Even while fund managers increase their fees, investors building portfolios are overwhelmingly choosing the cheapest options and paying, on average, less than ever before.
Funds fees have been gradually declining for years and that trend continued in 2023. Last year, the average expense ratio paid by fund investors was less than half of what it was two decades ago; between 2004 and 2023, the asset-weighted average fee fell to 0.36 percent from 0.87 percent, according to Morningstar’s 2023 U.S. Fund Fees study. The asset-weighted average represents the cost better than an equal-weighted average because it approximates what investors actually paid to invest in funds rather than what funds charged, according to Morningstar.
The difference between asset-weighted and equal-weighted fees is meaningful. For example, when analyzing active US equity funds in 2023, the asset-weighted average expense ratio was 0.60 percent and the equal-weighted average expense ratio for the same group was 1.04 percent. (Funds with expense ratios above 1.04 percent were a small portion of assets invested in active US equity funds at the end of 2023.)
The lower average asset-weighted fee wasn’t totally a result of fund managers continuing to charge less. Both inexpensive passive funds and the cheaper actively managed funds have attracted inflows over the past decades, but that wasn’t the case in 2022 and 2023. During the past two years, passive funds attracted more than $1.1 trillion in new money while active funds shed almost $1.4 trillion. Passive funds (which aren’t disheveling markets like some claim and that more institutional investors are using) “remain a crowd favorite” and the cheapest 20 percent of passive funds collected 90 percent of all inflows over the last two years, helping drive down the average asset-weighted fee.
Investors have saved billions of dollars in fund fees (Morningstar estimates they saved nearly $3.4 billion in fund expenses in 2023 alone) which otherwise would have been collected by managers who are under greater financial pressure.
Although the average asset-weighted fee was down again slightly in 2023, more fund managers (both passive and active) actually raised their fees than decreased them. Last year, 37 percent of active funds and 24 percent of passive funds increased their fees — the first time increases outpaced decreases since 2019. Fees were higher for several possible reasons, the Morningstar report says, such as fee hikes, expired waivers, outflows below fee breakpoints, and fund accounting anomalies.
“The mass migration to lower-cost funds and share classes has been a key driver of falling costs, but asset managers are growing reluctant to continue competing fiercely on price,” Morningstar explained.
