Mutual Fund Fees

Morningstar each year does a trend study on mutual fund fees.  Here are some of their findings with a comment from me after each.

-The amount investors paid to own funds hit a record low in 2018: The asset-weighted average expense ratio for U.S. open-end mutual funds and exchange-traded funds fell to 0.48%, down from 0.51% in 2017. We estimate that investors saved roughly $5.5 billion in fund expenses last year due to this 6% fee decline, marking the second-largest year-over-year percentage decline since we began tracking asset-weighted average fees in 2000. 

{Of course fees are declining.  Mutual funds have to compete against ETFs where funds of major indices may charge fees of between 3-12 basis points.  Those ETF fees have been going down as well.  Still nearly 40 basis points difference in costs and many of these funds don't outperform the indices.}

-Funds with lower fees are experiencing greater asset flows Morningstar’s 2018 Active/Passive Barometer found that, historically, fees are one of the best indicators of future relative performance, as lower-cost funds generally have greater odds of surviving and outperforming their more-expensive peers. 

{When you can't compete on value you need to compete on price.}

-Evolving advice model.  The move toward fee-based financial advice has spurred the demand for lower-cost funds like ETFs.

{When advisors are paid for advice and expertise and not motivated by commissions for a living it becomes harder for mutual funds with all their inherent disadvantages to attract assets from the RIA community.}

It's hard for me to see how the mutual fund industry is ever going to be able to compete with ETFs.  They are unlikely to go away anytime soon but they are well beyond their prime as a concept and I believe are likely going to continue to hemorrhage assets in the coming years.  Maybe funds in the big mutual fund families will make it or funds that have a niche but the small and the weak are going to go the way of the dinosaurs.

Link:  Morningstar Fund-Fee Study:  "The Key Factors Helping Drive Fund Fees Lower."

Back Tuesday.