US Among Top 3 Global Markets for Low Fees: Morningstar

ETFs are “accessible and highly utilized” in the U.S. market through fee-based and self-directed investing, Morningstar said. Although ETFs are often associated with passive management, some U.S. ETFs instead use active management, “further eroding the distinction between” open-end funds and ETFs in the market, the report noted, adding ETFs in the U.S. “tend to be more tax-efficient than open-end vehicles owing to their more regular use of in-kind redemptions.”

Although “hundreds of asset managers operate” in the U.S., Morningstar singled out Vanguard for its influence on the fee landscape. “Offering predominantly passive strategies and operating at enormous scale in a mutual ownership structure, the firm routinely offers investments at prices well below the norm,” the report said, adding: “The asset-weighted average expense ratio across the firm’s open-end and exchange-traded funds together” was only 0.09% as of Dec. 31. Fee competition in the U.S. has “further benefited fund investors, as other large asset managers have matched or undercut Vanguard’s pricing of certain core strategies,” according to the report.

Fidelity, meanwhile, is attracting investors to its platform with new “ZERO” branded open-end index funds that actually charge 0% in ongoing expenses, the report went on to say. But the “broader trend toward creating mutual fund ‘clean shares’ that include only management expenses has lost significant momentum” since the Labor Department’s efforts to introduce a fiduciary rule in 2017 “fizzled out,” the report said.

The U.S. was one of the few markets in the survey to require that any performance fees paid to fund advisors include a symmetrical reduction in fees for underperformance, also known as fulcrum fees, Morningstar noted. “In practice, though, few funds” in the U.S. assess performance fees, it said, concluding: “Where such fees do exist, the terms are disclosed in the financial documents, though these can be complex.”

Scoring worst in the report were Italy and Taiwan, which each received a grade of “Bottom” for high fees and expenses.

Since Morningstar’s last Global Investor Experience study in 2017, “we’ve seen fund fees continue to decline across global markets,” according to Grant Kennaway, the firm’s global practice leader of manager research and the 2019 report’s co-author. “This reflects a number of key trends including orderly competition, regulatory intervention, and changing practices that have led to the unbundling of advice and sales fees from fund expense ratios in some markets.”

Chapters of the report to be released in the future will cover regulation and taxation, disclosure and sales.