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Investing May 2, 2019
U.S. Funds Are Seeing a Decline in Costs
A Morningstar study says investors are paying almost half as much to own funds in 2018, compared to 2000.
Reported by Amanda Umpierrez
Morningstar, Inc. has published its annual fee study, gauging trends surrounding U.S. open-end mutual funds and exchange-traded funds (ETFs) costs.
Among study findings, the report says the asset-weighted ratio fell across U.S. funds, from 0.51% in 2017 to 0.48% in 2018—resulting in an estimated $5.5 billion in savings for fund fees. The 6% year-over-year decline is the second largest recorded since asset-weighted fees were first tracked by Morningstar in 2000, according to the company.
The Morningstar report credits this decline to the migration towards lower-cost funds. In 2018, they note, active funds’ fees dropped to 0.67% and passive funds’ fell to 0.15%. Additionally, active funds saw a 3.7% decline in equal-weighted average fees, and equal-weighted average fees across all share classes of active funds declined from 1.15% in 2017 to 1.11%.
This decline in fees could also be attributed to strategic-beta funds, which the report notes some asset managers have started to launch. The asset-weighted average fee for U.S. equity strategic-beta funds was 0.17% in 2018, and while the report says this number is slightly higher than traditional index funds’ fees, it is still significantly lower than fees associated with active funds.
The study also reports that investors are paying almost half as much to own funds now, compared to 2000. Investors are contributing 40% less than what they paid a decade ago, and about 26% less than from five years ago.
“As awareness grows around the importance of minimizing investment costs, we have seen a mass migration to low-cost funds and share classes,” says Ben Johnson, Morningstar’s director of ETF and passive strategies research. “A shift in the economics of advice has further accelerated this trend. As advisers move from being paid on commission to collecting a fee for their service, a clear preference for semibundled and unbundled funds and share classes has emerged, as embedded advice and distribution costs are being stripped away from funds’ fees and charged separately.”
The study excludes money market funds and funds of funds. More findings on the study is available here.