It hasn’t been this cheap to invest in mutual funds for decades, possibly ever.
Expenses dropped again last year for both stock and bond funds, and they’re at their lowest levels since at least 1996, as a percentage of their total assets, according to the Investment Company Institute. That’s how far back the trade group’s records go, and funds have been getting steadily cheaper to own since.
“It’s a bit like Olympic records,” says Sean Collins, senior director of industry and financial analysis at the group. “Every four years, for whatever reason, records seem to fall. And you think: At some point, this has got to stop, right? And so far, we haven’t seen it.”
It’s heartening because low expenses mean investors are keeping more of their savings. And lower-cost funds tend to perform better than higher-cost rivals. That’s because higher-cost funds have to perform that much better to deliver the same after-cost returns, which is what investors care about and see in their quarterly statements.
Even though minimizing costs is such a key part of investing, investors don’t always notice them. No bill comes due each year. Instead, fund companies directly take out how much they need for managers’ salaries, record-keeping costs and other operating expenses from the fund’s assets.
To see how much a fund is taking out, check what the industry calls its expense ratio. This figure calculates what percentage of the fund’s assets is going to cover annual costs, and funds regularly give updates on theirs on their websites. Stock funds had an average expense ratio of 0.68 percent last year, down from 0.70 percent a year before and 1.04 percent in 1996.
That means a person with $1,000 invested had $6.80 taken out to cover fees last year, versus $7 in 2014 and $10.40 two decades ago. That might not sound like much, but the savings get proportionally bigger as nest eggs grow. For workers with an average-sized 401(k), which Fidelity Investments recently pegged at $87,900, they could be paying $316 less in expenses each year than they would have in 1996. Plus, long-term investors will see the value of those savings grow through compound interest.
A fund’s expense ratio doesn’t include the cover charge that some funds require to enter, something the industry calls a “load” payment. The ICI’s numbers also don’t include expenses for exchange-traded funds, which are becoming ever more popular in part because their fees are often lower than those of traditional mutual funds.
The ICI’s numbers give greater weight to the largest funds, so a big reason for the drop in expenses has been the extraordinary growth for index funds in recent years. Money has been pouring into these funds, which are some of the cheapest to own because they don’t hire teams of analysts to pick stocks.
Stock index funds had an average expense ratio of 0.11 percent last year, versus 0.84 percent for their actively managed rivals. Investors plugged nearly $413 billion into index mutual funds and ETFs last year, according to Morningstar. They pulled nearly $207 billion out of actively managed funds over the same time.
