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U.S. Mutual Funds Expense Trends

Lower expenses and the changing competitive landscape.

Over the past five years mutual fund expenses in the U.S. have trended downwards. While many factors have caused this trend, it is nearly impossible to identify a “primary” cause. Broadridge believes that it is important to give perspective on the many areas that are driving expenses down, especially for boards and management as part of the 15(c) process. Two of the common themes that are discussed for the impetus for lower expenses are related to downward pricing pressure from ETFs and passive products, and a shift in how investors purchase mutual fund shares, moving from retail load shares to institutional share classes, typically without sales loads, or 12b-1 fees.

Our research clearly indicates that expenses are decreasing for mutual funds; however, this does not depict the full cost of ownership, where it is difficult to capture the shift in how distribution is paid.

Five Year Expense Trends

The mutual fund industry has seen an overall decrease in total expense ratios over the past five years based on 12 month rolling periods with a fiscal end date of September 30th. On a dollar-weighted average basis, active funds’ total expenses ratios dropped ten percent, from 73.3 basis points in 2014 to 65.8 basis points in 2018. This trend is also true for funds’ management expenses, where fees have decreased by 6%, from 48.7 bps to 45.9 bps. However, during this same time period, the percent of management fees that make up a fund’s total expense have actually increased by 5%. This indicates that the fee pressures faced by fund companies are an area where both internal and external service providers are affected.

Active funds expense ratios

The amount in which total expense ratios have changed varies based on fund type. However, total expense and management fee ratios for equity, bond, and mixed asset mutual funds have each decreased by at least three percent since 2014. This downward movement in expenses is in part attributed to asset growth. In the past five years, average net assets for equity funds have increased by 45%, bond funds have increased by 17% and mixed asset funds have increased by 57%. This asset growth will create on-going decreases in management fees for funds with breakpoint fee schedules even if there aren’t new breakpoints added. Additionally, as some fund costs are relatively fixed, (accounting and audit fees, and director fees), any increase to fund size may have a downward effect on expense ratios.  

Active funds management fees

“In the past five years, average net assets for equity funds have increased by 45%, bond funds have increased by 17%, and mixed asset funds have increased by 57%. This asset growth creates economies of scale, decreasing management fees for funds with breakpoint fee scheduling.”

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