The pressure on asset managers to cut fund fees further may be less acute than it once was. That is a conclusion from Morningstar’s latest study of fund expenses, which shows that the pace of fee cuts is moderating.
The research and data company says the asset-weighted average expense ratio for all U.S. mutual funds and exchange-traded funds was 0.34% in 2024. That is a big improvement from 2005 when the average expense ratio was 0.83%, but it is a mere two basis points cheaper than the 0.36% average fee in 2023. (A basis point is one one-hundredth of a percentage point.) Morningstar estimates that investors saved almost $5.9 billion in fund expenses last year.
The ability of some asset managers to slash costs may be reaching its limits. Today, expenses for many passive index funds, which track baskets of stocks, are minuscule. As Morningstar’s report observes, “Fees of prominent index mutual funds and ETFs are approaching a floor, with many already charging less than 0.05%.”
For example, the expense ratio for the Vanguard S&P 500 ETF, one of the most popular index funds with about $650 billion in assets, is just 0.03%. Some companies, such as Fidelity Investments and Morgan Stanley’s E*Trade, have even launched zero-fee index funds.
“As fees for these funds sit either at or near zero, it is inevitable that the pace of fee declines will slow, prompting asset managers to look elsewhere for profits,” Morningstar’s report states.
Fund costs have done down over the years as investors became more attuned to expenses and came to prefer passive index funds, which are more affordable than their actively managed peers. Asset managers catering to cost-conscious customers have benefited as a result. Morningstar notes that four of the five largest asset managers were among the five cheapest providers in 2024 (as ranked by asset-weighted average fee).
What’s more, the cheapest quintile of funds saw net inflows of $930 billion last year, per Morningstar. The remaining 80% shed $254 billion in outflows.
Vanguard maintained its low-cost lead with an average fee of just 0.07%, according to Morningstar. The company, which has been a leader in low-cost index funds, has forced other asset managers to cut fees in what is known as the Vanguard effect. Earlier this year, the $10 trillion asset manager slashed expense ratios for 168 share classes across 87 funds. Morningstar estimates the move saved Vanguard investors estimated $350 million just this year.
Retail investors aren’t the only ones driving this trend. Financial advisors have also changed how they select which funds to invest in on behalf of their clients. “As advisors move away from transaction-driven compensation models and toward fee-based ones, less costly funds and share classes, those that have fewer—if any—embedded advice and/or distribution costs, are seeing more flows,” Morningstar’s report says.
So while the pace of fee cuts may be moderating, the pressure on asset managers to maintain low fees isn’t going anywhere.
Write to Andrew Welsch at andrew.welsch@barrons.com