Mutual fund investors appear to favor lower fee funds more than the industry itself.
According to the latest ICI Annual Mutual Fund Shareholder Tracking Survey, the asset-weighted expense ratio of mutual funds held by investors declined by 40% between 2000 and 2017, from 0.99% to 0.59%, while the average expense ratio charged by mutual funds (with each fund or fund class weighted equally) fell by only 21%, from 1.6% to 1.25%.
Shareholders are clearly favoring lower-cost fund assets more than the fund industry does, an investor preference also reflected in fund flows.
One-year net flows into lower cost passive U.S. mutual funds and ETFs through the end of June totaled $526.43 billion compared to $27.9 billion into higher cost active U.S. mutual funds and ETFs, according to the latest Morningstar fund flows report. Passive U.S. equity funds experienced net inflows of $165.09 billion through the end of June, while their active counterparts saw net outflows of $199.1 billion.
The ICI survey, based on a telephone sample of several thousand households, found that eight in 10 fund-owning households consider fees and expenses when selecting funds, with 40% noting that fees and expenses are “very important” considerations.
Historical performance was an even more important factor for fund investors, according to the ICI survey. Almost 90% of fund-owning households cited historical performance as a consideration when choosing funds, including 50% they rate historical performance as very important.