The Shift Towards Affordable Investment Funds
Investors are increasingly seeking out lower-fee investment funds, driving a significant decline in costs over the past two decades. According to Zachary Evens, a manager research analyst for Morningstar, average annual fund fees have plummeted from 0.87% in 2004 to 0.36% in 2023.
The Rise of Exchange-Traded Funds (ETFs)
ETFs have emerged as a popular choice for investors, offering a more affordable option compared to traditional mutual funds. The average ETF carries a 0.51% annual management fee, significantly lower than the 1.01% fee of the average mutual fund. This disparity is largely attributed to the fact that most ETFs are index funds, which are inherently cheaper than actively managed funds.
A Fair Comparison?
Some experts argue that comparing average ETF fees to those of mutual funds is not entirely fair, as most ETFs are index funds. However, when comparing index ETFs to index mutual funds, the fee dynamic remains similar. Index ETFs have a 0.44% average annual fee, half the 0.88% fee for index mutual funds.
The Importance of Fee Control
Investors should prioritize fee control, as it is one of the few aspects of investing that can be managed. Michael McClary, chief investment officer at Valmark Financial Group, emphasizes that fees are a crucial consideration for investors. “There are so many things you can’t control in investing… The one thing you can control is fees.”
ETFs vs. Mutual Funds: What’s the Difference?
Both ETFs and mutual funds offer diversified investment portfolios overseen by professional money managers. However, ETFs are a relatively newer innovation, with the first U.S. ETF debuting in 1993. While mutual funds still hold a larger market share, ETFs have been gaining traction as investor preferences shift.
Not All Mutual Funds Are Expensive
While ETFs tend to be cheaper on average, it’s essential to note that some mutual funds offer competitive fees relative to similar ETFs. Bryan Armour, director of passive strategies research for North America and editor of the ETFInvestor newsletter at Morningstar, points out that index mutual funds tracking major indexes like the S&P 500 have fees comparable to those of ETFs.
The Shrinking Fee Gap
Data shows that fees for newly issued mutual funds are declining, while those of new ETFs are increasing. The “fee gap” between newly launched mutual funds and ETFs has narrowed by 71% in the last decade, largely due to the emergence of active and alternative ETF strategies.
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