Analysis of asset-weighted averages confirms impact of rising cost consciousness and competitive pressure
The broad industry shift to lower investment product costs has led to a widely documented decline in expense ratios and fees. And a new report from the Investment Company Institute (ICI) provides an additional dimension to that narrative.
In the report titled Trends in the Expenses and Fees of Funds, 2019, the institute calculated asset-weighted average expense ratios for long-term mutual funds across bond, equity, and hybrid asset classes, as well as active and index-based strategies.
Based on data from ICI as well as Morningstar and Lipper data, the report that over a historical period of more than 20 years, asset-weighted average expense ratios for all types of mutual funds have declined substantially.
As of 2019, equity mutual fund expense ratios averaged 0.74%, compared to 1.08% in 1996. Over the same period, average index equity mutual fund expense ratios declined from 0.27% to 0.07%.
“This trend is fueled by investor interest in lower-cost actively managed and index equity mutual funds, as well as asset growth and the resulting economies of scale,” ICI noted.
Costs of bond mutual funds also fell. From 1996 to 2019, the institute found that actively managed bond funds saw their expense ratios drop from 0.84% to 0.56% on average; the average expense ratio for index-based counterparts declined from 0.2% to 0.07%.
Investors’ preference for lower-cost funds was alive and well in 2019, as the report found that in the active equity category, only the 5% of funds with the lowest expense ratios saw inflows last year. For active bond and hybrid funds, only those whose expense ratios landed in the lowest quartile gathered inflows, which were most concentrated among those with expense ratios in the lowest 5%.
“Among index funds—including domestic equity funds, world equity funds, and bond and hybrid funds—those with expense ratios in the lowest quartile all received inflows,” ICI said.
The report also examined data for ETFs, which ICI said tend to be low-cost because they are typically index-based and typically do not bundle distribution, account servicing, or maintenance fees in their expense ratios.
Between 2018 and 2019, average expense ratios for index equity ETFs were observed to decline by 1 basis point to 0.18%. Meanwhile, average index bond ETF expense ratios also dropped by 1 basis point, reaching 0.14%.
