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The trend is clear: investors continue to demand lower fees from their investment funds.
Mass migration to cheaper funds has been the main driver of lower costs. According to says Zachary Evens, Manager Research Analyst at Morningstar.
Average annual fund fees have more than halved over the past 20 years, from 0.87% in 2004 to 0.36% in 2023, Evens wrote.
And experts say exchange-traded funds often outperform mutual funds when it comes to fees.
The average ETF has an annual management fee of 0.51%, about half the average mutual fund's 1.01% fee, according to Morningstar data.
Some experts point out that it's not entirely fair to compare average ETF fees to mutual fund fees because most ETFs have historically been index funds rather than actively managed funds. Index funds are generally cheaper than active funds, which employ stock-picking tactics to beat the market. That means the ETF's average fees will naturally be lower, experts say.
However, a closer comparison reveals similar price trends.
On that note, index ETFs have an average annual fee of 0.44%, half the 0.88% fee for index mutual funds, according to Morningstar. Similarly, the average fee for active ETFs is 0.63%, compared to 1.02% for actively managed mutual funds, according to Morningstar data.
Investors pay this fee each year, which is equal to a percentage of their holdings in the fund. Asset managers obtain information directly from client accounts.
“There are a lot of things you can't control in investing,” said Michael McCrary, chief investment officer at Valmark Financial Group. “The only thing you can control is the fee.”
“I think this is one of the important things that people should be concerned about,” he said.
“There are also cheap investment trusts.”
The same goes for ETFs and mutual funds. Both are baskets of stocks and bonds overseen by professional money managers, giving you a way to diversify your investments and access a wide range of markets.
ETFs are newer. First US ETF — SPDR S&P 500 ETF Trust (spy), an index fund that tracks the S&P 500 stock index — debuted in 1993.
Mutual funds hold more than $20 trillion, about twice as many assets as ETFs. However, as investor preferences change, ETFs have steadily increased their market share.
While ETFs tend to be cheaper on average, that doesn't mean mutual funds are always more expensive.
“There are cheaper mutual funds out there,” said Brian Armor, director of North American passive strategies research at Morningstar and editor of the ETF Investor newsletter.
For example, some index mutual funds that track “major” indexes such as the S&P 500 have competitive fees compared to similar ETFs, Armor said.
“This is really just a core index where mutual funds compete more directly with ETFs on fees,” Armor said. “Other than that, I think ETFs are generally cheaper.”
The data also shows that fees for newly issued mutual funds are decreasing, but fees for new ETFs are increasing.
According to Morningstar Evens, the “fee differential” between newly launched mutual funds and ETFs has shrunk by 71% over the past 10 years, from 0.67% to 0.19%.
This is largely due to “the emergence of active, alternative ETF strategies that tend to be more expensive than broad index strategies,” he said.
