Here’s a bright spot in an era of rampant inflation: U.S. investors saved an estimated $6.9 billion last year thanks to another dip in the expense ratio they pay when investing in open-end mutual funds and exchange-traded funds.
Morningstar says the asset-weighted average expense ratio slipped to 0.4% in 2021, down from 0.42% the year before. Expense ratios now have fallen for two decades, dropping from 0.87% in 2001.
Passively managed mutual funds, aka index funds, continue to be far cheaper than their actively managed counterparts, on average.
According to Morningstar, the asset-weighted average fee for:
- Passively managed funds held steady at 0.12% in 2021, which is where they were in 2020.
- Actively managed funds fell from 0.63% in 2020 to 0.60% in 2021.
Money Talks News founder Stacy Johnson further details the advantages of index funds in “Are Actively Managed Mutual Funds Better Than Index Funds?”
What is an expense ratio?
An expense ratio is a measure of the cost of owning shares of a mutual fund. Morningstar says it examines asset-weighted average expense ratios because they are more reflective of what investors paid than equal-weighted average expense ratios. Equal-weighted ratios are what funds charge but not necessarily what an investor will pay.
The drop in mutual fund costs is a huge boon for retirement investors. In a press release, Bryan Armour, Morningstar’s director of passive strategies research for North America, explains what is behind the trend:
“Intensifying competition among asset managers and changes in the economics of advice are two factors driving fees lower. Investors are also increasingly aware of the importance of minimizing investment costs, which we expect to continue in this down market.”
Why lower fees matter
All of this is great news for your retirement nest egg. As we detail in “Of All the Fees You Pay, This Is the Worst,” just a 1% difference in investment expenses can cost you hundreds of thousands of dollars in lost savings over time.
Lower fees mean millions more Americans will enjoy the retirement of their dreams.
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