Morningstar Finds ESG Funds Are More Expensive Than Conventional Funds

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.