Investors Paid Lower Fund Expenses Than Ever in 2015

On average, U.S. investors paid lower fund expenses in 2015 than ever before, as assets continue to flow into lower-cost index mutual funds, exchange-traded funds (ETFs), and institutional share classes, Morningstar reports.

The asset-weighted average net expense ratio of all U.S. funds was 0.61% in 2015, down from 0.64% in 2014 and 0.73% five years ago. The decline was primarily driven by asset flows into lower-priced vehicles—namely, passive funds and less-expensive share classes—and not by fee cuts in the asset management industry, Morningstar notes. From 2013 to 2015, the simple-average expense ratio of the largest 1,000 share classes, which accounts for 75% of assets in mutual funds and ETFs, remained 0.64%.

The least-expensive funds—those with fees that fall in the lowest quintile—collected $1.7 trillion in flows during the past five years, while the remaining funds have seen outflows of $372 billion. On average, passive funds, including index funds and ETFs, accounted for approximately 75% of flows into the least-expensive funds in that time period.

In 2015, the asset-weighted expense ratio was 0.18% for passive funds, compared with 0.78% for active funds, a difference of 60 basis points. With such a large fee gap, rising flows into passive funds contributed to falling asset-weighted average expense ratios.

Although active funds outnumber passive funds eight to one, passive funds gathered $576 billion more in assets than active funds in 2015. That represents a sharp increase from 2011, when passive funds took in $140 billion more than active funds.

The largest flows to passive funds—and out of active funds—occurred in the Morningstar U.S. equity category group, where passive funds experienced $471 billion of inflows and active funds saw $572 billion of outflows during the past five years. The 67-basis-point fee gap between U.S. equity active funds and passive funds is the largest among the seven major asset class groups.