Fees plummet thanks to popularity of index funds, ETFs – Morningstar

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The average expense ratio paid by fund investors is half of what it was two decades ago, saving investors billions of dollars in expenses, results of an annual fund fee study published by Morningstar showed.

The study, which assesses trends in the cost of U.S. open-end mutual funds and exchange-traded funds, shows that, the asset-weighted average fee was 0.41% in 2020, down 52 basis points from 0.93% in 2000.

Morningstar attributes the drop mainly to investors allocating more to low-cost index mutual funds and ETFs, which have been reducing their expense ratios.

The report also showed that sustainable fund fees have fallen 27% over the past decade as low-cost, sustainable passive investments have become available.

All told, Morningstar estimates that investors saved $6.2 billion in fund expenses last year.

And it appears that more expensive doesn’t necessarily mean that investors are paying for more alpha. According to Morningstar, low-cost funds have a better chance of outperforming their more-expensive peers on average. In 2020, the cheapest 20% of funds saw $445 billion in net inflows, with the remainder seeing $293 billion in outflows. The cheapest 5% of funds alone received $412 billion of inflows.

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

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