ETFs Lose Some Edge Over Mutual Funds as Fees Decline

If a fund fee falls in the forest, does it make a sound?

ETFs’ pricing edge over mutual funds is shrinking, a report last week from Morningstar found. While fees for many passively managed exchange-traded funds and mutual funds are at or near single-digit basis point levels, ETFs as a category are not dropping in price as quickly as mutual funds. That’s largely because of the rise in actively managed ETFs, which have higher costs for clients. That might seem like a slight downside for the competitiveness of ETFs, but consumer behavior shows that fees may not matter very much.

For passive ETFs in particular, “fees are probably pretty close to a floor,” said Zachary Evens, a manager research analyst at Morningstar. 

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Last year, investors saved an estimated $5.9 billion, as fees between 2023 and 2024 dropped from 36 basis points to 34 on an asset-weighted basis across mutual funds and ETFs, Morningstar found. Investors prefer cheaper funds: The simple average, across funds regardless of asset levels, was 92 basis points last year. ETFs are still significantly cheaper than mutual funds, on an asset-weighted basis being less than 20 basis points last year, versus more than 40 basis points for mutual funds. Still, new ETFs are rising in price, given that many are actively managed. Since 2015, the equal weighted average fee for new ETFs went up 11%, while that figure went down 22% for new mutual funds.

Earlier this year Vanguard made a splash with a decision to reduce fees widely, making its already low cost funds even cheaper. Last year, the average asset weighted fee for its fund was 7 basis points, making it the lowest cost provider, according to Morningstar. Vanguard is keenly aware that low prices push sales.

Data from Morningstar’s report show:

• The cheapest 20% of funds raked in $930 billion last year, and the other 80% bled $254 billion. 
• The lowest 5% of funds by cost brought in nearly $600 billion, nearly double that of funds in the 5% to 10% range.

The Price Is Right: But while fees influence which specific ETFs people buy, costs are not necessarily the reason investors use ETFs instead of mutual funds, according to data from consumer research firm Hearts & Wallets. About 11% of US households invest through ETFs, and wealthier ones are more likely to allocate assets to them. Households with at least $1 million in investable assets allocate a quarter of their wealth to ETFs, compared with 12% or less among those with $100,000 or less, according to Hearts & Wallets. Further, being averse to fees appeared to have no relation to the likelihood of owning ETFs.

“I would have thought that the more fee-averse they get, the more money they would have in ETFs, but that’s not happening,” said Laura Varas, CEO of Hearts & Wallets. “The perception that fee-averse people like ETFs is a wrong perception.”