Fund fee wars are getting less bloody, says Morningstar

Investors are continuing to benefit from decreasing fund fees, with an estimated $3.4 billion in savings in 2023 alone, but the competition to gain market share through lower costs has become decidedly less cutthroat.

That’s according to Morningstar's 2023 US Fund Fee Study, which found the average expense ratio paid by fund investors continues to decline, though at a reduced pace.

According to the new fund fee research, the asset-weighted average fee for US open-end mutual funds and ETFs fell to 0.36 percent in 2023, down from 0.87 percent in 2004. This reduction marks a 3.4 percent decline from the previous year.

“Any fee decline is a big win for investors because fees compound over time and diminish returns,” wrote Zachary Evens and Bryan Armour from Morningstar’s Passive Strategies Research unit, who authored the report.

Still, the trend of declining fees isn’t nearly as intense today as it was in 2018, when Fidelity unveiled its industry-leading lineup of zero-fee index mutual funds. Prominent index mutual funds and ETFs are nearing a fee floor, Morningstar said, with many already charging less than 0.05 percent.

While the mass migration to lower-cost funds and share classes has been a major factor in reducing costs, that tailwind has held less sway as the rise of active and alternative ETFs lead to higher-priced fund launches. Beyond that, cost pressures are preventing asset managers from continuing to cut fees, with some even starting to increase fees quietly, Morningstar noted.

The increased reluctance to engage in price competition was clear to see in 2023, when more funds increased their fees than decreased them; by Morningstar’s records, that’s the first it’s happened since 2019.

Broad market index funds, known for their commodity-like nature, have seen their fees pushed down to the marginal cost of management, causing assets to become concentrated among a few large-scale players. Similar fee pressures are now affecting strategic-beta ETFs, which, despite having slightly higher management costs, are experiencing mounting fee competition.

The equal-weighted average expense ratio for both active and passive funds slightly increased, with the equal-weight average for active funds remaining at approximately 1.01 percent.

All in all, the share of active funds that reported lower annual expenses dropped to 24 percent in 2023 from 31 percent in 2022, while only 13 percent of passive funds reduced their fees, down from 20 percent in the previous year. Conversely, 37 percent of active funds and 24 percent of passive funds reported fee increases, highlighting a shift in the trend of fund expense management.

“While less frequent lately, fee wars still happen,” Morningstar noted.

The recent introduction of spot bitcoin ETFs was a perfect example, with asset managers moving aggressively to gain an early lead with the lowest-cost product. Before the SEC opened the gates for the digital asset ETFs to start trading in January, many providers lowered their fees at least once before launch to attract investors.

“For a product that’s essentially a commodity, fees matter, with the cheapest product likely to earn the bulk of investor dollars,” the report said.