Investors on average paid lower fees in 2016 than ever before, according to a study of U.S. funds published by Morningstar.
According to Morningstar's annual fund fee study evaluating the cost of U.S. mutual funds and exchange-traded funds in its database, the weighted average fee went down 7%, the largest annual decline since 1990, when Morningstar started recording and tracking this data. The asset-weighted average expense ratio across funds was 0.57% in 2016, down from 0.61% in 2015 and 0.65% three years ago.
Patricia Oey, senior manager research analyst for Morningstar and author of the report, said in a phone interview that the decline was primarily driven by asset flows into lower-priced investment offerings — specifically, passive funds and less-expensive share classes.
“Fees are declining fast, but it's not because the industry is trimming fees, it's because investors are moving toward cheaper funds,” Ms. Oey said. “Declines in fees are almost all attributable to investor behavior.”
Ms. Oey added that investors are not only drawn to passive funds but also “low-cost active funds,” which “still see inflows, although they are small.”
Other key findings include that in 2016, the asset-weighted average expense ratio was 0.17% for passive funds, compared with 0.75% for active funds. Passive funds' asset-weighted average fee declined a cumulative 19% during the past three years,Also, active funds saw a cumulative net $586 billion in outflows in 2015 and 2016. However, the outflows were all from expensive active funds, the report said. Over the same period, low-cost active funds saw positive, but small, net inflows of $41 billion.
Morningstar's report shows that U.S. equity funds saw the biggest migration to passive from active funds, with passive experiencing $458 billion in net inflows, while active saw $525 billion of net outflows over the past three years. During the same period, U.S. equity funds' asset-weighted average fees fell a cumulative 17% to 0.5%, the largest change of any asset class.
ETFs, meanwhile saw a sizable decline in asset-weighted average fees to 0.24% in 2016 from 0.29% in 2013.
Vanguard Group has the lowest asset-weighted average expense ratio at 0.11%, followed by State Street Global Advisors' SPDR ETFs at 0.19% and Dimensional Fund Advisors at 0.36%. During the past three years, Vanguard's asset-weighted average fee declined 21%, the most significant decline among the 10 largest fund providers.
Large inflows to Vanguard's low-cost passive funds had a notable impact on the industry's declining asset-weighted average expenses. From 2013 to 2016, the industrywide asset-weighted average expense ratio fell to 0.57% from 0.65%. Excluding Vanguard, the expense ratio decline would have been less, to 0.62% from 0.69%.
The full report is available on Morningstar's website.