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.”
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.