The average expense ratio paid by investors fell by 4 basis points last year to 0.57%, according to a Morningstar study released Tuesday.
Though the largest 2,000 funds had an average asset-weighted expense ratio of 0.72%, investors are paying less by moving into ETFs and other low-cost options, mainly passive index funds. The asset-weighted average cost of passive funds is 0.17% as of 2016 vs. 0.75% for active products.
Thus, Morningstar points out, as investors move more money into passive products, the average asset-weighted drop in fund fees in 2016 hit 7%, the biggest fall since 1990, when the research firm started compiling the data.
“This indicates that the decline in average mutual fund fees paid by investors stems largely from investors’ migration to lower-costs funds and not from fee cuts by the fund management industry,” Patricia Oey, senior analyst at Morningstar, said in the report.
Vanguard leads the way when it comes to low expenses with an asset-weighted average expense ratio of 0.11% in 2016. Its nearest rival is SPDR State Street at 0.19%.
Over the past three years, Vanguard’s average fee declined a total of 21%, the largest drop amount the biggest 10 fund families, Morningstar reports.
The average active fund had an expense ratio of 0.75% in 2016, while this figure was only 0.17% for passive funds, the research firm says.
Passive funds added $563 billion in assets last year vs. $325.6 billion for active products. Industry research has found that fewer than 1 in 5 active managers beat the basic market index their funds aim to outperform.
Vanguard had $739 billion of inflows from 2013 to 2016 vs. BlackRock’s $262 billion, the Chicago-based research firm says.
On Friday, Vanguard said four of its mutual funds and one ETF have lower expense ratios as of the fiscal year ending Jan. 31: Vanguard Dividend Appreciation Index Fund Investor Shares (VDAIX), which declined 2 basis points to 0.17%; Vanguard Dividend Appreciation Index Fund Admiral Shares (VDADX), which decreased 1 basis point to 0.08%; Vanguard Dividend Appreciation ETF (VIG), which dropped 1 basis point to 0.08%; the Vanguard Dividend Growth Fund (VDIGX), which declined 3 basis points to 0.30%; and the Vanguard Long-Term Investment-Grade Fund Admiral Shares (VWETX), which fell 1 basis point to 0.11%.
Six of Vanguard’s actively managed mutual funds, however, reported an expense ratio increase, three tied performance incentives and three due to higher expenses.
Over the past six months, the fund group says that lower expense ratios for 226 Vanguard mutual fund and ETF shares saved investors about $337 million. At the same time, 160 fund shares had no change in their expense, while 14 fund shares had increased expense ratios.
“In fact, more than 50% of our investment offerings — spanning all product types, asset classes, and management styles — have reported expense ratio reductions over the last six months,” said Vanguard CEO Bill McNabb, in a statement.
— Check out Can This Fee Structure Save Actively Managed Funds? on ThinkAdvisor.