Stock Pickers Left in Dust as Thrifty Investors Cut Costs

(Bloomberg) -- Investor interest in low-cost mutual funds shows no sign of abating and is costing stock pickers billions of dollars in assets.

Only the most inexpensive actively managed funds are luring new money as expense ratios continue a two-decade fall, the Investment Company Institute said in a report Monday.

The 5 percent of active domestic equity funds with the lowest expense ratios received $3 billion in inflows last year. Those funds had on average expenses of less than 0.56 percent. The hardest-hit group of funds: those with an expense ratio of 0.56 percent to about 0.87 percent, which suffered $117 billion in outflows, according to the ICI analysis.

Actively Managed Funds

Expense ratio< 0.56%>= 0.56 to <0.87%>= 0.87% to <1.15%>= 1.15%
Net flow$3B-$117-$80-$78

Index Funds

Expense ratio< 0.06%>= 0.06% to <0.20%>= 0.20% to <0.42%>= 0.42%
Net flow$115B$93$13$8

Source: ICI. Data show mutual funds and ETFs grouped from lowest to highest expense ratio. Net flow in USD billions.

Investor interest in low-cost investments, competition and economies of scale driven by asset growth have allowed fund advisers to keep pushing down costs. Investors paid, on average, 43 percent less in equity mutual fund expense ratios in 2017 than in 1996, the ICI found.

From 1996 to 2017, the average expense ratio of actively managed equity mutual funds fell by 28 percent. During the same period, it declined 67 percent for index equity mutual funds.

Which explains why money has poured into index funds. From 2000 to 2017, total net assets in index mutual funds have risen from $384 billion to $3.4 trillion, ICI said.

Fees haven’t dropped for all types of funds. Average money-market fund expense ratios increased to 0.25 percent last year from 0.20 percent in 2016. Many fund companies trimmed expense waivers last year as the Federal Reserve boosted short-term rates three times.

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