Fund Fee Wars Save Investors Billions

May 01, 2019

[Editor’s note: Ben Johnson will be speaking at Morningstar's Investment Conference May 8-10 in Chicago]

Ben JohnsonCost is one of the only things investors can truly control, and one of the most important when it comes to investment returns. The good news is that in the past 20 years, fees for open-end mutual funds and ETFs have dropped roughly by half, according to a recent Morningstar study.

Data shows that on an asset-weighted basis, average fund fees dropped year-over-year 6% in 2018 alone to 0.48% (the breakdown shows that average at 0.15% for passive funds vs. 0.67% for active.) That means investors saved an estimated $5.5 billion in fund fees last year. That’s a lot of money, especially considering that in 2000, average asset-weighted fees sat at 0.93%.


There are many factors driving fees lower, chief among them investor demand for cheaper products, Morningstar’s Director of Global ETF Research Ben Johnson says. Johnson, who’s one of the key speakers at the upcoming Morningstar Investment Conference in Chicago, shares here key findings of the study. Does anything in this trend toward zero surprise you?

Ben Johnson: One of the more surprising findings is just how shrewd investors are being when it comes to the expenses they're paying for funds. This year, for the first time, we looked more granularly at flows within the cheapest 20% of all funds to better understand exactly how shrewd they’re being when it comes to fund selection.

What we saw is that the lion's share of the money went into the low-cost quintile of funds, which in and of itself accounted for all of the net new money going into funds in 2018. People aren’t just looking for less expensive funds, they're increasingly allocating most of their money to the very cheapest of the cheap. In the passive category, average expense ratio is now 0.15%, and 0.67% for active. The study says that’s the widest disparity since 2000. What’s driving that?



Johnson: “Wide” is measured in terms of the multiple. Relative to 2000, it's a narrowly greater multiple—active investors are paying 4.5 times what passive investors pay on every dollar invested—than it was back in 2000 when we first began measuring this.

It’s not surprising because, generally speaking, money has been flowing into the absolute cheapest of the cheap, and within the cheapest of the cheap, most of it's been going to index-tracking products, be they mutual funds or ETFs. Even more granularly, we know money’s going into funds charging 0.10% or less.

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