As Judgement Day grows closer for funds measured by Morningstar — an update to its rating methodology that considers fund costs is set for an Oct. 31 rollout — a recent U.S. Fund Flows report highlights this trend: Money is moving into the lowest cost funds in a big way.

Overall, long-term funds saw inflows of $39.9 billion in September after open-end funds and ETFs saw combined outflows of close to $16 billion in August. When flows were measured by fee levels, “the entirety of third-quarter long-term fund flows went to the cheapest decile of funds,” the report states.

“As Morningstar has emphasized in its research and commentary, when it comes to performance, it is the cost rather than fund structure that makes a difference over the long term. This is a message that investors have taken to heart when flows are measured against fund expenses,” states Tom Lauricella, Morningstar editor for professional audiences, in the report.

He notes, however, the trend varied according to asset class, with U.S. equity and international stock funds mirroring overall numbers while bond funds saw “investors continue to direct net new cash to funds across much more of the cost spectrum.” He adds that of taxable-bond funds, only 20% of the most expensive saw outflows.

Other findings from the U.S. fund flow report:

  • Actively traded U.S. stock funds had $19 billion in outflows while overall U.S. stock funds had inflows of $3.8 billion, most of which went to passive strategies.
  • Bond funds saw a return to normal with taxable-bond funds taking in $36 billion in September, versus only adding $16 billion in August. Muni bonds are on track for a record year of inflows, with $5.8 billion in September. For the year thus far they’ve brought in $68 billion.
  • International stock funds had a fourth consecutive month of outflows, with year-to-date outflows now at $16.6 billion. The paper notes “The third quarter marked the biggest percentage of outflows for these funds since fourth quarter 2011, when the European sovereign debt crisis peaked and the U.S. credit rating was downgraded.”
  • BlackRock led the way with fund families, with $17.5 billion in long-term inflows, while Vanguard followed with $14 billion.

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