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Fees on fund vehicles, including exchange traded funds (ETFs), index funds and mutual funds, continued their downward pace in 2023. That’s good news for advisors and clients alike, but there’s a devil in the these details.
That being that the pace of fee declines slowed last year. Reasonable when considering the annual fee charged by any fund cannot fall below 0%. Speaking of 0%, that’s the “expense ratio” sported by seven ETFs at the moment, though I suspect at least five will eventually change their tune. From there, the universe of the 100 least expensive ETFs as measures by fees is populated by funds charging 0.02% to 0.05% per year.
That works out to $2 to $5 annually on $10,000 stakes. Not surprisingly, the bulk of the lowest fee ETFs are issued by just four companies: iShares, Vanguard, State Street Global Advisors (SSGA) and Charles Schwab. Those are four of the five largest ETF sponsors by assets meaning they heft and other avenues for generating profits to go low on fees. Many rivals don’t have those luxuries or don’t possess them for scale.
Still, the overall fund fee theme is positive because it’s trending in the right direction: downward. Let’s examine some of the highlights from 2023.
Pace of Fund Fee Drops Slows, Other Surprises
The pace of fund fee reductions did slow in 2023, but it was still robust enough to generate considerable savings for end users.
“Our study of US open-end mutual funds and ETFs found the asset-weighted average expense ratio across funds was 0.36% in 2023, a 3.4% decline from 2022—a solid fall but less pronounced than the 7.8% decline a year earlier. Still, we estimate that investors saved nearly $3.4 billion in fund expenses last year,” notes Morningstar analyst Zachary Evens.
Keep in mind that 0.36% figure is applicable to ETFs and index and mutual funds and while it may appear elevated to devotees of certain fund families, it is well off the average of 0.87% seen in 2004. However, 2023 brought some fund fee surprises.
Those include the point that more funds raised expense ratios last year than pared those costs. Plus, and this could be the truly big surprise, rookie mutual funds were, in aggregate, cheaper than their ETF peers. Typically, when higher fee ETFs come to market, they are niche or sophisticated products and if enough of those funds debut, they can skew overall ETF expense ratio data higher.
“The proliferation of new, higher-priced index ETFs helped nudge passive funds’ equal-weighted average fee almost a basis point higher in 2023,” adds Evens.
A Not-So-Surprising Fee Fact
In news that probably won’t surprise many adviors or their fee-savvy clients, Vanguard led the way in terms of average fees in 2023 with an asset-weighted expense ratio of 0.08%, down from 0.09% in 2018.
SSGA checked in 0.14% while iShares average asset-weighted expense ratio was 0.16%. Dimensional Fund Advisors (DFA), likely due to raft of mutual fund-to-ETF conversions, was a pleasant surprise at 0.24%.
“Vanguard’s competition continued to gain ground in 2023. As these firms jockeyed for position, investors have come out in front, benefiting from an ever-wider menu of cheap options offering wide market exposure,” concludes Evens.