Morningstar: Fund Expense Ratios Declined 7% in 2020

A Morningstar study of U.S. mutual funds and ETFs found the asset-weighted average expense ratio across funds was 0.41% in 2020, a 7% decline from 2019, the third-largest year-over-year decline Morningstar has recorded since 1991. Morningstar cites several realities accounting for the continuing decline, among them intensifying competition among asset managers cutting fees to vie for market share and the move toward fee-based models of charging for financial advice. Additional findings from the Morningstar study:

• The asset-weighted average expense ratio fell to 0.41% in 2020 from 0.44% in 2019. As a result, Morningstar estimates investors saved nearly $6.2 billion in fund expenses last year.
• The asset-weighted average expense ratio for active funds fell to 0.62% in 2020 from 0.65% in 2019, driven mainly by large net outflows from expensive funds and share classes and, to a lesser extent, inflows to cheaper ones.
• The asset-weighted average expense ratio for passive funds fell to 0.12% in 2020 from 0.13% in 2019, due to steady flows into the lowest-cost funds.
• The equal-weighted average expense ratio—which indicates what funds charge irrespective of where assets are held—fell to 0.98% in 2020 from 1.00% in 2019. Active funds’ equal-weighted fees declined to 1.04% from 1.07%, while the equal-weighted average fee among passive funds dropped to 0.45% from 0.46%.
• In 2020, the cheapest 20% of funds saw net inflows of $445 billion, with the remainder suffering outflows of $293 billion. The cheapest 5% of funds alone received $412 billion of inflows.
• Investors in sustainable funds are paying a “greenium” relative to investors in conventional funds. This is evidenced by these funds’ higher asset-weighted average expense ratio, which stood at 0.61% at the end of 2020 versus 0.41% for their traditional peers.