BECAUSE WE’RE HUMAN, we always find something to complain about. But I’ve come to believe there’s never been a better time to be a regular, everyday investor.
No, I’m not suggesting stocks are some great once-in-a-lifetime bargain. Rather, I mean the choices available to investors have never been greater, thanks in part to the growth of exchange-traded funds and the disappearance of brokerage commissions. On top of that, the costs of fund investing have never been lower.
This was demonstrated again by the latest annual fund-fee study from independent fund analysis firm Morningstar. The study found that the average expense ratio paid by fund investors is half that of 20 years ago. The study includes all mutual funds and exchange-traded funds (ETFs).
“Between 2000 and 2020, the asset-weighted average fee fell to 0.41% from 0.93%,” says Morningstar. “Investors have saved billions as a result.” Even just the change from 2019 to 2020—from 0.44% to 0.41%— saved investors $6.2 billion last year.
One factor driving the decline is competition among fund companies. Some index funds and ETFs now charge investors no expense ratio at all. That’s right: You can own a piece of every publicly traded company in the world at zero cost.
Since 2016, the average expense ratio for passive funds that just try to match market indexes has fallen 12%. What about active funds, which try—without much success—to beat the market? They fell 11%.
But there’s another factor at work: Investors are voting with their feet by moving money to less-expensive funds, be they index funds or actively managed funds. A big reason has been the migration to target-date funds that are composed of index funds, rather than actively managed ones. “The downward pressure on fund expenses is unlikely to abate,” notes Morningstar’s Ben Johnson in his ETF Specialist column.
It’s important for investors to tune out the noise and focus on the fundamentals, and low costs are one of the most fundamental of fundamentals. Your investments may be higher or lower this time next year—but, whatever happens, your results will be better if your costs are lower.
