Morningstar Magazine - August/September 2017 - 48

Strategies

EXHIBIT 3

Asset Class Trends U.S. equity showed the largest fee declines.
Asset-Weighted Average Fees (%)

resulted in large declines in asset-weighted
average fees for ETFs.

Market Share Passive (%)

2013

2016

Change

2013

2016

Difference

U.S. Equities

0.60

0.50

-17

Sector Equity

0.69

0.61

-12

Allocation

0.79

0.72

-9

International Equity

0.80

0.70

-13

Taxable Bond

0.57

0.48

-16

Muni Bond

0.58

0.53

-9

Alternative

1.27

1.34

-4

All Funds

0.65

0.57

-12

Source: Morningstar. Data as of 12/31/2016.

EXHIBIT 4

Share Class Trends ETFs show largest fee declines and inflows.

2013

2016

Change (%)

2013

2016

Estimated
3-Year Net
Flow $Bil

Load

1.04

1.01

-3

-514

Institutional

0.60

0.54

-10

442

Retirement

0.73

0.65

-11

Other/No Load

0.58

0.50

-14

ETFs

0.29

0.24

-17

610

Asset-Weighted Average Fees (%)

Market Share (%)

Source: Morningstar. Data as of 12/31/2016.

This share class migration was partly the
result of a change in the financial advisory industry
toward a fee-based model and away from
commissions. Fee-based advisors are more inclined
to use lower-cost vehicles such as passive
funds and ETFs. To meet that preference, fund
providers have made it easier to gain access
to cheaper (typically institutional) share classes.
Growth in 401(k) plans, which are increasingly
gravitating toward cheaper share classes,
has also contributed to increased availability and
usage of institutional shares.
E X H I B I T 4 groups funds into five different share
class types: load (A, B, C, or D shares),
institutional, retirement (primarily R shares and
Fidelity K shares), other/no load (advisor,

Morningstar August/September 2017

investor, M, N No Load, Other, S, or T shares), and
ETFs. All five categories contain both active
and passive funds, though there are fewer passive
funds in the load category and far more in the
ETF category.
ETFs showed the largest declines in assetweighted average fees during the past three years,
reflecting not just investor preferences for
the cheapest funds but also fee cuts. Vanguard,
BlackRock, and Charles Schwab SCHW are
among the firms that have aggressively cut fees,
making it possible for investors to buy a
total U.S. market ETF with expenses of around
0.03% and an international-equity ETF or core-bond
ETF charging around 0.04%. Given the flow of
assets into these extremely cheap funds, this has

Relative to other share classes, investors pay
the least for ETFs, which cost only 0.24%
on an asset-weighted average basis in 2016, versus
0.29% in 2013. At the other end of the spectrum,
load shares cost investors the most, with
1.01% in asset-weighted annual fees, a portion of
which typically pays for distribution and marketing
costs. EXHIB IT 5 shows how shareholders have
fled these pricier options.
The institutional, retirement, and no-load groups
also saw healthy declines, though no-load
fee declines were much less, as this share class
has fewer passive funds.
Trends by Firm
Vanguard has had a significant impact on the
industry's asset-weighted average expense ratio
and the recent pace of fee declines, as the
company's low-cost passive funds continue to
attract large inflows. From 2013 to 2016, the
industrywide asset-weighted average expense
ratio fell to 0.57% from 0.65%, a 14% decline.
Excluding Vanguard, the industry's asset-weighted
average expense ratio in 2016 would have
been higher, at 0.69%, which would have been
only a 9% decrease from 2013.

Vanguard's impact on industrywide asset-weighted
average fees is due to its market share
dominance and its fees, which typically are the
lowest relative to similar peers. The assetweighted average fee of Vanguard's funds fell
to 0.11% from 0.14% during the past three
years (EXHIB IT 6 ). This 21% decline was the largest
percentage decline among the largest fund
providers, thanks to large flows into
Vanguard's low-priced ETFs and index funds and
falling fees in some of Vanguard's largest
funds as the fund company passes improving
efficiencies to fundholders. During that
period, Vanguard has strengthened its leading
position, as its market share rose to 22% from 18%.
Vanguard's 2016 asset-weighted average
expense ratio of 0.11% was significantly below that
of the second-lowest-cost provider, SPDR
State Street, at 0.19%, followed by Dimensional
Fund Advisors at 0.36%.

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