Morningstar’s latest annual report on fund fees offers multiple reasons why advisors and investors should favor lower cost funds.
Not only do they tend to perform better than higher cost funds within the same asset category, they are more likely to experience bigger inflows and smaller outflows than higher cost funds.
In addition, lower fee funds allow more room for advisors’ own fees if they charge clients based on a percentage of their assets, writes Ben Johnson, director of global exchange-traded fund research for Morningstar, in a blog post accompanying the report.
Morningstar reports that over the last six years, the cheapest 20% of funds across all Morningstar categories experienced positive net flows, while the remaining 80% experienced net outflows.
‘The sums are staggering,” Johnson writes. “Nearly $3.6 trillion has flowed into the low cost cohort during this six-year span, while $1.6 trillion has been pulled from the remaining funds.”
In 2019 alone, $581 billion flowed into the cheapest 20% of funds on a net basis while $224 billion left the remaining, more expensive funds.
Fund fees have been falling for years. Between 1999 and 2019, the average asset-weighted fund fee, which reflects what investors paid for the funds they invest in, fell from 0.87% to 0.45%. In 2018, the average asset-weighted fund fee was 0.48%.
That 3 basis-point decline translates into $5.8 billion in savings for fund investors, says Johnson. Compounded at a 4.93% annual rate, that equates to $9.4 billion more in investors’ pockets by 2030, he writes.