Fees for funds keep dropping, and investors pocket the rewards

A virtuous cycle that’s helping investors keeps lowering fees for mutual funds and exchange-traded funds.

Investors in stock mutual funds paid an average of just 42 cents in fees for every $100 they had invested last year. That’s down from 44 cents the year before and from $1.04 in 1996. Fees were even lower for investors in stock ETFs, where they paid an average of just 15 cents last year for every $100 invested, according to the Investment Company Institute.

The drop is partly explained by investors flocking to lower-cost funds. In such cases, funds can spread their expenses over an even wider base of dollars, which means their expense ratios can drop. That in turn can attract even more investment in the future, continuing the cycle.

Lower expense ratios give a fund’s manager a lower hurdle to surpass in order to beat other funds’ after-fee results, which is what matters for investors.

Fund fees have also been dropping as investors opt more for index funds. These funds don’t hire teams of analysts and managers hoping to beat the market. They instead try to track the S&P 500 or another index, and they typically charge fees closer to zero.

For years, short-term interest rates near zero forced money-market funds to waive their fees to prevent investors from losing money. Over the last two years, though, the Federal Reserve has hiked its main overnight interest rate to a range of 5.25% to 5.50%. That allowed money-market funds to collect more fees while still giving their investors positive returns.