The Low-Cost Fund Arms Race
Funds will continue to get cheaper.
The Race to the Bottom
Twenty years ago, new mutual funds generally cost more than older funds. The industry, of course, charged what the market would bear. And the 90s' market would bear much. At the time, most investors viewed landing the right star manager as being more important than haggling over a fraction of a percent of expenses. As a result, fund companies nudged up management fees on their launches. Also, many new funds carried 12b-1 fees to pay for their distribution costs, which further boosted expense ratios.
Those days are long gone. Just how long gone was demonstrated by the recent news of BlackRock slashing fees on several of its existing exchange-traded funds. It cut costs on iShares Russell 3000 Growth (IWZ) and iShares Russell 3000 Value (IWW) by more than 60%, dropping those ETFs' annual expense ratios to 0.09% from 0.25%. The company took iShares High Dividend (HDV) even further, implementing a 70% markdown. At the same time, BlackRock launched several additional funds, each at the new, lower price point.
John Rekenthaler has a position in the following securities mentioned above: PTTRX. Find out about Morningstar’s editorial policies.