Morningstar Magazine - August/September 2017 - 47

EXHIBIT 1

That is a much greater percentage difference
than that for active funds, where the assetweighted average fee of 0.75% compares with a
simple average of 1.20%.
With investors' focus on low cost, only two firms
have really benefited from this rapid asset
growth in passive funds: Vanguard and BlackRock
BLK. Both firms have a broad menu of passive
funds with fees that are typically among
the lowest among their Morningstar Category
peers. During the past two years, Vanguard
and BlackRock, through its iShares ETF family,
have sustained their market-dominating
positions in the passive fund segment, at 49%
and 18%, respectively.
Trends by Asset Class
Average fees paid by investors fell in six of the
seven major asset classes from 2013 to 2016,
with U.S. equity funds showing the largest decline
(E X H I B I T 3 ). Not surprisingly, passive funds
captured a larger share of the market in all six
asset classes that experienced fee declines.
Alternatives, on the other hand, exhibited rising
average fees and a decline in market share of
passive funds.
U.S. equity funds' asset-weighted average fees fell
to 0.5% in 2016 from 0.6% in 2013, a decline
of 17%, the largest across the seven asset class
groups of funds. U.S. equity funds have also
seen the largest migration to passive funds from
active funds, with the former drawing in $458
billion of inflows and the latter experiencing $524
billion of outflows over the past three years. As a
result, U.S. equity funds also have the largest
percentage of assets in passive funds, at 41%,
which rose from an already significant 33% in 2013.

Taxable-bond funds exhibited the second-largest
three-year decline in fees, as their assetweighted average fees fell to 0.48% in 2016 from
0.57% in 2013, a decline of 16%. However, passive
funds accounted for a much lower 26% of all
taxable-bond funds relative to U.S. equity funds.
As for international-equity funds, their assetweighted average fees fell 13%, to 0.7% in 2016,
from 0.8% three years ago. Passive funds
now account for 33% of assets in these funds,
up from 27% in 2013.

Active Fund Flows Expensive funds account for recent outflows.
Cheapest 20%

Remaining 80%

Net Flows
400
$ Bil

Cheapest 20%

Remaining 80%

Net Flows
200
400
$ Bil
0
200
-200
0
- 400

'00

'01

'02 '03 '04 '05 '06 '07 '08 '09

'10

'11

'12

'13 '14

'15

'16

'10

'11

'12

'13 '14

'15

'16

-200

Source: Morningstar. Data as of 12/31/16.

- 400
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Cheapest
20%
Remaining 80%
EXHIBIT
2

Net Flows
500
$ Bil

Passive Fund Flows Investors seek the lowest-priced funds.
Cheapest 20%

400
Net Flows
500
$300
Bil

Remaining 80%

400
200
300
100
200
0
- 100
'00

'01

'02 '03 '04 '05 '06 '07 '08 '09

'10

'11

'12

'13 '14

'15

'16
0
- 100

'00

'01

'02 '03 '04 '05 '06 '07 '08 '09

'10

'11

'12

'13 '14

'15

'16

Source: Morningstar. Data as of 12/31/2016.

Alternative funds were alone in exhibiting rising
asset-weighted average fees, to 1.34% in
2016 from 1.27% in 2013. This rise in fees is mostly
attributable to a decline of passive funds as a
percentage of assets, to 18% in 2016 from 22% in
2013. Another reason for a rise in fees was
performance chasing. Expensive active funds, such
as Marketfield MFLDX (whose institutional share
class charges 1.56%) and Gotham Absolute
Return GARIX (2.2%), enjoyed large flows after
a year of strong performance.
While the asset-weighted average cost of an active
U.S. equity fund fell from 0.83% in 2013 to

0.77% in 2016, these funds are still at a big cost
disadvantage to passive funds. Indeed, as
the average asset-weighted cost of a passive U.S.
equity fund also fell (by 2 basis points to 0.11%),
there's still a 0.66% gap separating the two.
International equity funds also had 0.66% spread
between active and passive funds, while other
categories had lower active/passive spreads.
Trends by Share Class
A shift out of higher-cost share classes, such as
load shares, into lower-cost share classes,
such as institutional shares and ETFs, has
contributed to falling asset-weighted expenses.

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Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2017