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Falling Fund Fees

Most investors never see the expense ratios of their mutual funds and ETFs, but financial planners know that those costs add up. Planners typically seek the thriftiest share classes for their clients. That job is getting somewhat easier.

A recent industrywide review by the Morningstar fund research organization found that, on an equal-weighted basis (meaning that funds with more assets were weighted proportionately more heavily), investors pay an average fee of 1.10% a year in actively-managed U.S. equity funds, down from 1.21% in 2015. Investors in passively-managed U.S. equity funds (including ETFs) paid an average of 0.49% a year, down from 0.62% in 2015. Actively-managed international stock fund costs came down from 1.39% to 1.22% over the same time period; for passively-managed funds, the drop was from 0.60% to 0.49%. Overall, for all funds—including taxable and municipal bond funds, commodities and alternative funds—the weighted average for active managers came to 1.08% a year (down from 1.20% in 2015) compared with 0.61% (down from 0.72%) for passive funds.

Morningstar predicts that fund fees in both active and passive categories will continue to drift lower, as consumers and advisors put their money into increasingly less expensive funds. And it notes that there are now a handful of zero-fee index mutual funds and ETFs. Is it possible that 50 years from now, some funds will pay investors to put money in their hands?

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