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Look to the Fall of Fund Fees

Fund expense ratios continue to drop as funds compete for increasingly savvy investor dollars.

Articles by Adam Grealish

By Adam Grealish
Director of Investing, Betterment  |  Published: October 1, 2018

Fund expense ratios continue to drop as funds compete for increasingly savvy investor dollars.

Betterment is uniquely situated to help you take advantage of price competition because we’re an independent advisor.

In 1975, Gordon Moore observed that computing power tended to double about every two years. This trend, now called Moore’s Law, held remarkably steady over the next four decades due to remarkable efficiency gains in circuitry.

We might be seeing a financial equivalent in the investment industry, albeit with a slightly slower pace. Fund fees appear to halve every 20 years or so, driven perhaps by greater investor education and a sharp focus on reducing costs’ drag on performance.

Investors’ focus on costs is clear. Last year, the cheapest 20% of funds had almost $1 trillion in total inflows, while the rest saw money leaving their funds. Many fund companies have responded by aggressively cutting fees.

A Moore’s Law for finance? Fund fees might be halving every 20 years.

 

Asset-weighted average stock mutual fund expense ratio. Source: ICI

As an independent advisor, we’re well positioned to help our customers take advantage of funds’ battle over fees.

More than a third of the primary funds Betterment recommends to customers have lowered their fees over the past year. Recently, our primary municipal bond fund, MUB, cut its fee by more than half.

You can benefit when your advisor has just one factor in mind when selecting funds: your best interest. Some advisors maintain conflicts of interest with fund providers—sometimes, they’re even owned by the same parent corporation. We only ever use one approach: We systematically select the funds we determine to be the most appropriate for each asset class, regardless of the company selling them.

Each quarter, we review the entire ETF universe of more than 2,000 funds, and select what we believe are the most appropriate funds for our portfolio strategy. We carefully consider factors that might drag on returns. Fund fees weigh heavily. We also consider the costs associated with trading, and how closely a fund follows its investment mandate. Together, these factors make up a fund’s total annual cost of ownership, which we seek to minimize when selecting investments for your portfolio.

The funds in your portfolio are already among the lowest cost in the industry, and our investment process enables you to take advantage as competition drives costs even lower.

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