According to 2023 US Fund Fee Study published by Morningstar. Expense reports are now in the lowest levels recorded and are less than half of what they were two decades ago, at 0.87% in 2004, Morningstar estimates.
Some reasons behind the fee reduction 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 choose funds. Additionally, Morningstar researchers believe that fees for many mutual funds and ETFs have reached a plateau, with fees now reaching 0.05% in some cases. moving forward, Cost pressures are likely to prevent asset managers from cutting fees further. In 2023, for example, the 3.4% rate decline in the ratio of weighted average expenses to assets was less than the 7.8% decline recorded in 2022.
“Fund fees are still falling, but at a slower pace,” said Zachary Evans, Morningstar's passive strategies research analyst and one of the report's authors. “Investors are still finding their way to the cheapest fund. However, they seem to be doing so at a lower rate.”
The trend towards lower fees was more pronounced for passive funds. The average asset-weighted expense ratio for active funds fell 20 basis points year-over-year to approximately 0.59%, while the average asset-weighted expense ratio for passive funds fell 130 basis points to 0.11%. Additionally, 37% of active funds and 24% of passive funds reported fee increases in 2023, marking the first year since 2019 that fee increases outpaced fees.
At the same time, active funds saw $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 downward in recent years, the emergence of active and alternative ETFs has driven up new ETF fees. While passive ETFs still represent the majority 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 for new ETFs rose 28%, while fees for new mutual funds fell 30%.
“On the passive side of core equity and core bonds, you have to think that rates are approaching a level. A lot of funds charge 3, 4, 5 basis points now, and with economies of scale, I don't expect smaller asset managers to be able to compete with Vanguards and iShares on fees in that space,” Evans said.
“However, on the active and alternative side, you see that mutual fund fees are still declining on average every 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 will probably gravitate towards the cheaper funds of that new set and we may still see a tariff pressure in those growing areas. within asset management, such as active and alternative ETFs.”