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Fund Managers Race to Bottom on Expense Ratios

A Wall Street Journal article highlights the trend of decreasing fees in mutual funds. The article notes that BlackRock, Charles Schwab, and Vanguard moved at the end of 2015 to cut annual expenses at several of their respective funds anywhere from 25 to 50 percent. However, Vanguard went a step further by adding a new “institutional select” share class to its Vanguard Total Stock Market Index, Total Bond Market Index, and S&P 500 Index funds with fees of just 0.01 percent. The minimum investments of this share class range from $3 billion to $5 billion. The article notes that the average fund charges 1.07 percent, a drop from an average of 1.22 percent in 2005.

The article suggests that complexes are using the low fee funds as “loss leaders” in an attempt to get investors in the door and then sell the investor on more expensive funds. The industry profit margin dropped to 22 percent in the third quarter of 2015, down 3 percentage points from the same quarter in 2014, according to data cited from DST Kasina.