Mutual fund and ETF investors on average paid lower fees in 2017 than ever before and saved around $4 billion in fund expenses compared to the previous year, according to a study of U.S. funds published by Morningstar.
Investors paid an average 0.52% expense to own mutual funds and exchange-traded funds in 2017, an 8% decline from 2016 when the average was 0.56%, according to Morningstar's annual fund fee study evaluating the cost of U.S. mutual funds and ETFs in its database of about 25,000 open-end funds.
The asset-weighted average expense ratio for active funds was 0.72% in 2017, down from 0.75% in 2016, and on the passive side, the asset-weighted average expense ratio was 0.15% in 2017, down from 0.16% in 2016.
Morningstar's report also states investors are gravitating toward the lowest-cost funds among passively managed offerings. Changes in fees charged by money managers, represented in the equal-weighted average expense ratio, was 0.30% in 2017, down from 0.31% in 2016. Because that decrease was smaller than the asset-weighted average decline of 7%, it indicates investors gravitating toward lower-cost passive funds, the report said.
Patricia Oey, senior manager research analyst for Morningstar and author of the report, said in a telephone interview that domestic equity is the primary driver of fee changes because domestic equity funds make up about 44% of the total fund market.
"We're continuing to see in active funds, U.S. equities have seen outflows for the past 10 years. A lot of that has been redirecting to passive funds," Ms. Oey said, adding that within the passive funds universe, it has gotten "very, very competitive" as investors go to the cheapest funds. She also mentioned actively managed funds have seen lower fees in the past few years because they've reached "break points" due to excellent market returns. She said after a certain level has been reached in returns, there's a "little more decline in the fees charged by managers for active equities."
Regardless of active or passive status, the cheapest 20% of funds within their category groups saw net inflows of $949 billion in 2017, with passive funds getting about 70% of those inflows and active funds, about 30%. Among the rest of the funds, the most expensive 80%, funds saw net outflows of $251 billion.
Vanguard Group has the lowest asset-weighted average expense ratio at 0.1%, followed by State Street Global Advisors' SPDR ETFs at 0.16% and iShares at 0.25%. During the past three years, Vanguard's asset-weighted average fee declined a cumulative 25%, the most significant decline among the 10 largest fund providers. Vanguard was followed by iShares at 19% and Fidelity Investments at 14%.
The full report is available on Morningstar's website.