$6.2 billion – that’s a lot of coin. And that’s the amount in fees that Morningstar estimates investors saved last year as expense ratios continued to drop. In 2020, the asset-weighted average expense ratio across all mutual funds and exchange-traded funds – minus money market funds and so-called funds-of-funds – clocked in at 0.41%, which comes out to be just $41 per $10,000 invested. That’s down from 0.44%, or $44 per $10,000 invested in 2019.
Pulling back further, falling expense ratios have been a major source of additional investor return and cost savings according to the investment researcher. Average expense ratios stood at 0.93% for all mutual funds and ETFs back in the year 2000. That’s a huge savings for investors.
Leading the way has been the revolution in passive ETFs and index funds. The reality is that all S&P 500 index funds are the same, especially those that use a full replication strategy. As a result, there’s no real difference between, say, Vanguard, BlackRock or Joe Schmo. You can still expect the same cost of ownership. Because of this, the major investment managers have spent the latter part of the decade decreasing their fees to attract investors to their funds.
And it’s worked. Billions have flowed into index funds, and the asset-weighted fee across all passive funds has declined by 66% since 1990. Currently, the average expense ratio of these funds stands at 0.12%.
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