NEW YORK — Good news for investors: We’re keeping more of what’s ours.
Mutual funds charged less to cover operational expenses last year, as a percentage of their total assets. It was the fourth straight year that the average expense ratio fell for stock mutual funds, according to separate reports from the Investment Company Institute and Morningstar. And it’s not just stocks that have become cheaper for investors to own. Expense ratios have also dropped for bond and money-market mutual funds in recent years.
It’s a win for investors because they get to keep more of their returns, and funds with low expenses have historically performed better than higher-cost rivals, says Russel Kinnel, director of manager research at Morningstar. That’s because low-cost funds essentially have a head start in the race for returns: High-cost funds need to make more just to match the performance of their competitors once expenses are taken into account.
It may seem like no fun to parse expense-ratio data when the difference from one fund to the next may be less than a quarter of a percentage point. “But it’s something, and that advantage compounds over time and adds up to something meaningful,” Kinnel says. Low costs are such a good predictor of success that Kinnel suggests investors look at a fund’s expense ratio first when considering whether to purchase it.
Stock mutual funds had an average expense ratio of 0.74 percent last year, according to the Investment Company Institute. That means for every $10,000 in assets, a stock fund took $74 to cover expenses. That’s down from $77 in 2012 and $100 a decade earlier. The expense ratio covers everything from analysts’ salaries to the cost of mailing shareholder reports.
The expense ratio does not include every type of fee that an investor may pay.