Investor Demand Pushes Fund Fees to Lowest Levels In 2 Decades

Investor demand has driven fund fees down to half of what they paid two decades ago, as they continue to pour most of their cash into the cheapest 20% of ETFs and mutual funds.  

Competition among asset managers to offer investors the lowest fees isn’t likely to subside any time soon, according to Morningstar Inc.’s latest annual fund fee study. What may seem like moderate fee cuts add up to significant savings for retail investors. Investors saved nearly $9.8 billion last year as the asset-weighted average expense ratio fell to 0.37% in 2022 from 0.4% the year prior—a 0.3% decrease. 

“I think fee pressures will continue but that pressure will be concentrated in areas where fees are still high relative to cheaper (and largely passive) alternatives,” Zachary Evens, associate manager research analyst at Morningstar, told etf.com.  

Investors are pushing the fee competition forward by continuing to prioritize exchange-traded funds with lower than average fees. Morningstar said 100% of the net positive inflows in eight of the past nine years have gone into the cheapest 20% of funds.  

The top 80% of more expensive funds have seen outflows over the same period. Last year, for the first time in five years, the lowest-fee quintile of funds had a net flow advantage of over $1.1 trillion compared with 80% of more expensive funds.  

The average asset-weighted expense ratio across all mutual funds and ETFs was 0.37% in 2022, which is half of what investors paid two decades ago.  

Fund fee cuts have coincided with the rise in financial advisor costs, according to the report. As financial advisors point their clients to the lowest quintile of funds, they also are charging for financial advice.  

“Investors employing a fee-based advisor may not be pocketing the difference from lower fund fees but redirecting those dollars to cover the price of advice,” analysts wrote in the report.  

Active ETFs 

Passive investors have largely reaped the benefits of fund cuts. Passive fund fees have declined by 60% since 1994. Active ETFs have declined by 40%. More recently, passive funds saw fees fall by 10% from 2021 to 2022, while active ETFs' fees fell 3%.  

Evens predicts the fee cut competition will continue to be amplified for managers of active funds, especially as active ETFs gain popularity: “The active ETF landscape is largely dominated by systematic active providers like Dimensional Fund Advisors and Avantis who price their products to compete with passive offerings.”  

Contact Lucy Brewster at [email protected]