US Asset Managers Face Fee Pressure Amid Rising Demand for ETFs

Asset managers in the US had to forego billions in fees last year as the demand for exchange traded funds (ETFs) continued to rise, according to Morningstar’s annual US fund fee study. The study revealed that US investors saved nearly $3.4 billion in fund expenses compared to the previous year, with the average asset-weighted expense ratio decreasing from 0.37% to 0.36%, continuing a downward trend. This shift is attributed to the growing preference for cheaper passive funds over actively managed funds, with passive funds attracting over $1.1 trillion in net new money while active funds lost almost $1.4 trillion in the past two years.

Dimensional, one of the largest US asset managers with nearly $740 billion in assets under management, has seen success with its actively managed ETFs. However, entering the ETF market has led to fee pressure as managers are forced to compete with low-cost index-based products for investors’ attention. Despite this, the trend towards lower fees remains strong, with Morningstar noting consistent demand for the “cheapest of the cheap.” Some analysts suggest that fee pressure may be stabilizing, with some funds starting to raise fees, indicating a potential shift in the landscape of fund management fees.

The flight of capital from active to passive strategies has left asset managers grappling with the need to manage larger pools of money to break even, particularly in the public funds segment of their business. While signs suggest that fee pressure may be nearing a plateau, the competition among asset managers to attract investors through lower fees remains a significant challenge. The ongoing evolution of the fund management industry, driven by cost-conscious investors and the rise of passive investment options like ETFs, continues to shape the market dynamics for asset managers in the US.