Index mutual funds and exchange-traded funds have surged ahead of actively managed funds, capturing 51% of assets under management in 2024, the Investment Company Institute reported March 26.
The passive funds’ dramatic gains have coincided with an overall aggregate growth of mutual funds and ETFs, reaching $31.7 trillion in AUM last year vs. $9.9 trillion in 2010, according to an ICI report on fund fees and expenses.
During that period, the index fund assets climbed to $16.3 trillion from $1.71 trillion. Index funds accounted for only 19% of total fund assets in 2010.
Among the passive investments, ETFs have surpassed mutual funds, according to ICI data. Of the 51% market share last year, the index component was 29% and the mutual fund component was 22%.
The ICI data excludes money market funds and non-1940 Act ETFs. The ICI report noted that 90% of ETF assets last year were in index ETFs.
The average expense ratio for an index equity ETF was 14 basis points last year, down from 22 basis points in 2016. The average expense ratio for a bond ETF dropped to 10 basis point from 20 basis points during this period.
Fees for actively managed ETFs fell, too. Last year, the average equity ETF expense ratio was 44 basis points, or half the amount in 2016. During this period, the average expense ratio for an actively managed bond ETF fell to 34 basis points from 48 basis points.
All of the expense ratios are measured as asset-weighted average. ICI chooses this measurement because simple averages would overstate the expense ratios of investments in which investors hold few dollars, the ICI report said.
“In recent years, competition and economies of scale within the ETF industry have put downward pressure on both equity and bond ETF expense ratios,” the report said. “New ETF sponsors have entered the marketplace to compete for market share, and the number of equity and bond ETFs has skyrocketed,” the report said. “Even with the steady stream of new types of equity and bond ETF offerings, which can have a wide range of expense ratios, the rapid growth in ETF total net assets has enabled many funds to reduce their expense ratios because of economies of scale.”
The ICI report also noted a decline in weighted average mutual fund expense ratios, comparing last year to 1996. For actively managed equity mutual funds, the average expense ratio declined to 64 basis points from 108 basis points. The average expense ratio for actively managed bond mutual funds dropped to 47 basis points from 84 basis points.
For passive equity mutual funds, the average expense ratio declined to 5 basis points last year from 27 basis points in 1996. During this period, the average expense ratio for bond index funds dropped to 5 basis points from 20 basis points.
The ICI report also noted two reasons passive mutual fund ratios are lower than passive ETF expense ratios.
“First, index mutual funds have a larger share of total net assets held in funds with low expense ratios,” the report said. “Second, index mutual funds are, on average, much larger than index ETFs, and benefit more from economies of scale.”
Last year, the average long-term index mutual fund had $13.4 billion in net assets vs. $5 billion for the average index, more than twice the size of the average index ETF. “As the index ETF market has matured, the gap between the average expense ratios for index ETFs and index mutual funds has narrowed,” the report said.
