Expense Ratios Are Falling

Expense ratios have come down for investors over the past two years. The driver was appreciation in fund values, which drove up asset levels and in turn triggered built-in cuts in management fees.

The annual expense ratio is an average of the expense ratio charged by funds over that time. Typically, that figure rises and falls as assets grow and shrink. The reason is that funds typically have breakpoints in management fees so that, above a certain threshold, they will charge less on additional dollars managed. A second related force at work for funds is that other fees that go into expense ratios are set on a firmwide asset level basis. Thus, when you have huge market moves such as the 2008 bear market or the 2009-10 rebound, you'll see significant adjustments to other fees, too.

The data from 2010 expense ratios are encouraging thanks to a big spike in assets. Fees fell significantly in 2010 and are now lower than they have ever been. If rallying market values seem like an old story, they are. There's a significant lag in expense ratio reporting. The figures for 2010 came out in February and March 2011. Moreover, the 2010 figures themselves generally cover the fiscal year that began in November 2009 and ended Oct. 31, 2010. Thus, the numbers we're looking at today reflect information from as far back as 18 months ago.

For this study as in years past, we asset-weighted expenses to come up with what the average investor is paying. In addition, we excluded money markets, exchange-traded funds, and closed-end funds. All open-end fund share classes were included. In the accompanying table, you'll see that we broke fees down by asset class and rolled them up for an overall figure. Some fees that you might pay for your funds are not included in expense ratios, such as front-end loads, wrap fees, and redemption fees.

Asset-Weighted and Average Expense Ratios, Broad Groups--Excludes Load-Waive Shares

 

Year Dom-Equity Ast-Wgt Exp Ratio % Balanced Ast-Wgt Exp Ratio % Intl Equity Ast-Wgt Exp Ratio % Alt Ast-Wgt Exp Ratio % Taxable-Bnd Ast-Wgt Exp Ratio % Muni Bonds Ast-Wgt Exp Ratio % All Funds Ast-Wgt Exp Ratio % 1990 0.96 1.00 1.19 1.29 1.01 0.69 0.94 1991 0.97 0.97 1.25 1.36 1.01 0.68 0.94 1992 0.97 0.95 1.27 1.35 0.97 0.68 0.93 1993 0.98 0.96 1.30 1.32 0.93 0.70 0.93 1994 1.00 1.00 1.34 1.24 0.95 0.72 0.97 1995 1.00 0.97 1.31 1.31 0.94 0.75 0.98 1996 0.97 0.95 1.27 1.31 0.91 0.75 0.97 1997 0.93 0.92 1.25 1.39 0.90 0.72 0.95 1998 0.91 0.89 1.23 1.56 0.88 0.72 0.92 1999 0.91 0.88 1.25 1.61 0.86 0.71 0.92 2000 0.94 0.89 1.21 1.51 0.83 0.71 0.95 2001 0.96 0.86 1.20 1.40 0.80 0.69 0.94 2002 0.98 0.85 1.20 1.50 0.77 0.68 0.93 2003 0.97 0.85 1.20 1.56 0.77 0.69 0.92 2004 0.92 0.81 1.14 1.45 0.75 0.68 0.89 2005 0.87 0.77 1.08 1.31 0.71 0.67 0.85 2006 0.83 0.73 1.03 1.36 0.69 0.66 0.83 2007 0.80 0.75 0.99 1.22 0.67 0.67 0.81 2008 0.80 0.74 0.96 1.20 0.65 0.63 0.79 2009 0.81 0.77 1.00 1.28 0.64 0.65 0.79 2010 0.77 0.74 0.97 1.18 0.64 0.61 0.77

 

A Healthy Drop
Overall, the average fund investor paid about 3 basis points less in 2010 than in 2009 as expenses dropped to 0.765% from 0.791%. Ten years ago that figure was 0.941%. In 1990, it was 0.936%. That's a decent drop, though one that you'd expect from an industry with economies of scale that have doubled in size a few times since 1990.

In 2010, municipal-bond fund expense ratios dropped the most to 0.613% from 0.655%. It may have helped that some municipal-bond funds were merged away in 2009 and 2010, as smaller higher-cost funds are usually the ones to be merged away. In addition, assets at some of the bigger higher-cost funds such as Oppenheimer Rochester shrank relative to lower-cost funds.

U.S. equity funds also enjoyed a drop to 0.774% from 0.801%. Although flows into U.S. stock funds were tepid at best, asset sizes nonetheless surged because of big total returns over the course of the fiscal year. The 2009 expense ratio figures included the final four months of the bear market, so asset bases were significantly smaller and therefore expenses higher over that period.

The story was similar for international equity funds, where expense ratios dropped to 0.970% from 0.998%. That's the cheapest that international funds have been since fiscal 2008.

Balanced funds saw a drop as fees fell to 0.774% from 0.735%.

Taxable-bond funds actually saw a slight uptick in expenses even though they had the greatest inflows. The average investor paid 0.639% for taxable-bond management compared with 0.636% in the prior year. The reason is likely the shift in categories among taxable-bond flows. Quite a bit of the flows went to world-bond and multisector funds, which are among the priciest taxable-bond funds.

Alternative funds saw expenses fall to 1.178% from 1.283% even as the number of funds in alternatives keeps growing.

Where to Next?
Just as the markets have flattened of late, so might expense ratios. Barring a big move in stocks or bonds, I wouldn't expect fees to change much in the coming year. True, PIMCO recently did move to cut its retail level fees, but there don't appear to be any widespread changes afoot.

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