Late last week, mutual fund trade group the Investment Company Institute published a press release entitled, "Average Equity and Bond Mutual Fund Expense Ratios Continue to Decline," along with the report, "Trends in the Expenses and Fees of Funds, 2022." The full report tells us, "On an asset-weighted basis, average expense ratios incurred by mutual fund investors have fallen substantially over the past 26 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 2022, that average had fallen to 0.44 percent. Average expense ratios of hybrid and bond mutual funds, as well as money market funds, have also declined meaningfully since 1996." A table, "Average Expense Ratios for Long-Term Mutual Funds Have Fallen," lists expense ratios by type from 1996 to 2022 and shows bonds fund averages falling from 0.84% to 0.37% over this period and money fund ratios falling from 0.52% to 0.13%. (Note: Crane Data shows the average expense ratio for money market mutual funds at 0.27% as of 2/28/23 as measured by our Crane 100 Money Fund Index.)
It explains, "The decrease in the average expense ratios of equity, hybrid, and bond mutual funds in 2022 primarily reflects a long-running shift by investors toward lower-cost funds or fund share classes. In particular, investors have been moving toward no-load share classes -- those that had neither a front-end load fee, nor a back-end load fee, nor a 12b-1 fee of more than 0.25 percent."
ICI writes, "In addition to varying from year to year, 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 0.35% at the 10th percentile, 0.71% at the Median, 1.54% at the 90th percentile, 0.37% for the asset-weighted average and 0.82% for the simple average. For money market funds, it shows averages of 0.06% at the 10th percentile, 0.15% at the Median, 0.39% at the 90th percentile, 0.13% for the asset-weighted average and 0.19% for the simple average."
A section on "Money Market Funds," comments, "The average expense ratio of money market funds increased 2 basis point to 0.13 percent in 2022.... Over the past 15 years, developments that stemmed from changes in short-term interest rates have been the primary factors affecting average money market fund expense ratios."
It continues, "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 remained in stasis from 2010 to late 2015."
ICI states, "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. 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."
They write, "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."
ICI says, "In 2020, the Federal Reserve slashed the federal funds rate back to near-zero territory 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."
Finally, they add, "In 2022, the Federal Reserve responded to rising inflation by raising the federal funds rate seven times and bringing it to between 4.25 and 4.50 percent. As a result, fewer money market funds found it necessary to provide expense waivers to prevent yields from falling below zero as was the case in 2021. Total money market fund waivers decreased sharply from $8.4 billion in 2021 to $4.1 billion in 2022. In addition, the percentage of money market funds offering waivers declined from 96 percent in February 2022 (just prior to when the Federal Reserve started tightening monetary policy) to 74 percent in December 2022. Despite fewer expense waivers in 2022, the average expense ratio for money market funds rose only 2 basis points to 0.13 percent."
In other news, the Financial Times published, "Flood of cash into US money market funds could add to banking strains." The piece says, "The flood of cash pouring into US money market funds is unlikely to stop soon, analysts and investors say, and has the potential to exacerbate strains in the banking system. The returns offered by money market funds, vehicles that invest largely in safe assets such as short-term government debt, have soared far above the interest rates banks pay to depositors, as the Federal Reserve rapidly raised borrowing costs over the past year. Despite the yawning gap, it took the banking crisis sparked by the collapse of Silicon Valley Bank to spark the recent stampede: money market funds have drawn in more than $340bn since the beginning of March."
The article quotes T. Rowe Price's Doug Spratley, "People that were making half a per cent in bank accounts were ignoring the 4 per cent they could make in money market funds.... And now they just got a big swift kick in the pants."
It adds, "The recent flows into money market funds have drawn the attention of Treasury secretary Janet Yellen, who on Thursday warned over the 'structural vulnerabilities' of the sector. 'If there is any place where the vulnerabilities of the system to runs and fire sales have been clear-cut, it is money market funds,' she said in a speech at a conference hosted by the National Associations of Business Economics. 'The financial stability risks posed by money market and open-end funds have not been sufficiently addressed.'" (See our March 31 Link of the Day, "Yellen Hits MMFs in Stability Speech.")
