The average expense ratios of long-term mutual funds declined in 2016, continuing a 20 year downward trend, said a report released Wednesday by the Investment Company Institute.
Investors on average paid 39% less for equity mutual fund expense ratios in 2016 than in 1996, according to the report. The average expense ratios of equity, bond and hybrid mutual funds all showed an overall decline, including both active and passive funds. For example, the average expense ratio of active mutual funds in 2016 was 24% less than in 1996.
“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,” said Sean Collins, ICI's senior director of industry and financial analysis, in a news release accompanying the report. “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.”
Equity mutual fund expense ratios averaged 0.63% in 2016, down from 1.04% in 1996, the report said. Bond mutual fund expense ratios averaged 0.51% in 2016, down from 0.84% in 1996. Hybrid mutual fund expense ratios averaged 0.74% in 2016, down from 0.95% in 1996.
The expense ratios of exchange-traded funds also show a downward trend, including a 32% decline in index equity ETF expense ratios to 2016 from 2009. In 2016, the expense ratios of index equity ETFs fell to 0.23%, down from 0.34% in 2009 and 0.24% in 2015. Expense ratios of index bond ETFs, although down from a recent peak of 0.26% in 2013, were unchanged in 2016 at 0.2%.
This was the first year the report looked at the expense ratios of ETFs.
In 2016, the average expense ratio of active equity mutual funds fell to 0.82%, down from 1.08% in 1996. Index equity mutual fund expense ratios fell to 0.09% in 2016 from 0.27% in 1996.
On a year-over-year basis, the average expense ratio of active equity mutual funds fell to 0.82% in 2016 from 0.84% in 2015, while active bond mutual fund average expense ratio fell to 0.58% from 0.6%. Over the same time, the average index equity mutual fund expense ratio fell to 0.09% from 0.1% and average index bond mutual fund, to 0.07% from 0.08%.
Investor interest in lower-cost equity mutual funds, both actively managed and indexed, has fueled this trend, as has asset growth and resulting economies of scale, according to the report.
The full report is available one ICI's website.