Record YoY Fee Decline in 2017 Driven by Vanguard, Discount Brokerages: Morningstar – Investopedia

Expenses on mutual funds and exchange-traded funds saw their steepest year-over-year decline in 2017 thanks to Vanguard and rivals Fidelity Investments, Charles Schwab and BlackRock, all of which stepped up the fee reductions in 2017.

According to Morningstar, the asset-weighted average expense ratio across funds was 0.52% in 2017, marking an 8% year-over-year decline. Morningstar said in a report that this marked the steepest year-over-year decline since the company started tracking asset-weighted average fees in 2000. As a result of the fee reductions, Morningstar estimates that investors saved around $4 billion in expenses in 2017 alone. The fund ranking company noted that funds with expense ratios that were above 1.10% accounted for under 10% of the assets invested in U.S. equity funds last year.

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Breaking it down into categories, Morningstar found that the asset-weighted average fee for U.S. equity funds declined 9% to 0.45% last year, while taxable bond funds saw asset-weighted average fees decline 7% to 0.44%, and international equity funds saw fees decline 8% to 0.64%.

“Declines in the asset-weighted average fees were more pronounced among passively managed funds thanks to strong flows into the lowest-cost funds, as well as fee cuts by some asset managers for widely held broad index funds,” wrote Morningstar. “In aggregate, passively managed funds exhibited asset-weighted expense ratio declines of 7% from 2016. International equity funds exhibited the largest declines among passive funds, whose asset-weighted average fees fell 9% to reach 0.23%.”

On the active side, the decline in fees was driven by large outflows from pricey funds and large inflows into cheaper ones. What’s more, last year, more actively managed funds lowered their fees, resulting in asset-weighted fees for actively managed funds declining 4%. It marked the largest year-over-year dip in more than 10 years.

According to Morningstar, during the past three years, passive funds have seen steeper reductions in equal-weighted fees when compared with actively managed funds. Vanguard set the bar for the lower fees, while BlackRock, Inc. (BLK) The Charles Schwab Corporation (SCHW) and Fidelity Investments have followed with their own aggressive cuts. At it stands, some asset managers charge only a few basis points for broad index funds, resulting in larger declines in average fees for passive U.S. equity and taxable bond funds. Those account for 64% of assets that are held in mutual funds and ETFs, noted Morningstar.

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