By Ian Salisbury

This may be the end of the great mutual fund fee war. Investors are still benefiting from the relentless pressure asset managers feel to keep costs low.

Investment fees are key when it comes to picking mutual funds, since every dollar in fees comes out of returns, and lower-cost funds have a long history of outperforming pricier options. Driven by the runaway popularity of exchange-traded funds, the industry has spent years competing to offer cheaper and cheaper options.

The race may be all but over, according to a new Morningstar report. Last year, the average asset-weighted fee for index funds stood at 0.11%, essentially flat with 2023. Still, that's much lower than a decade ago, when the average fee was 0.19%. Among active funds, average fees also held steady at 0.59% between 2023 and 2024. A decade ago, they were 0.78%.

Steady fees may be disappointing to investors used to seeing the fund industry fall all over itself to announce price cuts. But it's not necessarily bad news. "It is inevitable that the pace of fee deadlines will slow, prompting asset managers to look elsewhere for profits," wrote analysts Zachary Evens and Bryan Armour.

To be sure, fee cuts aren't completely dead. In June Charles Schwab slashed fees on a handful of funds, such as the Schwab 1000 Index ETF and the Schwab International Equity ETF, which lowered their expense ratios to 0.03% from 0.05% and 0.06%, respectively.

Earlier this year, Vanguard also issued cuts across many of its funds, such as the Vanguard S&P 500 Growth ETF, which went to 0.07% from 0.1%.

But with fees already so low, there are diminishing returns. On a $10,000 investment, a 0.1% expense ratio amounts to $10 a year, so the annual savings if that falls to 0.07% are just $3 per $10,000. Ultimately, focusing on picking the right mix of stocks and bonds will have a much bigger impact on your returns than chasing such small differences.

What's more, it's not clear investors benefit from cutting costs below where they are today. A few asset-management firms, most notably Fidelity, offer mutual funds with expense ratios of zero. Still, there are potential downsides to this approach.

No fund is free to run. Zero expense-ratio funds are either subsidized by a fund firm's broader lineup or pay overhead through other sources of revenue, such as profits from securities lending. That revenue could otherwise be used to boost a fund's returns. Fidelity didn't respond to a request for comment.

The good news for investors: The popularity of ultralow cost index funds continues to motivate fund firms to keep costs as low as they can. Last year, mutual funds that were in the least expensive quintile in their category grabbed $930 billion in new investor dollars, while those in the most expensive quintile saw investors yank $250 billion. "Investors overwhelmingly prefer cheap funds. It doesn't matter if it's active or passive," Evens told Barron's. "There is pressure across the board."

Of course, Wall Street has been looking for ways to push back. More than 350 ETFs have launched in 2025. Plenty of these funds boast expense ratios of 1%, and sometimes quite a bit more. Consider the Fortuna Hedged Bitcoin ETF, which charges 1.75%, or the Brookmont Catastrophic Bond ETF, with a fee of 1.58%.

Fund firms have given up trying to get customers to pay big fees for stock-picking, but they still hope investors will cough up for more complicated, niche strategies, especially ones built around exotic financial instruments.

While there are dozens of these funds, they don't have a big impact on Morningstar's industrywide average-fee calculations because those are weighted by assets, with larger, more established funds counting more.

While investors enjoy more choices and lower prices than ever, they still need to exercise caution, says Nate Geraci, investment advisor and president of the ETF Store.

"The vast majority of strategies investors would want to own in the core of their portfolio are spoken for, so what you're seeing is a lot of ETF innovation around the edges," he says. "There are much more complicated products coming to market, and much higher fee points. The bar for due diligence has been raised."

Write to Ian Salisbury at ian.salisbury@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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June 11, 2025 02:30 ET (06:30 GMT)

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