Fees for mutual funds and exchange-traded funds continue to fall as more money flows into the cheapest funds, more money flows out of the most expensive funds and more asset managers across the board are trimming fees, according to annual research by Morningstar Inc.
"Investors are much more attuned to the price of the funds," Bryan Armour, Morningstar's Chicago-based director of passive strategies, said in an interview.
The asset-weighted average expense ratio for mutual funds and exchange-traded funds dropped to 37 basis points last year from 40 basis points in 2021. The ratio was 90 basis points in 2003, according to a recently published Morningstar report. The asset-weighted average expense ratio for actively managed funds and share classes declined to 59 basis points last year from 61 basis in 2021 "driven mainly by large net outflows from expensive funds and share classes," the report said.
The ratio for passively managed funds and share classes slipped to 12 basis points from 13 basis points for the same period.
Morningstar's annual fees report covers mutual funds and exchange-traded funds encompassing taxable and retirement accounts. Last year, Morningstar compiled data on more than 19,000 unique funds — and 50,000 share classes — holding more than $27 trillion in assets.
Morningstar calculates asset-weighted results. This annual survey doesn't correlate cost and performance.
Last year was especially difficult for expensive funds. "As markets cratered, investors moved back to more core funds and low-cost strategies," Mr. Armour said.
Net inflows from the cheapest 20% of funds tracked by Morningstar gained $394 billion last year, the report said. The other 80% suffered combined record outflows of $734 billion.
Last year's results were dramatic but not unusual. Between 2003 and 2022, the cheapest 20% of funds reported positive inflows every year. In eight of the nine years ending in 2022, the other 80% of funds experienced outflows.
Over time, cheaper-fund fees have fallen faster than the more expensive fund fees. The Morningstar report examined five- year intervals — 2007, 2012, 2017 and 2022 — checking for the cheapest 10% of funds vs. the most expensive 10%.
In 2007, the cut-off point in Morningstar's analysis for the cheapest 10% group was 60 basis points; last year it was 33 basis points, or down 48%.
The cut-off point for the most expensive funds was 206 basis points in 2007, declining 17% to 171 basis points in 2022.
Morningstar also found that bundled funds and share classes have taken a beating at the expense of unbundled and semibundled funds and share classes.
Morningstar defines unbundled funds and share classes those as charging a management fee and operating expenses. The semi-bundled funds and share classes add subtransfer agency fees, revenue-sharing, platform fees or "other access fees" to a management fee and operating expenses, the report said.
Bundled funds and share classes charge all of the above plus distribution fees, loads and commissions and "transactions and other operational fees," the report said.
Bundled funds and share classes accounted for 13.8% of assets last year, one-third of what they captured in 2003.
Unbundled share classes reached 32.8% last year vs. 16.3% in 2003. Semibundled funds also took a bigger piece of the allocation pie, hitting 53.5% last year vs. 41.5% in 2003.
Morningstar also reported that fee-cutting competition remains "intense" among the largest asset managers. Each of the 10 biggest cut their fees between 2017 and 2022 ranging from 16 basis points to 42 basis points on an asset-weighted average basis.
The five lowest-price leaders in 2022 were the same as those in 2017. Asset-weighted average fees for:
