U.S. fund investors are paying fees that are nearly half what they were two decades ago, according to a report Tuesday, reflecting not only investor thriftiness, but also a shift in the way Americans pay for financial products and services.

The report, from research provider Morningstar shows that American investors in mutual and exchange traded funds paid an average expense ratio of 45 basis points in 2019 versus 87points in 1999.

And as of 2019, fees weren’t just falling: they were falling faster. The average expense ratio was 48 basis points in 2018, and the 6% decline from that year to 2019 was among the largest yearly decreases on record back to 1991.

That decline in fees saved investors $5.8 billion in the immediate term, according to Morningstar’s calculations. Over the longer term, they note, “fees compound over time and diminish returns.”

What’s going on? Investors are plowing more money into cheaper funds and taking dollars out of more expensive ones. And some asset managers are responding to those shifts by reducing fees.

“Providers of broad-based market-capitalization-weighted index funds have been engaged in what has been dubbed a ‘fee war,’” Morningstar analysts wrote in the report.

“This fee fighting reached what seemed at the time to be its inevitable conclusion when Fidelity launched its lineup of zero-fee index mutual funds,” the analysts wrote. “More recently, other ETF providers have followed suit, with one going so far as to offer to pay early investors in its fund—temporarily—in the form of a negative expense ratio.”

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That makes sense for what Morningstar called the “broad-based index funds”. Such products are essentially commodities, and it usually doesn’t make sense for investors to pay more for exposure to the same assets tracked by different fund companies.

The scope of investors’ preference for lower-cost is enormous. In 2019, funds with fees in the lowest 20% of their category saw net inflows of $581 billion. The remaining 80% of funds have lost money for the past five years straight, including seeing outflows of $224 billion in 2019.

Investors aren’t just being cheap, though. As the Morningstar analysts wrote in this report, their past research “has demonstrated that fees are a reliable predictor of future returns. Low-cost funds generally have greater odds of surviving and outperforming their more-expensive peers.”

See:More evidence that passive fund management beats active

There’s also a bigger financial-services industry shift amplifying these trends. For about a decade, what Morningstar calls “bundled” classes of funds — those mutual funds with a load and a 12b-1 fee — have been losing market share.

In what Morningstar calls “unbundled” shares, investors pay simply for investment management and fund operating expenses. The fund and its advisors do not pay third parties to sell their funds to the public. Such funds have picked up more flows as advisors increasingly offer fee-based services, not transaction-based ones.

As MarketWatch has previously reported, some fund industry observers believe it will be just a few years before more assets are held in ETFs than in mutual funds.


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