This year is a trying time from a financial perspective as good news is hard to come by.
Indeed, 2022 is proving to be one of those years in which positive headlines arrive on an incremental basis, if at all. Blame rising interest rates, rampant inflation, asset class failure nearly across the board and more. Bottom line: 2022 isn’t a picnic.
However, there are some favorable headlines scattered about. Fortunately, some of the bright spots are easy to find. Take the case of fund fees, which continue a decades-long decline. That’s an issue sure to resonate with nearly all investors because they’re allocated to mutual funds, index funds and exchange traded funds or perhaps all three. Simple math, courtesy of Vanguard, highlights the benefits of low fees.
“At Vanguard you could save $65,936 over 10 years based on Vanguard's average expense ratio of 0.09%, which results in a cost of $15,147 in this scenario, compared with the industry average expense ratio of 0.49%, which results in a cost of $81,083,” according to the fund giant. “Over 20 years, you could save $229,818 based on costs of $54,024 at Vanguard compared with $283,842 at the industry average. Stay invested for 30 years and you could save $600,838 based on costs of $144,510 at Vanguard compared with $745,348 at the industry average.”
Not Just Vanguard
Alright, so Vanguard and a few other issuers have low-fee reputations, but fund costs are declining across the board and that’s excellent news for investors.
“The average expense ratio paid by fund investors has been falling for two decades. In 2021, the asset-weighted average expense ratio across all mutual funds and exchange-traded funds (not including money market funds and funds of funds) was 0.40%,” notes Morningstar analyst Bryan Armour. “This is less than half of what investors paid in fund fees, on average, in 2001.”
As Armour notes, if the 4.1% investors saved on fund fees last year is compounded over the next decade, they’ll save a staggering $10.3 billion on fees in 2032. To be fair, fund fees are declining across the board – both active and passive. However, it’s passive funds that are leading these declines.
“These savings have disproportionately accrued to investors in passive funds,” says Armour. “The asset-weighted fund fee across all passive funds has declined 66% since 1990, landing at 0.12% in 2021. Meanwhile, the asset-weighted fee paid by investors in active funds stood at 0.60% in 2021—a 34% decline over the same period.”
More Good News
There’s more good news for fee-conscious investors. Fund costs are declining more rapidly than the fees investors pay to own those funds.
“Asset-weighted fees have dropped more sharply than equal-weighted fees—meaning the average amount investors are paying for the funds they invest in has fallen more than the toll taken by the average fund,” adds Armour. “The fact that asset-weighted fees are persistently lower than equal-weighted fees indicates that investors, on average, choose funds with below-average fees.”
Indeed, the persistent decline in fund fees is likely to continue and that’s a plus for investors because it’s a clear signal passive strategies and target date funds for retirees work.