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March 21, 2019 01:00 AM

Mutual fund expense ratios fall significantly — ICI report

Brian Croce
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    Expense ratios for long-term mutual funds have declined on average for more than 20 years, according to a report from the Investment Company Institute released Thursday.

    Equity mutual fund expense ratios averaged 0.55% in 2018, down from 0.99% in 1997, while hybrid mutual fund expense ratios averaged 0.66% in 2018 vs. 0.92% in 1997 and 2018 bond mutual fund expense ratios averaged 0.48% compared with 0.82% in 1997, according to "Trends in the Expenses and Fees of Funds, 2018."

    Investors shifting toward lower-cost funds or fund share classes, increased industry competition and increasing economies of scale are reasons for the declines, the report said.

    "Industry competition continues to push down the expense ratios of mutual funds and exchange-traded funds, as the fund industry meets investors' demand for lower cost funds," said Shelly Antoniewicz, ICI's senior director of industry and financial analysis, in a news release. "This demand is driven by a major shift in the industry's business model, as more investors pay directly for investment advice and assistance from investment professionals, rather than indirectly through fund fees."

    But the average expense ratios for money market funds rose 1 basis point to 0.26% in 2018. The report said the increase was due to the Federal Reserve raising interest rates while fund advisers kept their use of expense waivers low. Expense waivers had been offered widely during the period of near-zero short-term interest rates that prevailed after the financial crisis, ICI noted.

    ICI analyzed fee trends using asset-weighted averages to summarize the expenses that shareholders actually pay through funds, which takes into account both the decline in funds' expense ratios and the increasing shift of investor assets toward lower-cost funds.

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