• Research firm ICI study shows expense ratio fell for 6th year
  • Not just stocks: bond, hybrid, money market funds cheaper

Index and exchange-traded funds are getting better at the thing that makes them so popular: driving down the cost of investing. 

Not just among themselves. New research from Washington-based Investment Company Institute shows that the cost mutual funds charge investors is the lowest since at least 1996. The average expense ratio for equity funds, defined as the fund’s total expenses as a percent of its net assets, dropped to 68 basis points (0.68 percentage point) last year, the sixth straight year it’s fallen, data from ICI show. Expense ratios for bond and hybrid funds also declined in 2015.

The rise in popularity of investing in vehicles that track equity benchmarks has also drawn a vocal group of critics, who have blamed ETFs for increasing correlation. With dispersed returns from stocks reaching the lowest since 1979 by some measures, investors from billionaire Bill Ackman to Martin Taylor, who closed his 15-year-old hedge fund in January, have blamed index investing for contributing to the demise of stock-picking.

Yet the growing popularity of the style has driven down costs across equity funds, ICI wrote in a note on Wednesday. Assets in equity index funds rose by $109 billion in 2015 while assets in actively managed funds fell by $275 billion. The expense ratio at actively managed funds has dropped as they trim down costs in the face of competition, according to ICI.

“It indicates how competitive this industry is and how much more widespread and aggressive it is,” said Brian Reid, the Washington, D.C.-based chief economist at ICI. “There’s competition between active and passive and from ETFs that are competing for dollars with mutual funds. Actively managed funds have stripped down fee structures to compete head-on with the index and ETF funds.”

The trend isn’t limited to just stock investors. The costs of bond funds fell in 2015, amid a decline in the assets of high-yield funds. Fees for those investing in a mix of stocks and bonds slipped last year, offset by growth in alternative strategy funds, according to ICI. All these groups have become cheaper in the last decade.

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