Good news! Mutual fund and ETF investors got an extra $5.5 billion in their pockets last year.

No, the windfall had nothing to do with tax law changes or new-fangled stock-picking strategies. Instead, expenses on mutual funds and exchange-traded funds (ETFs) dropped to 0.48% on average in 2018 from 0.51% the year before, according Morningstar Inc., the Chicago-based fund tracker and financial publisher.

That seemingly modest decline is the second sharpest since the firm began tracking such fees in 2000. And it accounts for that substantial extra pot of billions of dollars in fund investors’ accounts.

“As awareness grows around the importance of minimizing investment costs, we have seen a mass migration to low-cost funds and share classes,” said Ben Johnson, Morningstar’s director of ETF and passive strategies research.

The biggest chunk of savings comes from the drop in the average asset-weighted fee for actively managed funds, which tend to charge far more than index or other passive funds. These fell to 0.67% from 0.71%.

But investors are switching to index mutual funds and ETFs, and the cost of these passive strategies is declining, too. The average asset-weighted fee for passively managed funds fell to 0.15% in 2018 from 0.16% in 2016.

So that means despite the drop in fees, investors in actively-managed funds are still paying about 4.5 times what their peers in passive funds are for each dollar invested. That’s quite a bill unless your active manager is hitting the ball out of the park—which according to research very few of them are.

Thrifty mom and pop investors, however, aren’t the only ones driving change. Another big reason for the declining expenses is the ongoing transition by financial advisers from commission-based compensation setups to fee-based arrangements.

With commissions, brokers and their ilk were effectively encouraged to channel client money into more expensive funds, which often paid them for the business. Fee-only arrangements make it worthwhile for them to invest customer assets in low-cost options, such as index funds and ETFs. “A shift in the economics of advice has further accelerated this trend,” Morningstar’s Johnson said.

Make no mistake—this trend is not only about stock-focused funds. The momentum towards lower fees was evidenced across all the major fund asset classes tracked by Morningstar, including taxable bonds and municipals. And the trend was repeated every year since at least 2015.

Accordingly, the cumulative impact has been particularly dramatic. Mutual fund investors are paying about half of what they did to invest in 2018 as they did in 2000, according to Morningstar. They are paying about 40% less than they did 10 years ago and about 26% less than they did just five years ago.

All this is having a momentous effect on the fund managers as a whole. Sponsors are cutting fees, rolling out cheaper share classes and shuttering expensive funds, Morningstar says. 

Vanguard Group has the lowest asset-weighted expense ratio among money managers, just 0.09% overall in 2018, according to Morningstar. That was followed by State Street Corp. with a 0.17% average expense ratio and BlackRock with an average expense ratio of 0.30%.

Low-cost providers like these are gathering up more and more assets at the expense of their gilt-edged rivals.

Last year, investors poured a net $605 billion into the cheapest 20% of funds, according to Morningstar. By contrast, investors yanked $478 billion out of the remaining more expensive 80% of funds. 

Of the $605 billion, fully 97% of it flowed into the cheapest 10% of mutual funds.

The result: Morningstar calculates that 83% of all assets today are invested in funds whose expenses are in the lowest 40% of their respective categories. Just 7% of assets are invested in the most expensive 40% of funds by this measure.

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