Fund fees fall 6% as investors aim to minimize investment costs

Morningstar study estimates investors saved $5.8B in expenses last year

Asset-weighted average expense ratio across U.S. funds dropped 6 percent year-over-year, which is the third-largest decline since 1991, an annual fund fee study conducted by investment research company Morningstar found.

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"Investors are increasingly aware of the importance of minimizing investment costs, which has led them towards lower-cost funds and share classes," said Ben Johnson, Morningstar's director of ETF and passive strategies research. "There has also been intensifying competition among asset managers, who have cut fees to appeal to cost-conscious investors."

Fees dropped to 0.45 percent in 2019 compared to 0.48 percent in 2018. Morningstar estimates investors saved $5.8 billion in fund expenses last year.

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According to the study, the ratio of all U.S. open-end funds and ETFs has been nearly cut in half over the past two decades, from 0.87 percent in 1999 to 0.45 percent in 2019. Active funds fell 0.66 percent in 2019 from 0.68 percent in 2018 while passive funds fell to 0.13 percent in 2019 from 0.14 percent in 2018.

In addition, the study found investors have begun to reject costly funds for more favorable low-cost funds. In 2019, the cheapest 20 percent of funds saw a net increase of $581 billion while the remainder of funds saw a decrease of $224 billion. The cheapest 10 percent of funds alone received an increase of $526 billion.

The cheapest 10 percent of funds have fallen 43 percent compared to the rest over the past 15 years while the most expensive 10 percent of funds have fallen just 19 percent compared to the rest.

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Morningstar also found that another factor impacting funds is "the way financial advice is delivered and paid for."

"As advisors move away from transaction-driven compensation models and toward fee-based ones, fund share classes that have fewer embedded advice or distribution costs are seeing more flows," Johnson added.

The study concluded that over the past decade, semibundled and unbundled fund share classes, which provide less embedded advice or lower distribution costs, have seen more favorability from investors compared to bundled fund share classes.

While investors have a wide array of cheap options, Vanguard has the lowest asset-weighted average expense ratio of 0.09% in 2019 compared to BlackRock/iShares, State Street Global Advisors, and others.

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The most attractive alternative to higher-cost actively managed funds are strategic-beta funds, which had an average fee of 0.20%, slightly higher than 0.12% for traditional index funds but signifcantly lower than 0.66% for active funds.

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