Here’s one for the record books: In 2016, the average annual expense ratio paid by mutual-fund and exchange-traded-fund investors dipped to its lowest point ever—0.57%—versus 0.61% in 2015, according to Morningstar’s most recent fee study, released late last month. This marks the greatest annual decline since the firm started tracking the data in 1990.
What happened? Chalk it up to a combination of factors. Morningstar tallied asset-weighted averages—meaning the fees of the funds with the most money in them counted more than smaller funds—so the ongoing migration of investor assets from high-cost active funds to low-cost index funds and ETFs was certainly a factor. There has also been a wave of fee reductions at some of the largest fund complexes, and, not least of all, a rising stock market.
“One big tailwind for lower fees for the industry as a whole has been the stock market rally,” says Russ Kinnel, director of mutual fund research at Morningstar. Because Standard & Poor’s 500 index funds are among the cheapest of the bunch, any relative growth in assets in that group—even if it stems purely from performance—will lower the average asset-weighted expense.