The average expense ratios of long-term mutual funds have been in decline for 20 years now, due to increased demand for index funds and a continuing shift by investors in both actively managed and index funds toward lower-cost funds, according to a report from the Investment Company Institute.
In 2017, average annual expense ratios for equity mutual funds fell four basis points to 0.59% from 0.63%. Average hybrid and bond mutual fund expense ratios declined three basis points from their values in 2016, to 0.7% and 0.48%, respectively.
Longer term, the average expense ratio of actively managed equity mutual funds fell to 0.78% in 2017, down from 1.08% in 1996. Index equity mutual fund expense ratios fell to 0.09% in 2017 from 0.27% in 1996. 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, the ICI report said.
Meanwhile, expense ratios of money market funds continue to rise in response to the increase of short-term interest rates associated with a firming of monetary policy, according to the report. The average expense ratios for money market funds rose five basis points in 2017 to 0.25%. This increase was connected to the Federal Reserve raising short-term interest rates three times in 2017.
Strong asset growth and competitive pressures, driven by individuals saving for retirement, continue to put pressure on target-date mutual fund expense ratios.
Expense ratios of target-date mutual funds averaged 0.44% in 2017. Since 2008, the expense ratios of these funds have fallen 34%. Because these funds are attractive to individuals saving for retirement, investor demand for them has flourished in recent years. Ninety-five percent of target-date mutual funds are funds of funds, the expense ratios of which fell to 0.58% in 2017 from 0.65% in 2016.
Economies of scale and increased competition are putting pressure on expense ratios of exchange-traded funds. In 2017, the expense ratios of index equity ETFs fell to 0.21% (from 0.34% at their peak in 2009). Expense ratios of index bond ETFs, fell to 0.18% in 2017 from a peak of 0.26% in 2013.
In 2017, average expense ratios for index equity ETFs fell one basis point to 0.21%. Average index bond ETF expense ratios declined two basis points from their value in 2016, to 0.18%.
A full copy of the report is available on ICI's website.