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Fund-Fee Study: The Key Factors Helping Drive Fund Fees Lower

Our study finds fund fees reached an all-time low in 2018

Ben Johnson, Morningstar Research Services LLC


The amount investors paid to own funds hit a record low in 2018: The asset-weighted average expense ratio for U.S. open-end mutual funds and exchange-traded funds fell to 0.48%, down from 0.51% in 2017. We estimate that investors saved roughly $5.5 billion in fund expenses last year due to this 6% fee decline, marking the second-largest year-over-year percentage decline since we began tracking asset-weighted average fees in 2000. 

We believe several factors are driving this decrease in the asset-weighted average fee, such as: 

  1. Greater awareness. Investors are increasingly seeking to minimize investment costs, which has led them to favor lower-cost funds. 
  2. Intensifying competition. Many asset managers have been cutting fees to vie for market share. 
  3. Evolving advice model. The move toward fee-based financial advice has spurred the demand for lower-cost funds like ETFs. 
  4. Unbundling. Institutions and advisors have increasingly opted against costlier share classes that embed advice and distribution fees. 

Morningstar Research Services’ annual fund-fee study examines fees across U.S. open-end mutual funds and exchange-traded funds. Below, explore some of this year’s key findings. 

Funds with lower fees are experiencing greater asset flows 

Morningstar’s 2018 Active/Passive Barometer found that, historically, fees are one of the best indicators of future relative performance, as lower-cost funds generally have greater odds of surviving and outperforming their more-expensive peers. 

Since 2000, we have seen the cheapest funds (defined as funds whose fees rank within the bottom quintile of their Morningstar Category group) rake in assets. The trend continued in 2018, when these lower-cost funds saw net inflows of $605 billion, with around three fourths of that sum directed to passively managed funds.  

On the flip side, the remaining 80% of funds (the top four quintiles when sorted by cost) have seen substantial outflows. As shown below, this group’s flows have been negative for five consecutive years, a trend that continued in 2018 when it witnessed a record $478 billion in outflows. 

Fund fees are being shaped by the evolving economics of advice  

As the financial advice business continues to evolve, it’s creating a marked impact on flows and fee trends. For instance: 

  • Advisor compensation is becoming less reliant on commissions and more so on basis-point fees, which can move advisors to avoid share classes with built-in costs for advice and distribution. 
  • The ongoing shift from investment management to planning has led several advisors to redefine the way they advise clients, emphasizing asset allocation over security selection.  

These trends have spurred demand for cheap wide-market exposure, which has favored lower-cost passive funds. 

How fund fees account for advice 

In 2018, Morningstar introduced the service-fee-arrangement data point to its U.S. funds database, which identifies how fund share classes bundle in fees that pay for advice. The three options for this data point include:  

  • Unbundled. In this case, the share class charges investors for investment management and fund-operating expenses only. 
  • Semibundled. The share class charges investors for investment management and other operating expenses, and it indirectly charges for sales distribution (in the form of revenue sharing), but doesn't levy 12b-1 fees. 
  • Bundled. This indicates that the share class charges investors for investment management and other operating expenses, and levies 12b-1 fees. 

The chart below compares these three service-fee arrangements in full.  

When compared with one another, we see that bundled share classes have experienced outflows over the past five years, while semibundled and unbundled share classes have earned steady inflows (as shown on the chart below). This trend aligns with the shift from transaction-driven advice models toward fee-based models. 

Overall, we have reason to believe that this trend toward lower fund fees is likely to continue. Today’s investors are paying roughly half as much to own funds as they did in 2000, 40% less than a decade ago, and about 26% less than five years ago. We believe it is unlikely that any of the forces driving declines in fund fees will abate any time soon, so investors may be likely to see fund fees slip even lower in the years to come.


To explore the full analysis, download this year’s U.S. Fund Fee Study.

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The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission.

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