Investing with the Big 3 firms — Vanguard, BlackRock, and State Street — got cheaper in the opening weeks of 2022, as Vanguard cut expense ratios on actively managed mutual funds and ETFs, while the others cut expenses on a variety of ETFs.
On Feb. 1, Vanguard reported lower expense ratios for seven share classes of actively managed mutual funds and one index ETF in prospectus filings for funds with fiscal years ending September 30, 2021. Vanguard said these reductions resulted in $4.4 million in savings for investors.
Vanguard's active bond funds reporting lower expenses include investor shares of the $6.2 billion Vanguard Core Bond Fund as well as investor and Admiral shares of the $2.6 billion Vanguard Emerging Markets Bond Fund.
Among Vanguard's active equity funds, investor and Admiral Shares of the $21.2 billion Vanguard Capital Opportunity Fund and the $568.1 million Vanguard International Core Stock Fund are reporting lower expenses. The $19.9 billion Vanguard Short-Term Inflation-Protected Securities ETF is also reporting a lower expense ratio.
The cuts ranged from one to five basis points.
On Dec. 17, Vanguard reported lower expense ratios for 17 fund shares, including nine fixed income ETFs, resulting, the firm said, in almost $19 million in savings for investors. The fixed income ETFs for which Vanguard reported lower expense ratios included corporate credit, U.S. Treasury and mortgage-backed securities ETFs. All cuts were by one basis point.
There were also cuts in other categories of Vanguard’s equity and balanced mutual funds and ETFs. Leading the way was Vanguard’s Explorer Fund Value Shares, with a 12 basis point cut, from 0.64% to 0.52%.
During 2021, BlackRock cut expense ratios on a variety of equity and fixed income ETFs, by anywhere from three to 30 basis points, the biggest cut coming on the iShares U.S. Infrastructure ETF. In the first week of January 2022, BlackRock cut the expense ratio on its mortgage-backed securities ETF from six basis points to four, and its short-duration Treasury inflation-protected securities ETF from four basis points to three.
From March 2021 to January 2022, State Street Global Advisors cut expense ratios on a variety of equity and fixed income ETFs, by anywhere from two to five basis points, with the biggest cut on the high-yield bond ETF.
The past 20 years have seen a dramatic drop in expense ratios for equity mutual funds, from about 1% in 2000 to a half percent in 2020, according to the Investment Company Institute.
Hybrid and bond mutual fund expense ratios have also tumbled in that time — hybrid down 34%, bond down 45%, the ICI reports.
There are a few key reasons — a surge in fund assets, a shift toward no-load share classes and competition.
Several factors help account for the steep drop in mutual fund expense ratios. First, expense ratios often vary inversely with fund assets.
Another factor contributing to the decline of the average expense ratios of long-term mutual funds is the shift toward no-load share classes.
Mutual fund expense ratios also have fallen because of economies of scale and competition. Investor demand for mutual fund services has increased dramatically in the past few decades.
Kashif Ahmed, president of American Private Wealth in Bedford, Massachusetts, said the lower fees can actually mean more money for advisors.
“If the expense ratio goes down, the advisor gets away with not lowering his or her own fee and can keep the client at basically the same all-in level,” said Ahmed. “And if expenses go down and performance is elevated, AUM should increase, and barring a parallel increase in advisors’ own business expenses, advisors should make more money. It’s a combination of two things — new money coming in or existing money growing faster with no rise in expense.”
Lower fees give Melissa Joy, president of Pearl Planning in Dexter, Michigan, more opportunity to cut expenses for clients.
“When our clients make money, we make money when we reduce the cost of portfolios,” she said. “A lower expense ratio adds to the client bottom line and our bottom line. A reduction in the cost of existing funds is a great way to do that without turnover.”
But mostly on the active side, she said, acknowledging that on the passive side: “There is little left to cut.”
