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Mutual fund fees continued falling last year.
Patricia Oey, a senior analyst for the investment research company, notes:
“This fee decline is a big positive for investors because fees compound over time and diminish returns.”
In other words, when fees eat less of your retirement savings, more of that savings remains in your account and can thus continue growing. That leaves you with a bigger nest egg by the time you retire.
In fact, Morningstar estimates that investors saved roughly $4 billion in mutual fund expenses last year due to lower fees.
Mutual fund fees in 2017
The asset-weighted average expense ratio reached 0.52 percent last year — down from 0.57 in 2016, according to Morningstar’s latest annual study of mutual fund fees.
Not only is 0.52 percent a record low but it also represents the largest one-year drop since Morningstar started tracking average asset-weighted expense ratios in 2000.
An expense ratio is a measure of the cost of owning shares of a mutual fund. Morningstar notes that it specifically examined average asset-weighted expense ratios because they are more reflective of investors’ experiences than simple average expense ratios.
Looking at mutual funds based on how they are managed, the drop in fees last year was bigger for passively managed mutual funds, also known as passive funds and index funds. Their average asset-weighted expense ratio fell 7 percent, reaching a strikingly low 0.15 percent.
The average asset-weighted expense ratio of actively managed mutual funds, on the other hand, dropped by only 4 percent, to 0.72 percent.
The lesson for investors
If you hadn’t already caught on, the takeaway here is not just the value of mutual funds. It’s the value of index funds in particular. Based on Morningstar’s numbers, active funds are nearly five times more expensive than index funds.
That’s a big part of why everyone from Money Talks News found Stacy Johnson to investor extraordinaire Warren Buffett preaches the value of index funds.
To learn more, check out “Ask Stacy — How Do I Invest in a Mutual Fund?”
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