As fees fall industrywide, some funds see price hikes

Register now

Turns out, fee compression is not a universal phenomenon.

Even as the average-weighted expense ratio for active and passive funds fell — yet again — in 2019, there were price hikes in some funds last year, according to a new Morningstar report.

Although the expense ratio clients pay has been falling for 20 years — “investors have saved billions,” according to the report — about 21% of passive and 29% of active funds raised their expense ratio in 2019, while only 9% and 20%, respectively, did so in 2018, according to Morningstar Direct.

The asset-weighted average expense ratio of all open-end mutual funds and ETFs in the U.S. fell to .45% in 2019 from .87% in 1999, according to Morningstar Direct, which estimates that investors saved $5.8 billion in fund expenses last year alone.

But not all funds are dropping their prices. The equal-weighted average expense ratio, which measures what asset managers charge regardless of the size of their funds, rose for passive funds in 2019, according to Morningstar. The average fee across all passive funds went up a single basis point to 0.61% from 0.60%. Active funds, on average, dropped their expense ratios from 1.11% to 1.08%.

Even if some asset managers have raised prices or introduced more expensive funds to the market, it’s evident that clients still want low price tags.

Some 93% of net new money — or $526 billion in assets — flowed into the cheapest 10% of all funds in 2019, according to Morningstar. At the end of 2019, 72% of assets in long-term mutual funds were in no-load share classes, up from 43% at the beginning of the decade, according to the Investment Company Institute.

Asset managers have clearly been paying heed to cost. Even some of the larger, already less-expensive funds in the industry are getting cheaper. iShares National Muni Bond ETF (MUB) cut its fee to 0.11% from 0.25%, according to Morningstar. Vanguard’s Tax-Exempt Bond ETF (VTEB) now costs 0.06%, down from 0.08%.

Earlier this year, BNY Mellon launched two zero-cost ETFs into the marketplace. Fidelity released zero-fee index mutual funds in 2018.

Strategic-beta ETFs, too, which are generally more expensive than traditional index funds, are being squeezed, according to Morningstar.

“This space has and will continue to see mounting fee pressure in coming years,” the report says.

For reprint and licensing requests for this article, click here.
Portfolio management ETFs Asset managers Fee-based compensation Mutual funds Morningstar Passive management Active management