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April 26, 2016 at 10:39 AM
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.
