The 2023 US Fund Fee Study From Morningstar

In 2023, the average expense ratio paid by fund investors was less than half of what it was two decades ago. Between 2004 and 2023, the asset-weighted average fee fell to 0.36% from 0.87%. Investors have saved billions in fund fees as a result.

Several factors played a role in lowering fees:

• Investors are increasingly aware of the importance of minimizing investment costs, which has led them to favor lower-cost funds.
• Competition among asset managers has led many to cut fees.
• Evolution in the economics of advice has also played a central role. The move toward fee-based models of charging for financial advice has been a key driver of the shift toward lower-cost funds, share classes, and fund types—most notably exchange-traded funds.

Several factors caused the pace of declining fees to slow:

• Fees of prominent index mutual funds and ETFs are approaching a floor, with many already charging less than 0.05%.
• The emergence of active and alternative ETFs contributed to higher-priced fund launches than previously observed.
• Cost pressures are preventing asset managers from continuing to cut fees. Some are even quietly raising fees.

This article was adapted from the 2023 US Fund Fee Study published by the Morningstar Manager Research team. It is only a small representation of the many key findings in the 45-page report. Download it in its entirety here for free.

Changes in fees charged by asset managers are represented by trends in the equal-weighted average expense ratio, which reflect what the asset-management industry is charging for its products, regardless of fund size. We calculated the equal-weighted average expense ratio for active and passive funds by Morningstar Category group. The calculations include all share classes of all funds, excluding funds of funds and money market funds.

The mass migration to lower-cost funds and share classes has been a key driver of falling costs, but asset managers are growing reluctant to continue competing fiercely on price. In 2023, there were more fee increases than fee decreases by both active and passive funds, contributing to a slight increase in each’s equal-weighted average expense ratio, though the equal-weight average for active funds stays rounded to 1.01%.

In recent years, index mutual funds and ETFs have experienced significant fee pressure. Most notably, providers of broad market index funds have been engaged in what has been dubbed a "fee war." In September 2018, 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. More recently, other asset managers have followed suit. As fees for these funds sit either at or near zero, it is inevitable that the pace of fee declines will slow, prompting asset managers to look for profit elsewhere.

Each year, the number of new share classes launched has been decreasing, but so have their average fees. The average fee of newly launched mutual funds and ETFs was 1.09% in 2014, less than the 1.18% equal-weighted average fee for all funds that year. In 2023, the average new fund charged 0.70%, a 36% decrease from 10 years prior and an even steeper discount to last year’s equal-weighted average fund fee of 0.95%. Fees are not shrinking everywhere, though.

The fee gap between newly launched mutual funds and ETFs shrank from 0.67% to 0.19% in the last 10 years, a 71% decrease. In 2014, new ETFs charged just 0.47% on average, while new mutual funds charged 1.14%. Fast-forward 10 years, and this gap narrowed as new ETF fees rose by 28% and new mutual fund fees fell by 30%. The emergence of active and alternative ETF strategies, which tend to be pricier than broad index strategies, likely drove the increase in new ETF fees.

Spot bitcoin ETFs began trading on Jan. 11, 2024, to much fanfare. Prior to launch, each of the 10 providers jockeyed to be the lowest-cost offering. For a product that’s essentially a commodity, fees matter, with the cheapest product likely to earn the bulk of investor dollars. To not tip off competitors on where each might land, many providers opted to unveil their ETF fee only days ahead of its scheduled debut. Even still, each lowered their fee at least once prior to launch. ARK adjusted its fee four times since ARK 21Shares Bitcoin ETF’s May 2023 filing.

While less frequent lately, fee wars still happen. Bitcoin ETFs proved the perfect storm: investor interest, commercial opportunity, and blanket SEC approval pitting nine (now 11) asset managers against one another to earn investor dollars. When the conditions are right, asset managers will still compete fiercely to be the cheapest.

There’s much more to understand about fees declining at a slower pace over the last year. The full report from the Morningstar Manager Research team provides more robust commentary and analysis of what’s happening.

Other topics covered in the full report include:

• Asset Flows by Fees
• How Fund Fees Are Being Shaped by the Evolving Economics of Advice
• The Sustainable Fund ‘Greenium’
• Strategic-Beta Fees
• Asset Manager Fee Wars

Download the full report for free here.

The Morningstar team uses Morningstar Direct to pull the data discussed in their reports. Direct is a comprehensive platform that helps asset and wealth managers build their assets and manage their portfolios by supporting market research, product creation, positioning, marketing, and distribution strategies.

Start a two-week trial of Direct to see how it works.