Investors Save Billions as U.S. Fund Fees Hit Record Lows in 2023
The landscape of fund fees in the investment world is rapidly changing, with investors benefiting from lower costs but also facing new challenges in navigating the market. According to a recent study by Morningstar, investors paid almost $3.4 billion less in fund fees in 2023, with the asset-weighted expense ratio of U.S. mutual funds and exchange-traded funds declining to a record low of 0.36%.
One of the main reasons behind this decline is the fierce competition among asset managers for investors’ dollars, leading to a preference for lower-cost funds. However, the study also found that while fund fees are decreasing, investors are not necessarily reaping the full benefits. Instead, they are redirecting those saved dollars to pay for the services of financial advisors who help them choose the right funds.
Despite the overall decline in fund fees, Morningstar researchers believe that fees for many mutual and ETF funds have reached a floor, with charges as low as 0.05%. Going forward, cost pressures may prevent asset managers from cutting fees further, as evidenced by the slower rate of decline in 2023 compared to previous years.
The trend towards lower fees is more pronounced for passive funds, with the asset-weighted average expense ratio for active funds declining to approximately 0.59% and for passive funds to 0.11%. However, the study also noted that fee increases outpaced fee decreases for the first time since 2019, with 37% of active and 24% of passive funds reporting fee hikes in 2023.
In addition, the emergence of active and alternative ETFs has led to higher fees for new ETF launches, while fees for new mutual funds have declined. This shift in the market dynamics suggests that while fees on core equity and bond passive funds may be approaching a floor, there is still room for fee pressure in the active and alternative ETF space.
Overall, the changing landscape of fund fees presents both opportunities and challenges for investors. While lower costs can lead to higher returns in the long run, navigating the market to find the right balance between cost and performance remains crucial. As the investment landscape continues to evolve, staying informed and adapting to new trends will be key to success in the ever-changing world of fund fees.
