The average expense ratio paid by fund investors has been falling for more than two decades, according to Morningstar’s “2020 U.S. Fund Fee Study.”
Last year, the asset-weighted average expense ratio of all U.S. open-end mutual funds and exchange-traded funds (ETFs) was 0.41%, compared with 0.93% in 2000. From 2019 to 2020, the asset-weighted average expense ratio fell from 0.44% to 0.41%. As a result, Morningstar estimates investors saved nearly $6.2 billion in fund expenses last year.
The asset-weighted average expense ratio for passive funds fell to 0.12% in 2020 from 0.13% in 2019, thanks to steady flows into the lowest-cost funds, the study report says. Active funds, which are discouraged by some in the retirement plan industry, in part because of their higher fees, also had a decline in fees from 0.65% in 2019 to 0.62% in 2020. Morningstar says this is driven mainly by large net outflows from expensive funds and share classes and, to a lesser extent, inflows to cheaper ones.
In 2020, the cheapest 20% of funds saw net inflows of $445 billion, with the remainder seeing outflows of $293 billion.
The Morningstar report says investors in sustainable funds are paying a “greenium” relative to investors in conventional funds. The study found a higher asset-weighted average expense ratio for environmental, social and governance (ESG) funds (0.61%) compared with their traditional peers (0.41%). The Department of Labor (DOL) recently proposed new regulations regarding ESG investing in retirement plans, which is expected to encourage the use of ESG funds.
Morningstar notes that strategic-beta funds are an alternative to higher-cost actively managed funds, and, in 2020, the asset-weighted average fee for strategic-beta funds was 0.18%—slightly higher than the fee for traditional index funds (0.11%) but significantly lower than for active funds.