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Morningstar: Competition has Driven Fund Fees to a New Low

But the pace of declines is beginning to slow down as many passive funds are already charging only a few basis points.

Investors paid almost $3.4 billion less in fund fees in 2023, as the asset-weighted expense ratio of U.S. mutual funds and exchange-traded funds declined to 0.36%, down 3.4% year-over-year, according to a 2023 U.S. Fund Fee Study published by Morningstar. Expense ratios are now at the lowest levels on record and are less than half of what they were two decades ago, at 0.87% in 2004, Morningstar estimates.

Some reasons behind the fee declines include asset managers’ competition for investors’ dollars and investors’ growing preference for lower-cost funds.

However, the study also found that end investors do not necessarily benefit from lower fund fees as they redirect those dollars to pay for the services of financial advisors, who help them pick the funds. In addition, Morningstar researchers believe the fees for many mutual and ETF funds have reached a floor, with charges that, in some cases, now total 0.05%. Going forward, cost pressures will likely prevent asset managers from cutting fees further. In 2023, for example, the 3.4% rate decline in the asset-weighted average expense ratio was less than the 7.8% drop registered in 2022.

“Fund fees are still declining, but at a slower pace,” said Zachary Evans, Morningstar analyst for passive strategies research and one of the report’s authors. “Investors are still finding their way to the cheapest funds. However, they seem to be doing so at a lower rate.”

The trend toward lower fees was more pronounced for passive funds. The asset-weighted average expense ratio for active funds declined 20 basis points year-over-year to approximately 0.59%, while the asset-weighted average expense ratio for passive funds declined 130 basis points to 0.11%. In addition, 37% of active and 24% of passive funds reported fee increases in 2023, marking the first year since 2019 when fee hikes outpaced fee decreases.

At the same time, active funds experienced $1.4 trillion in outflows in the past two years, while passive funds saw $1.1 trillion in inflows.

Morningstar also found that while mutual fund fees have been trending down in recent years, the emergence of active and alternative ETFs has pushed new ETF fees higher. While passive ETFs still represent the lion’s share of all ETF assets, active ETFs, with their higher fees, account for the majority of new launches. As a result, between 2014 and 2024, average fees on new ETFs rose by 28%, while fees on new mutual funds declined by 30%.

“On the core equity and core bond passive side, you have to think fees are approaching a floor. A lot of funds charge 3, 4, 5 basis points now, and with the economies of scale, I don’t expect smaller asset managers to be able to compete with the Vanguards and the iShares on fees in that space,” said Evans.

“However, on the active and alternative side, you see that mutual fund fees are still declining on average each year for new funds,” he added. “As more of these products come to market, some of these alternative and active strategies, because investors prefer cheap funds, they’ll probably gravitate toward the cheaper funds of that new cohort, and we could still see some fee pressure across those growing areas within asset management, such as active and alternative ETFs.”

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