Mutual funds, ETFs are taking a smaller bite out of returns as expense ratios fall

Mutual funds, ETFs are taking a smaller bite out of returns as expense ratios fall
2023 continued a long-term trend of decreasing expense ratios.
MAR 22, 2024

The expenses associated with managing, marketing, and other costs of running an investment fund make a big difference to the returns to investors, but the long-term trend is favorable.

A new report from the Investment Company Institute reveals that the average expense ratio for mutual funds has continued a downward trend for the 14th consecutive year and in 2023 decreased two basis points for equity mutual funds (to 0.42 percent) while it remained steady at 0.37 percent for bond mutual funds. Investor interest in lower-cost equity mutual funds has helped fuel declines in average expense ratios for both actively managed and index equity mutual funds.

Looking at the stats longer term, the average expense ratio for long-term mutual funds has decreased over 27 years (from 1996 to 2023) – 60 percent for equity funds and 56 percent for bond funds. This is largely due to a market shift toward low-cost funds, with 92 percent of gross sales of long-term funds in 2023 being no-load funds, which have no 12b-1 fees. In 2000, these funds accounted for 46 percent of gross sales.

“The ongoing shift toward no-load funds, which is bolstered by the popularity of 401(k) plans and other retirement accounts, continues to be an important factor affecting average mutual fund expense ratios in 2023,” explained James Duvall, ICI economist. “Sustained growth of index mutual funds and competition from ETFs also played a major role.”

For ETFs, the average expense ratio for index equity funds declined one basis point to 0.15 percent last year while for index bond ETFs it remained unchanged at 0.11 percent. The growth of the market has enabled funds to get bigger and helped bring down expenses as a percentage of assets.

While 2023 saw overall lower expense ratios for mutual funds and ETFs, for money market funds the ratio increased, from 0.13 percent in 2022 to 0.22 percent in 2023, as short-term interest rates impacted fund sponsors’ willingness to relax expense waivers they had been offering to funds.

Latest News

SEC bars ex-broker who sold clients phony private equity fund
SEC bars ex-broker who sold clients phony private equity fund

Rajesh Markan earlier this year pleaded guilty to one count of criminal fraud related to his sale of fake investments to 10 clients totaling $2.9 million.

The key to attracting and retaining the next generation of advisors? Client-focused training
The key to attracting and retaining the next generation of advisors? Client-focused training

From building trust to steering through emotions and responding to client challenges, new advisors need human skills to shape the future of the advice industry.

Chuck Roberts, ex-star at Stifel, barred from the securities industry
Chuck Roberts, ex-star at Stifel, barred from the securities industry

"The outcome is correct, but it's disappointing that FINRA had ample opportunity to investigate the merits of clients' allegations in these claims, including the testimony in the three investor arbitrations with hearings," Jeff Erez, a plaintiff's attorney representing a large portion of the Stifel clients, said.

SEC to weigh ‘innovation exception’ tied to crypto, Atkins says
SEC to weigh ‘innovation exception’ tied to crypto, Atkins says

Chair also praised the passage of stablecoin legislation this week.

Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest
Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest

Maridea Wealth Management's deal in Chicago, Illinois is its first after securing a strategic investment in April.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.