Investors saved approximately $5.5 billion during 2018 due to fee cuts in the US asset management industry, according to a report by investment research house Morningstar.
Fee cuts saved investors $5.5bn in 2018, finds Morningstar
The investment research house found that the asset-weighted average expense ratio of US open-end mutual funds and ETFs dropped by three basis points over the year, from 0.51% to 0.48%.
This fall of 6% was the second-largest year-over-year decline since Morningstar began tracking the trend in asset-weighted average fees in 2000.
The asset-weighted average expense ratio has fallen every year since 2000 with investors paying roughly half as much to own funds today as they were when Morningstar’s records began – the asset-weighted average fee in 2000 stood at 0.93%. Investors are paying 40% less than they did a decade ago and about 26% less than they did five years ago.
Passive funds remain considerably cheaper than their active counterparts. The asset-weighted average expense ratio for passive funds was 0.15% in 2018, down by one basis point, compared with 0.67% for active funds. This means active fund investors are paying about 4.5 times more than passive fund investors on each dollar, the widest disparity on record.
While average passive fees of 0.15% are certainly cheap, investors may obtain broad US equity market exposure for as little as just 0.02% thanks to JP Morgan which rolled out the JPMorgan BetaBuilders US Equity ETF (BBUS US) on Cboe BZX Exchange in March 2019.
Morningstar notes that several factors are driving asset-weighted average fees lower.
One of the most significant factors is that investors are placing greater importance on minimizing investment costs to boost portfolio performance and have, therefore, actively sought out the lowest costing funds. During 2018, $605bn flowed into funds ranking in the lowest quintile by fees, while $478bn collectively flowed out of all other funds. Investors actually favored the cheapest of the cheap, as 97% of net new money flowed into the least costly 10% of all funds.
Additionally, intensifying competition between asset managers has led to lower fees as firms vie for market share. Morningstar notes that the average fund’s price tag, or the equal-weighted average expense ratio, dropped by five basis points in 2018, lowering from 1.10% to 1.05%.
Just this week, low-cost ETF provider Vanguard trimmed the fees charged on 21 of its ETFs including some of the firm’s biggest blockbuster products such as the $114 billion Vanguard Total Stock Market ETF (VTI US) and $113bn Vanguard S&P 500 ETF (VOO US).
Morningstar also notes additional factors resulting in a lower average expense ratio include the move toward fee-based financial advice which has spurred the demand for lower-cost funds like ETFs, and the trend by institutions and advisors towards unbundling advice and distribution fees from share classes.