Average Expense Ratios for Equity, Hybrid, and Bond Mutual Funds Hit 20-Year Lows
Washington, DC, March 16, 2016—Expense ratios for equity, hybrid, and bond mutual funds dropped in 2015 to the lowest level in at least 20 years, while money market fund expense ratios remained at their 2014 low, according to data released by the Investment Company Institute (ICI) today. A fund’s expense ratio is the fund’s total annual expenses expressed as a percentage of its net assets.
“Mutual fund expense ratios have been experiencing an overall decline for many years, driven by increased competition and growth in the fund industry,” said Sean Collins, ICI’s senior director of industry and financial analysis. “Expense ratios for both actively managed and index funds have seen substantial declines.”
Expense Ratios Have Declined Substantially Since 1996
Basis points, 1996–2015
Note: Expense ratios are measured as asset-weighted averages. Data exclude mutual funds available as investment choices in variable annuities and mutual funds that invest primarily in other mutual funds.
Sources: Investment Company Institute and Lipper
Growing Popularity of Index Funds Contributes to Decline in Equity Fund Expense Ratios
Weighted by assets, average equity fund expense ratios fell 2 basis points to 68 basis points (0.68 percent of assets) in 2015. This follows a 4 basis point decline in 2014 and marks the sixth straight year in which equity fund expense ratios have fallen. An increase in the share of equity fund assets held in index funds contributed to the decline in equity fund expense ratios: actively managed equity fund assets fell by $275 billion in 2015, while index equity fund assets rose by $109 billion.
Share of Assets in Costly-to-Manage Categories of Bond Funds Declines
Bond fund expense ratios averaged 54 basis points in 2015. In 2015, bond fund expense ratios fell 3 basis points, in large measure reflecting a decline in the assets of high-yield bond funds, which tend to have higher-than-average expense ratios. Performance of high-yield bonds suffered in 2015, pushing down the value of funds’ holdings and prompting investor redemptions.
Hybrid Mutual Fund Expense Ratios Fell Slightly in 2015
The average expense ratio of hybrid mutual funds, which invest in a mix of equities and bonds, fell 1 basis point to 77 basis points in 2015, a smaller decline than stock and bond funds experienced. Hybrid fund assets have increased substantially in recent years, with a portion of that growth occurring among “alternative strategy” funds, which now account for 8 percent of the assets of all hybrid funds. Alternative strategy funds offer fund investors diversification across a wider range of asset classes and lower correlation with the equity market, but such strategies can be more costly to manage. The average expense ratio for other types of hybrid funds fell 2 basis points in 2015.
Money Market Fund Expense Ratios Remained Stable in 2015
Money market fund expense ratios averaged 13 basis points in 2015, unchanged from 2014. The current low interest rate environment has limited the expense ratios of money market funds over the last few years, as these funds have waived portions of their fees to prevent their net yields falling below zero. In 2015, 98 percent of money market fund share classes waived at least some portion of their fees. Fund advisers and their distributors pay for these waivers, which totaled an estimated $5.5 billion in 2015.
Actively Managed Equity and Bond Fund Expense Ratios Continued Steady Decline
The average expense ratios for actively managed equity and bond funds fell by 2 and 3 basis points, respectively, in 2015, though the expense ratios of index funds have leveled out in the past two years. The declining cost of actively managed funds was due in large part to competitive pressures and investor interest in lower-cost funds. For both actively managed and index funds, this demand for lower-cost funds is evidenced by the concentration of assets in the very lowest cost funds. In 2015, 57 percent of the assets of actively managed equity funds were held in the 10 percent of such funds with the lowest expense ratios. In 2015, 69 percent of index equity fund assets were held in the 10 percent of index equity funds with the lowest expense ratios.
Expense Ratios of Actively Managed and Index Funds
Basis points, 1996–2015
Note: Expense ratios are measured as asset-weighted averages. Data exclude mutual funds available as investment choices in variable annuities and mutual funds that invest primarily in other mutual funds.
Sources: Investment Company Institute and Lipper
ICI Methodology
ICI evaluates fee trends using asset-weighted averages to summarize the expenses that shareholders actually pay through mutual funds. To compute the average, ICI weights each fund’s expense ratio by that fund’s end-of-year assets. Simple averages (counting each fund’s expense ratio equally) overstate the impact of the expenses of funds in which investors hold few dollars.
Expense Ratios Have Declined Substantially Since 1996
Basis points, 1996–2015
Year
Equity
Hybrid
Bond
Money market
1996104
95
84
52
199799
92
82
51
199895
89
80
50
199998
90
78
50
200099
89
76
49
200199
89
75
46
2002100
89
74
44
2003100
90
75
42
200495
85
72
42
200591
81
69
42
200688
78
67
40
200786
77
64
38
200883
77
61
35
200987
84
64
33
201083
82
63
24
201179
80
62
21
201277
79
61
18
201374
80
61
17
201470
78
57
13
201568
77
54
13
Note: Expense ratios are measured as asset-weighted averages. Data exclude mutual funds available as investment choices in variable annuities and mutual funds that invest primarily in other mutual funds.
Sources: Investment Company Institute and Lipper
Expense Ratios of Actively Managed and Index Funds
Basis points, 1996–2015
Year
Actively managed
Index
Equity
Bond
Equity
Bond
1996108
84
27
20
1997104
83
27
21
1998102
81
25
21
1999105
80
25
21
2000106
78
27
21
2001108
77
25
21
2002109
76
25
21
2003110
77
25
21
2004105
75
24
19
2005101
71
21
18
200698
69
19
17
200795
67
17
16
200894
65
17
16
200999
67
17
16
201096
67
15
14
201192
66
14
13
201292
65
13
11
201389
65
12
10
201486
63
11
10
201584
60
11
10
Note: Expense ratios are measured as asset-weighted averages. Data exclude mutual funds available as investment choices in variable annuities and mutual funds that invest primarily in other mutual funds.
Sources: Investment Company Institute and Lipper