On average, U.S. investors paid lower fund expenses in 2015 than ever before, as assets continue to flow into lower-cost index mutual funds, exchange-traded funds (ETFs), and institutional share classes, Morningstar reports.
The asset-weighted average net expense ratio of all U.S. funds was 0.61% in 2015, down from 0.64% in 2014 and 0.73% five years ago. The decline was primarily driven by asset flows into lower-priced vehicles—namely, passive funds and less-expensive share classes—and not by fee cuts in the asset management industry, Morningstar notes. From 2013 to 2015, the simple-average expense ratio of the largest 1,000 share classes, which accounts for 75% of assets in mutual funds and ETFs, remained 0.64%.
The least-expensive funds—those with fees that fall in the lowest quintile—collected $1.7 trillion in flows during the past five years, while the remaining funds have seen outflows of $372 billion. On average, passive funds, including index funds and ETFs, accounted for approximately 75% of flows into the least-expensive funds in that time period.
In 2015, the asset-weighted expense ratio was 0.18% for passive funds, compared with 0.78% for active funds, a difference of 60 basis points. With such a large fee gap, rising flows into passive funds contributed to falling asset-weighted average expense ratios.
Although active funds outnumber passive funds eight to one, passive funds gathered $576 billion more in assets than active funds in 2015. That represents a sharp increase from 2011, when passive funds took in $140 billion more than active funds.
The largest flows to passive funds—and out of active funds—occurred in the Morningstar U.S. equity category group, where passive funds experienced $471 billion of inflows and active funds saw $572 billion of outflows during the past five years. The 67-basis-point fee gap between U.S. equity active funds and passive funds is the largest among the seven major asset class groups.“Fees in the asset management industry are coming under increasing scrutiny, and this trend has driven investment dollars into lower-cost funds, particularly index funds,” says Patricia Oey, senior manager research analyst for Morningstar. “While certainly a positive trend, it’s worth remembering that fund expenses are not the whole story, as investors often pay additional fees on retirement platforms and for advice.”