The ICI published the study, "Trends in the Expenses and Fees of Funds, 2021." It tells us, "Average expense ratios for money market funds fell 9 basis points from 0.21 percent in 2020 to 0.12 percent in 2021. Fund advisers' use of expense waivers remained high in 2021 as the Federal Reserve kept short-term interest rates at near-zero levels." Shelly Antoniewicz, ICI's senior director of industry and financial analysis, comments, "As the fund industry meets the demands of cost-conscious investors, competition continues to push down on the expense ratios of mutual funds and exchange-traded funds ... and investors continue to concentrate their assets in lower-cost funds when they invest." (Note: ICI's Antoniewicz will speak Monday at our Bond Fund Symposium in Newport Beach, Calif., along with our Peter Crane, on "The State of the Bond Fund Market." We look forward to seeing some of you Monday!)
ICI explains, "On an asset-weighted basis, average expense ratios incurred by mutual fund investors have fallen substantially over the past 25 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 2021, that average had fallen to 0.47 percent. Hybrid and bond mutual fund expense ratios have also declined since 1996. The average ... bond mutual fund expense ratio fell from 0.84 percent to 0.39 percent. The average expense ratio for money market funds dropped from 0.52 percent to 0.12 percent over this period."
The section on "Money Market Funds" (page 23) tells us, "The average expense ratio of money market funds fell 9 basis points from 0.21 percent in 2020 to 0.12 percent in 2021.... Over the past decade, developments that stemmed from changes in short-term interest rates have been the primary factors affecting average money market fund expense ratios."
It says, "Over 2008–2009, the Federal Reserve sharply reduced short-term interest rates. By 2009, the federal funds rate was hovering at a little more than zero. Gross yields on taxable money market funds (the yield before deducting the fund's expense ratio) -- which closely track short-term interest rates -- fell to all-time lows. This situation continued from 2010 to late 2015."
ICI writes, "In this environment, most money market funds adopted expense waivers to ensure that net yields (the yield on a fund after deducting fund expenses) did not fall below zero. 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."
They state, "From 2009 to 2015, advisers waived an estimated $36 billion in money market fund expenses. It was expected that when short-term interest rates rose and pushed up gross yields on money market funds, advisers would reduce or eliminate expense waivers, causing the expense ratios of money market funds to rise somewhat."
ICI continues, "That, ultimately, is what happened. In December 2015, the Federal Reserve raised the federal funds rate by 0.25 percent, signifying a strengthening economy; it was raised eight more times from 2016 to 2018, each time by 0.25 percent. In 2019, however, this trend reversed -- as global trade tensions grew more uncertain and expectations around future global growth fell, the Federal Reserve lowered the federal funds rate three times. These actions were reflected in short-term interest rates and gross yields on money market funds."
They add, "In 2020, the Federal Reserve slashed the federal funds rate again as the COVID-19 pandemic effectively shut down the global economy. With short-term interest rates at nearly zero by the end of April 2020, it became more likely that the net yields of money market funds could fall below zero. Consequently, advisers reinstituted the expense waivers they had provided to their money market funds in the ultralow interest rate environment that persisted from 2009 through 2015. In 2021, the federal funds rate continued to hover close to zero and an average 97 percent of money market fund share classes provided expense waivers. As such, the expenses waived by money market funds increased sharply from an estimated $3.1 billion in 2020 to an estimated $8.4 billion in 2021."
In related news, ICI's latest "Money Market Fund Assets" report shows assets flat after falling sharply for two weeks in a row. Year-to-date, MMFs are down by $144 billion, or -3.1%, with Institutional MMFs down $112 billion, or -3.4% and Retail MMFs down $33 billion, or 2.2%. Over the past 52 weeks, money fund assets have increased by $113 billion, or 2.5%, with Retail MMFs falling by $62 billion (-4.2%) and Inst MMFs rising by $175 billion (5.9%).
ICI's weekly release says, "Total money market fund assets increased by $1.95 billion to $4.56 trillion for the week ended Wednesday, March 23, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $1.81 billion and prime funds increased by $3.50 billion. Tax-exempt money market funds increased by $268 million." ICI's stats show Institutional MMFs increasing $4.1 billion and Retail MMFs decreasing $2.2 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.050 trillion (88.9% of all money funds), while Total Prime MMFs were $424.1 billion (9.3%). Tax Exempt MMFs totaled $86.2 billion (1.9%).
ICI explains, "Assets of retail money market funds decreased by $2.17 billion to $1.44 trillion. Among retail funds, government money market fund assets decreased by $2.04 billion to $1.16 trillion, prime money market fund assets decreased by $736 million to $196.89 billion, and tax-exempt fund assets increased by $607 million to $76.64 billion." Retail assets account for just under a third of total assets, or 31.5%, and Government Retail assets make up 80.9% of all Retail MMFs.
They add, "Assets of institutional money market funds increased by $4.12 billion to $3.12 trillion. Among institutional funds, government money market fund assets increased by $223 million to $2.89 trillion, prime money market fund assets increased by $4.24 billion to $227.21 billion, and tax-exempt fund assets decreased by $340 million to $9.51 billion." Institutional assets accounted for 68.5% of all MMF assets, with Government Institutional assets making up 92.4% of all Institutional MMF totals. (Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're almost $400 billion lower than Crane's asset series.)
