Fee-Only Advisors Driving a Rush Into Cheap Funds: Morningstar

What You Need to Know

Investors saved about $9.8 billion in fees for open-end mutual funds and ETFs last year, Morningstar reported.
For the first time in five years, the cheapest 20% of funds drew over $1.1 trillion more than the rest.
Vanguard still claims the lowest average fees, but rivals are gaining ground.

Investors saved about $9.8 billion in fees for open-end mutual funds and exchange-traded funds last year as expense ratios edged down, continuing a long-term trend, according to Morningstar.

The research firm noted the role played by investors flocking to lower-cost funds, especially ETFs, and shifting to fee-only advisors.

U.S. funds’ asset-weighted average expense ratio fell to 0.37% in 2022 from 0.40% in 2021, Morningstar reported in its 2022 U.S. Fund Fee Study this week. The average expense ratio has been falling for over two decades, from 0.91% in 2002, according to the firm.

“We saw substantial assets wiped from expensive funds in 2022 as investors poured their money into lower-cost funds to minimize investment costs,” Bryan Armour, Morningstar’s director of passive strategies research, said in a release.

“Asset managers have responded to this trend by cutting fees to vie for market share, and the end result is a win for investors,” he said.

In 2022, the gap between investor cash flowing into cheap versus expensive funds “grew into a chasm,” Morningstar said. For the first time in five years, the cheapest quintile of funds drew over $1.1 trillion more than the remaining 80% of funds; the cheapest 20% brought in $394 billion net while the remaining 80% of funds shed $734 billion, the firm reported.

The average expense ratio for active funds fell to 0.59% in 2022 from 0.61% the previous year, mostly due to large net outflows from expensive funds and share classes, according to Morningstar. The average for passive funds slid to 0.12% in 2022 from 0.13% a year earlier.