New research released Monday by the Investment Company Institute shows that between 1996 and 2017, investors paid 43% less on average for equity, hybrid and bond mutual funds, including both actively managed and index mutual funds in those asset classes.
Here’s how the two-decade expense ratio declines looked:
- Equity mutual funds: 1.04% – 1996; 0.59% – 2017
- Hybrid mutual funds: 0.95% – 1996; 0.70% – 2017
- Bond mutual funds: 0.84% – 1996; 0.48% – 2017
“Industry competition continues to push down the expense ratios of mutual funds and exchange-traded funds, as the fund industry meets cost-conscious investors’ demand for lower cost funds,” ICI’s senior director of industry and financial analysis, Shelly Antoniewicz, said in a statement.
“This demand is driven by a major shift in the industry’s business model, as increasingly investors pay directly for investment advice and assistance from investment professionals, rather than through fund fees.”
ICI said its 2017 report for the first time examines net new cash flow to mutual funds and net share issuance of ETFs by expense ratio ranges for both actively managed and index funds.
The research showed that in 2017, the 5% of actively managed domestic equity funds with the lowest expense ratios amassed $3 billion in inflows. For index domestic equity funds, upward of 90% of net inflows went to funds with expense ratios below the 25th percentile.
ICI noted that even though flows between actively managed and index domestic equity funds were sharply different last year, investors continued to buy, on net, active funds with the lowest expense ratios.
Just as the average expense ratios of equity, hybrid and bond mutual funds have gone down overall since 1996, so have those for actively managed and index equity and bond mutual funds.
One example: the average expense ratio for index equity mutual funds fell by 67% from 1996 to 2017, and for their actively managed counterparts, it fell by 28%.
Last year, the average expense ratio of actively managed equity and bond mutual funds fell of 0.78% and 0.55%, respectively, from 0.82% and 0.58% in 2016.
During the same period, the average expense ratios for index equity and index bond mutual funds remained unchanged at 0.09% and 0.07%.
Investors in target date mutual funds — which are usually funds of funds — paid an average expense ratio of 0.44% in 2017, compared with 0.50% in 2016 and 0.67% in 2008.
ICI reported that the average expense ratio of index equity ETFs fell to 0.21% last year from 0.22% in 2016. For the average bond ETF, the ratio fell to 0.18% from 0.20%.
Index ETFs’ falling expense ratios reflect a maturing ETF industry, with robust competition and economies of scale continuing to exert downward pressure, according to the report.
The research showed that the difference in composition of assets and relative size between index ETFs and index mutual funds largely explains why the former’s average expense ratios slightly higher than the latter’s.
Last year, average money market fund expense ratios rose five basis points from 0.20% in 2016. ICI said the increase was indirectly related to the Federal Reserve’s three short-term interest rate hikes.
It said these actions prompted fund advisors to continue paring expense waivers that most money market funds offered during the period of prolonged, near-zero short-term interest rates.
— Check out Mutual Fund and ETF Fees Fall to Record Lows: Morningstar on ThinkAdvisor.