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Investors are paying less than ever to own mutual funds and ETFs, saving billions of dollars in the process.

According to Morningstar’s latest annual fee study, the asset-weighted average expense ratio of the funds investors bought in 2018 was 0.48%, down from 0.51% the previous year, which saved investors roughly $5.5 billion in fund expenses.

The asset-weighted average expense ratio for active funds fell from 0.71% in 2017 to 0.67% in 2018, the biggest drop (of 4.9%) since 2000, when Morningstar began to track asset-weighted average fees. The average asset-weighted expense ratio for passive funds fell just slightly, from 0.16% to 0.15%. Based on this comparison, active investors paid about 4.5 times more than passive investors for funds in 2018.

As a result of these fee declines, investors today are paying roughly half as much to own mutual funds and ETFs as they paid in 2000 and about a quarter less than they paid five years ago.

The asset-weighted average measures what investors paid for the funds they bought rather than the fees the funds charged, which better reflects investor preferences.

Morningstar notes that several factors are driving fund fees lower:

  • Greater investor awareness about the importance of minimizing investment costs
  • Increasing competition among asset managers to cut fees as they vie to preserve and grow market share
  • An evolving financial advice model, moving from commission- to fee-based advice, which emphasizes planning and asset allocation over investment management and increases demand for cheaper passive funds
  • Growing popularity of unbundled funds, which charge only for investment management and fund operating expenses and have no embedded fees like 12b-1 fees.
  • Increasing launches of strategic beta funds, which have characteristics of actively managed and passive funds but charge far less than the former, averaging 0.17% asset-weighted vs. 0.70% for active.

Investors are voting with their wallets, buying more low-cost funds and exiting more high-cost ones. The cheapest funds, which Morningstar defines as having fees in the bottom 20% of any Morningstar category, saw inflows of $605 billion last year. The remaining 80% of funds by cost experienced outflows of $478 billion.

Fund companies, in turn, continue to cut fees. Overall, 42% of mutual funds and ETFs, including both active and passive funds, reported lower expense ratios in 2018 — 32% of passive funds and 43% of active funds.

The biggest percentage fee cuts since 2011 occurred among passive index funds rather than active funds: down 10% versus 8.3% but the average active fund still charges about 1.8 times as much as the average passive fund, basically unchanged from 2017.

Vanguard remains the low-cost leader among fund companies, with an average asset-weighted expense ratio of 0.09%, compared with 0.17% for State Street and 0.30% for BlackRock, sponsor of iShares ETFs, the second- and third-lowest cost fund companies.

Vanguard also attracted more asset flows than any other competitors last year, with net inflows of $138 billion. Fidelity and BlackRock followed with net inflows of $117 billion and $77 billion, respectively. Vanguard also leads in assets under management, at $4.2 trillion, followed by BlackRock ($1.6 trillion) and American Funds and Fidelity, at about $1.4 trillion each.

— Check out A Flood of Nontransparent Active ETFs Could Be Coming — Soon  on ThinkAdvisor.