Mutual Fund Expenses Continue Downward Trend

There was a decline in expense ratios for actively managed and index equity and bond mutual funds, ICI data shows.

The average expense ratios of long-term mutual funds declined in 2016, continuing a two-decade downward trend, the Investment Company Institute (ICI) reports.

In 2016, investors paid, on average, 39% less for equity mutual fund expense ratios than in 1996—reflecting investor interest in lower-cost funds, industry competition, and economies of scale driven by asset growth, ICI says. A fund’s expense ratio is the fund’s total annual expenses expressed as a percentage of its net assets.

For the first time, the report, “Trends in the Expenses and Fees of Funds, 2016,” examines the expense ratios of exchange-traded funds (ETFs). They, too, show a downward trend, including a 32% decline in index equity ETF expense ratios from 2009 to 2016. In 2016, the average expense ratio of index equity ETFs fell to 0.23%, down from 0.24% in 2015. Index equity ETF average expense ratios have fallen each year since 2009, when the average was 0.34%. ICI says this is largely attributable to competition and economies of scale within the ETF industry, which appear to have put downward pressure on index equity ETF expense ratios since then.

The average expense ratio of index bond ETFs was 0.20% in 2016, unchanged from 2015, and down from 0.25% in 2009. The market for bond ETFs has been maturing. Assets have increased significantly, and the number of funds and sponsors competing for investor dollars has grown. These developments have played a part in the recent decline of index bond ETF expense ratios.

NEXT: Decline in actively managed and index funds

The report shows an overall decline in the average expense ratios of equity, bond, and hybrid mutual funds—a decline that also is present for actively managed and index equity and bond mutual funds. For example, over the two decades of actively managed and index mutual fund expense ratios plotted by the ICI report, the average expense ratio of actively managed equity mutual funds in 2016 was 24% less than in 1996.

In 2016, the average expense ratio of actively managed equity mutual funds fell to 0.82% from 0.84% in 2015, while the actively managed bond mutual fund average expense ratio fell to 0.58% from 0.60%. Over the same time period, the average index equity mutual fund expense ratio fell to 0.09% from 0.10%, and the average index bond mutual fund expense ratio fell to 0.07% from 0.08%.

“Our research study finds a two-decade downward trajectory for expense ratios of actively managed and index mutual funds in a highly competitive market,” says Sean Collins, ICI’s senior director of industry and financial analysis. “In recent years, economies of scale and intense competition put downward pressure on fund expense ratios. The fund industry continues to meet investor demand for lower-cost investment options, such as through no-load share classes. Funds are adapting to a paradigm shift in the industry’s business model—a growing number of investors are paying their investment professionals for investment advice and assistance directly out of their pockets, rather than paying indirectly for advice through funds.”

ICI says the decline in average expense ratios in 2016 coincided with the Department of Labor’s fiduciary rulemaking, but was not caused by the rulemaking.

Average money market fund expense ratios rose to 0.18% in 2016, from 0.13% in 2015, as fund sponsors reacted to rising short-term interest rates by reducing fund expense waivers. The Federal Reserve raised short-term interest rates in December 2015, enabling money market funds to reduce the amount of expenses they had waived to avoid negative yields—from $5.5 billion in 2015 to $2.5 billion in 2016. This led to higher average expense ratios in 2016, according to ICI.

The full report is here.