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Morningstar Fee Study Finds “Expensive” Active Funds Hardest Hit in Migration to Passive Funds

A recent Morningstar study sheds additional light on the industry shift toward investing in passively managed funds.  In its 2016 U.S. Fund Fee Study Morningstar found that average fund fees paid by investors are declining.  Importantly, the study found that the investor exodus out of active funds has been limited to the most-expensive active funds and that low-cost active funds actually saw positive, though small, inflows. Expensive actively-managed funds saw outflows of $369 billion in 2016 compared to $91 billion in outflows in 2014, Morningstar found. The passive funds that saw increasingly large inflows were funds with low fees relative to other passive funds. Morningstar also noted that the overall trends paint a challenging picture for high-cost active funds, which it defined as funds with fees that rank within the second, third, fourth, and fifth quintiles (or that are more expensive than the cheapest 20% of funds), relative to other active funds. Other takeaways from the study:

  • Industrywide, investors paid an average of 0.57% for their fund holdings (excluding money market funds and funds of funds) in 2016, a decline of 7% from the previous year and the largest decline ever, based on data going back to 1990.
  • Passive funds continue to be significantly cheaper than active funds, costing investors an average 0.17% in 2016, 58 basis points less than active funds.
  • Vanguard and BlackRock/iShares have benefited greatly from the growth in passive funds. Both firms have a broad menu of passive funds with fees that are typically among the lowest among their Morningstar Category peers.