Late last week, mutual fund trade group the Investment Company Institute published a press release entitled, "Mutual Fund Expense Ratios Have Declined Substantially over the Past 27 Years," along with the report, "Trends in the Expenses and Fees of Funds, 2023." The full report tells us, "On average, expense ratios for long-term mutual funds have declined substantially over the past 27 years.... In 1996, equity mutual fund investors incurred expense ratios of 1.04 percent, on average, or $1.04 for every $100 in assets. By 2023, that average had fallen to 0.42 percent. Average expense ratios of hybrid and bond mutual funds, as well as money market funds, have also declined meaningfully since 1996." (Note: Thank you to those who attended our Bond Fund Symposium Monday and Tuesday in Philadelphia! Attendees and Crane Data subscribers may access the conference binder, Powerpoints and recordings (after the show) via our "Bond Fund Symposium 2024 Download Center.")
A table, "Average Expense Ratios Incurred by Mutual Fund Investors Have Declined Substantially Since 1996," presents expense ratios by type from 1996 to 2023 and shows bonds fund averages falling from 0.84% to 0.37% over this period and money fund ratios falling from 0.52% to 0.22%. (Note: Crane Data shows the average expense ratio for money market mutual funds at 0.26% as of 2/29/24 as measured by our Crane 100 Money Fund Index.)
It explains, "Like the prices of most goods and services, the expense ratios of individual mutual funds differ considerably across the array of available products. For example, fund size and asset growth play an important role in mutual fund expense ratios. Some fund costs -- such as transfer agency fees, accounting and audit fees, and director fees -- are relatively fixed in dollar terms, regardless of fund size. As a result, when fund assets rise, these relatively fixed costs make up a smaller proportion of a fund's expense ratio."
ICI writes, "Fund expense ratios can also vary by fund type.... For example, bond and money market mutual funds tend to have lower expense ratios than equity and hybrid mutual funds." Another table, "Mutual Fund Expense Ratios Vary Across Investment Objectives," shows bond fund expenses averaging 0.34% at the 10th percentile, 0.72% at the Median, 1.55% at the 90th percentile, 0.37% for the asset-weighted average and 0.83% for the simple average. For money market funds, it shows averages of 0.12% at the 10th percentile, 0.28% at the Median, 0.70% at the 90th percentile, 0.22% for the asset-weighted average and 0.36% for the simple average."
The section on "Money Market Funds," comments, "The average expense ratio of money market funds increased 9 basis point to 0.22 percent in 2023.... Over the past 15 years, movements in average money market fund expense ratios have largely been driven by changes in short-term interest rates that altered funds' use of expense waivers."
It continues, "For example, over 2008–2009, the Federal Reserve reduced short-term interest rates to nearly zero where they remained until the end of 2015. Because gross yields on taxable money market funds (the yield before deducting the fund's expense ratio) closely track short-term interest rates, most money market funds adopted expense waivers during this period to ensure that net yields (the yield on a fund after deducting fund expenses) did not fall below zero."
ICI writes, "With an expense waiver, a fund's adviser agrees to absorb the cost of all or a portion of a fund's fees and expenses for some time. The expense waiver, by reducing the fund's expense ratio, boosts the fund's net yield. These expense waivers are costly for fund advisers, reducing their revenues and profits. From 2009 to 2015, advisers waived an estimated $36 billion in money market fund expenses and average expense ratios fell accordingly."
The report states, "In 2022 and 2023, the Federal Reserve aggressively raised the federal funds rate from near zero to more than 5 percent to combat high inflation. As a result, money market funds were able to pare back expense waivers put in place in 2020 and 2021 -- total money market fund waivers decreased from $8.4 billion in 2021 to $1.6 billion in 2023.... The percentage of money market funds offering waivers declined from 97 percent at year-end 2021 to 65 percent by year-end 2023. With fewer expense waivers in 2022 and 2023, the average expense ratio for money market funds naturally increased from 0.11 percent in 2021 to 0.22 percent in 2023."
