Investors saved billions last year, thanks to record-low fund fees

Morningstar study finds two major factors driving reductions in mutual fund fees

Investors saved billions last year, thanks to record-low fund fees

As U.S. mutual fund fee ratios dropped from 2020 levels, investors were able to save US$6.9 billion last year, according to new research from Morningstar.

According to the organization’s latest U.S. Fund Fee Report, which assesses expense trends for U.S. open-end mutual funds and exchange-traded funds, found that the asset-weighted average expense ratio for U.S. funds decreased from 0.42% to 0.40% in 2021.

“Intensifying competition among asset managers and changes in the economics of advice are two factors driving fees lower,” Bryan Armour, Morningstar director of passive strategies research for North America, said in a statement. “Investors are also increasingly aware of the importance of minimizing investment costs, which we expect to continue in this down market.”

Morningstar noted that the most current average compares with 0.87% in 2001 and that the average expense ratio paid by fund investors has been dropping for more than 20 years.

The research company found that for active funds, the asset-weighted average expense ratio decreased from 0.63% in 2020 to 0.60% in 2021. Most of the adjustment was driven by significant net outflows from pricey share classes and funds, with inflows into less expensive ones also making a difference.

Even though it dropped to its lowest level ever in 2021, sustainable funds still charge investors a "greenium." At the end of 2021, these funds' asset-weighted average expense ratio was 0.55% compared to 0.39% for their traditional peers.

Investors continue to select low-cost funds, according to Morningstar.

The least costly 20% of funds experienced net inflows of $1.05 trillion in 2021, with the remaining 80% receiving inflows of $57 billion. This was the first year since 2013 that the more expensive funds saw combined inflows.

Flows totaled $648 billion into the least priced 5% of funds alone.

Despite its rivals' gains, Vanguard continued to have the lowest asset-weighted average expense ratio among asset managers in 2021 at 0.08%.