The year 2015 was rather noneventful for investors except for two things: the big drop in oil prices and, according to Morningstar, the lowest ever average fees for mutual fund and ETF assets.
“Fees in the asset management industry are coming under increasing scrutiny, and this trend has driven investment dollars into lower-cost funds, particularly index funds,” according to a Morningstar report released today.
The asset-weighted average net expense ratio of all U.S. funds in 2015 fell to 0.61% from 0.64% in 2014. While that drop may not seem very dramatic, consider the context: The asset-weighted average expense ratio for passive funds was 0.18% versus 0.78% for active funds.
Passive funds, in fact, took in $576 billion more in assets than active funds in 2015 despite the fact that there were eight times more active funds than passive ones.
The increased flows into lower cost funds and scrutiny of fees is good news for investors because expense ratios are “proven predictors of future fund performance,” according to the Morningstar report. But it notes that lower fees “don’t necessarily mean investors are paying less for their investments overall.”
Investors may be paying “another layer of fees through financial advisors and retirement plans” who are buying cheaper share classes of mutual funds and ETFs on behalf of their clients, according to Morningstar.
Those fees, in turn, could come under more scrutiny under the new Department of Labor fiduciary rule, which may require “better transparency on the total costs of investing,” according to Morningstar.
Meanwhile, investors and advisors have been favoring the least expensive funds, which over the past five years had inflows of $1.7 trillion while more expensive funds experienced outflows of $372 billion.
US. equity funds saw the largest change in flows, reflecting a 67 basis-point gap in fees between active and passive funds – 0.79% for active funds; 0.12% for passive funds. Over the past five years, passive U.S. equity funds took in $471 billion while their actively managed counterparts saw outflows of $572 billion.
Despite these differences in fund flows, passive funds still account for less than 30% of total fund assets, although they have doubled their market share in 2005.
Vanguard Leads in Low-Cost Funds & ETFs
Vanguard, like its name implies, leads the industry for cutting expense ratios and is the single most important factor for the decline in fund industry expenses. It currently has the lowest asset weighted average expense ratio among mutual funds — 0.12% — and controls $3 trillion worth of fund assets, which is 20% of the U.S. market, according to Morningstar.
Vanguard is also a low-cost provider for ETFs and holds 24% of that market, where it is especially popular among financial advisors. They account for about one-third of its clients by assets, says Morningstar.
Vanguard’s target-date funds are a key area of growth for the firm, accounting for over $700 billion worth of assets. These funds of funds have seen their assets grow 10% to 15% annually over the past five years.
— Related on ThinkAdvisor:
- When It Comes to Active vs. Passive Funds, Fees Matter: Morningstar
- How the DOL Fiduciary Rule Will (and Won’t) Affect RIAs
- Vanguard Lowers Fees on 42 Funds