Morningstar, Inc., a leading provider of independent investment research, today published its annual fee study, which evaluates trends in the cost of U.S. open-end mutual funds and exchange-traded funds (ETFs).
The study found that across U.S. funds, the asset-weighted expense ratio dropped to 0.48% in 2018, compared to 0.51% in 2017. As a result, investors saved an estimated $5.5 billion in fund fees in 2018. This 6% percent year-over-year decline is the second largest recorded since Morningstar began tracking asset-weighted fees in 2000.
For the first time, the study examines trends in flows through Morningstar's service-fee arrangement attribute—dividing funds and fund share classes into bundled, semibundled, and unbundled groupings.
"As awareness grows around the importance of minimizing investment costs, we have seen a mass migration to low-cost funds and share classes," said Ben Johnson, Morningstar's director of ETF and passive strategies research. "A shift in the economics of advice has further accelerated this trend. As advisors 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."
Key findings of the study include:
- Investors are paying approximately half as much to own funds as they were in the year 2000; they're paying roughly 40% less than they did a decade ago; and about 26% less than they did five years ago.
- The mass migration to lower-cost funds has been a key driver behind the decline in the asset-weighted average fee. In 2018, active funds' fees fell to 0.67% and passive funds' fees fell to 0.15%. By these numbers, active-fund investors paid about 4.5 times more than passive-fund investors on each dollar in 2018.
- It's evident that investors are favoring lower-cost share classes, as the "fee war" continues and new funds and share classes are introduced, which are represented in the equal-weighted average expense ratio. In 2018, active funds exhibited a 3.7% decline in equal-weighted average fees while the equal-weighted average fees across all share classes of active funds dropped to 1.11% from 1.15% in 2017.
- The cheapest of the cheap are making headway. In 2018, the cheapest 20% of funds saw net inflows of $605 billion, with the remaining 80% of funds experiencing net outflows of $478 billion. Of the $605 billion that flowed into the cheapest 20% of funds and share classes, 97% of net new money flowed into the least costly 10% of all funds.
- As a result of these trends, most investors now own lower-priced funds; 83% of all assets reside in mutual funds and ETFs whose fees rank in the bottom 40% when compared with other funds in their category group.
- Over the past five years, bundled funds and share classes have seen a collective $1.28 trillion in net outflows while semibundled and unbundled funds and share classes have amassed just over $3.0 trillion in net new flows.
- As an alternative to higher-cost actively managed funds, some asset managers have launched strategic-beta funds. In 2018, the asset-weighted average fee for U.S. equity strategic-beta funds was 0.17%, which was slightly higher than traditional index funds' fees, but significantly lower than active funds' fees.
- Vanguard continues to have the lowest asset-weighted average expense ratio among asset managers, which was 0.09% in 2018, followed closely behind by State Street with 0.17% and BlackRock/iShares with 0.30%.
Morningstar has approximately 130 manager research analysts worldwide. The company provides data on approximately 249,780 open-end mutual funds, 13,010 closed-end funds, and 16,720 exchange-traded product listings as of March 31, 2019.
About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, retirement plan providers and sponsors, and institutional investors in the private capital markets. Morningstar provides data and research insights on a wide range of investment offerings, including managed investment products, publicly listed companies, private capital markets, and real-time global market data. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $210 billion in assets under advisement and management as of March 31, 2019. The company has operations in 27 countries. For more information, visit www.morningstar.com/company. Follow Morningstar on Twitter @MorningstarInc.
Morningstar's Manager Research Group consists of various wholly owned subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC. Analyst Ratings are subjective in nature and should not be used as the sole basis for investment decisions. Analyst Ratings are based on Morningstar's Manager Research Group's current expectations about future events and therefore involve unknown risks and uncertainties that may cause such expectations not to occur or to differ significantly from what was expected. Analyst Ratings are not guarantees nor should they be viewed as an assessment of a fund's or the fund's underlying securities' creditworthiness. This press release is for informational purposes only; references to securities in this press release should not be considered an offer or solicitation to buy or sell the securities.
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