Here’s a bright spot in an era of high inflation: U.S. investors saved an estimated $9.8 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 reports that the asset-weighted average expense ratio for these types of investments slipped to 0.37% in 2022, down from 0.4% the year before. This figure has fallen for more than two decades now; it was 0.91% in 2002.
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 fell to 0.12% last year, from 0.13% the prior year.
- Actively managed funds fell to 0.59% last year, from 0.61% the prior year.
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 examines asset-weighted average expense ratios because they are more reflective of what investors pay 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, explains what is behind the trend:
“We saw substantial assets wiped from expensive funds in 2022 as investors poured their money into lower-cost funds to minimize investment costs. Asset managers have responded to this trend by cutting fees to vie for market share, and the end result is a win for investors.”
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.
In short, lower fees mean millions more Americans will enjoy the retirement of their dreams.
So, always compare the costs of owning different mutual funds before investing in any. One way to do this is to use the Financial Industry Regulatory Authority’s free Fund Analyzer tool.