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Falling Fund Fees Saved Investors $6.2B in 2020: Morningstar

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What You Need to Know

  • Much of the decline in fees resulted from investors allocating more of their money to low-cost index mutual funds and ETFs,
  • Asset-weighted fees across both passive and active funds plummeted between 1990 and 2020.
  • Investors in sustainable funds pay what the study called a “greenium” relative to investors in conventional funds, but it has been shrinking.

Morningstar’s annual fund fee survey, released Wednesday, shows that between 2000 and 2020, the asset-weighted average fee fell to 0.41% from 0.93%, a saving of billions of dollars for investors. The analysis excludes money market funds and funds of funds.

Morningstar noted that much of the documented decline in fees can be attributed to the fact that investors have been allocating more of their investment dollars to low-cost index mutual funds and ETFs and that those funds have been slashing their expense ratios.

“The fact that fees have been reduced to either nothing or next to nothing among broad-based index funds is only natural,” Ben Johnson, Morningstar’s director of ETF and passive strategies research, said in a statement. 

“Given these funds’ commodity-like nature, it seems inevitable that their prices would be pushed down to the marginal cost of managing them and that assets would consolidate in the hands of a few large-scale manufacturers.”

Key Findings 

The asset-weighted average expense ratio fell to 0.41% in 2020 from 0.44% in 2019. As a result, Morningstar estimates that investors saved some $6.2 billion in fund expenses last year. 

The asset-weighted average expense ratio for active funds fell to 0.62% in 2020 from 0.65% the year before. The main driver was large net outflows from expensive funds and share classes and, to a lesser extent, inflows to cheaper ones, according to the study. 

Steady flows into the lowest-cost funds caused the asset-weighted average expense ratio for passive funds to fall to 0.12% in 2020 from 0.13% in 2019. 

Between 1990 and 2020, asset-weighted fees across both passive and active funds plummeted, by 66% for the former and by 33% for the latter.

Investors in sustainable funds are paying what the study called a “greenium” relative to investors in conventional funds, as evidenced by these funds’ higher asset-weighted expense ratio, which stood at 0.61% at the end of 2020 versus 0.41% for their traditional peers. 

This “greenium,” however, has been shrinking, according to the analysis. Over the past decade, sustainable funds’ equal-weighted average fee has fallen 27%, while the asset-weighted average fee paid by investors in these funds has dropped 38%. 

This has been driven in large part by the introduction of numerous low-fee sustainable index mutual funds and ETFs to the menu, many of which have gained favor with investors. 

Low-cost funds generally have greater odds of surviving and outperforming their pricier peers, the study found. In 2020, the cheapest 20% of funds had net inflows of $445 billion, while the remainder suffered outflows of $293 billion. The cheapest 5% of funds alone received $412 billion of inflows. 

According to the study, the evolution of the economics of the advice business is shaping flows and fees. Bundled share classes have been in outflows for the past 11 years while semi-bundled and unbundled share classes have enjoyed steady inflows. 

Although its competition continues to breathe down its neck, Vanguard still claims the lowest asset-weighted average expense ratio among asset managers — 0.09% in 2020.