Investors paid less to own funds in 2018 than ever before, according to Morningstar’s annual fee study of the cost trends of U.S. open-end mutual funds and exchange-traded funds.
The study found that across U.S. funds, the asset-weighted expense ratio dropped to 0.48% in 2018, compared to 0.51% in 2017, resulting in investors saving an estimated $5.5 billion in fund fees in 2018. Morningstar notes that this 6% year-over-year decline is the second largest recorded since it began tracking asset-weighted fees in 2000.
The firm also observes that the asset-weighted average expense ratio has fallen every year since 2000, with investors paying nearly half as much to own funds as they were in the year 2000, when the asset-weighted average fee stood at 0.93%.
The so-called "mass migration" to lower-cost funds has been a key driver behind the decline in the asset-weighted average fee, the firm says. The asset-weighted average expense ratio for active funds fell to 0.67% in 2018 from 0.71% in 2017. This 4.9% decline was the largest-ever annual percentage decrease Morningstar has measured dating back to 2000, and was driven mainly by large net outflows from more expensive funds and share classes.
For passive funds, the asset-weighted average expense ratio fell to 0.15% in 2018 from 0.16% in 2017. This reflected strong flows into the lowest-cost equity and bond funds, as well as fee cuts by some asset managers for widely held broad index mutual funds and ETFs, the firm notes.
By these numbers, active-fund investors apparently paid nearly 4.5 times more than passive-fund investors on each dollar in 2018. Morningstar reports that this is the widest gap between active and passive fund fees since it began tracking trends in asset-weighted average fees in 2000.
“It’s evident that investors are favoring lower-cost share classes, as the ‘fee war’ continues and new funds and share classes are introduced, which are represented in the equal-weighted average expense ratio,” the firm explains. In 2018, active funds exhibited a 3.7% decline in equal-weighted average fees while the equal-weighted average fees across all share classes of active funds dropped to 1.11% from 1.15% in 2017.
“A shift in the economics of advice has further accelerated this trend,” notes Ben Johnson, Morningstar’s director of ETF and passive strategies research. “As advisors move from being paid on commission to collecting a fee for their service, a clear preference for semi-bundled and unbundled funds and share classes has emerged, as embedded advice and distribution costs are being stripped away from funds’ fees and charged separately,” Johnson emphasizes.
Inflows and Outflows
Meanwhile, the least expensive 20% of funds saw net inflows of $605 billion in 2018, with the remaining 80% of funds experiencing net outflows of $478 billion. Of the $605 billion that flowed into the cheapest 20% of funds and share classes, 97% of net new money flowed into the least costly 10% of all funds, Morningstar notes.
Consequently, most investors now own lower-priced funds. The firm reports that 83% of all assets reside in mutual funds and ETFs whose fees rank in the bottom 40% when compared with other funds in their category group.
What’s more, bundled funds and share classes over the past five years have seen a collective $1.28 trillion in net outflows, while semi-bundled and unbundled funds and share classes have accumulated more than $3 trillion in net new flows.
Morningstar further observes that, as an alternative to higher-cost actively managed funds, some asset managers have launched strategic-beta funds. In 2018, the asset-weighted average fee for U.S. equity strategic-beta funds was 0.17%, which was slightly higher than traditional index funds’ fees, but significantly lower than active funds’ fees.
Vanguard continues to claim the lowest asset-weighted average expense ratio among asset managers, coming in at 0.09% in 2018, followed closely by State Street with 0.17% and BlackRock/iShares with 0.30%.