ETFs typically have lower fees than mutual funds due to their structure.

• According to investment experts, exchange-traded funds typically have lower fees compared to mutual funds.
• Fees are one of the few factors that people can control with investing.
• While ETFs are often praised for their low fees, experts noted that there are also affordable mutual funds, particularly index funds, that can be just as effective.

The pattern is evident: Investors persistently look for lower fee options for investment funds.

According to Zachary Evens, a manager research analyst for Morningstar, the mass migration to cheaper funds has been a significant factor in the decline of costs.

The cost of managing an average annual fund has decreased by more than half in the past two decades, from 0.87% in 2004 to 0.36% in 2023, according to Evens.

Experts said that exchange-traded funds (ETFs) typically outperform mutual funds when it comes to fees.

According to Morningstar data, the average ETF has an annual management fee of 0.51%, which is roughly half the 1.01% fee of the average mutual fund.

Experts argue that comparing the average fees of ETFs to mutual funds is not entirely accurate, as most ETFs are index funds, which are generally less expensive than actively managed funds that employ stock-picking strategies to outperform the market. As a result, the average ETF fees are naturally lower, experts contend.

When comparing on a more apples-to-apples basis, there's a similar fee dynamic.

Index ETFs have an average annual fee of 0.44%, which is half the 0.88% fee for index mutual funds, according to Morningstar. On the other hand, actively managed ETFs have an average fee of 0.63%, which is lower than the 1.02% fee for actively managed mutual funds, Morningstar data indicate.

Each year, asset managers withdraw a percentage of their clients' fund holdings as a fee.

"Michael McClary, chief investment officer at Valmark Financial Group, stated that while there are numerous factors beyond an investor's control in the stock market, the only aspect that an individual can manage is the fees associated with their investments."

He stated that it's a crucial matter for individuals to prioritize.

'Cheap mutual funds also exist'

Both ETFs and mutual funds are managed by professionals, comprise a mix of stocks and bonds, and provide diversification and access to various markets.

The SPDR S&P 500 ETF Trust, an index fund tracking the S&P 500 stock index, was the first U.S. ETF to debut in 1993.

ETFs have steadily increased their market share, despite mutual funds holding more than $20 trillion, which is about double the assets in ETFs.

On average, ETFs are cheaper than mutual funds, but this is not always the case.

"There are affordable mutual funds available," stated Bryan Armour, head of passive strategies research for North America and editor of the ETFInvestor newsletter at Morningstar.

Some ETFs, like those that track major indexes such as the S&P 500, have competitive fees relative to similar index mutual funds, Armour said.

"ETFs are generally cheaper than mutual funds, except for in the core indexes where they compete directly with mutual funds on fees, according to Armour."

The cost of newly launched mutual funds is decreasing, while the cost of new ETFs is rising, according to data.

The fee gap between newly launched mutual funds and ETFs has decreased by 71% in the last decade, from 0.67% to 0.19%, according to Evens of Morningstar.

He stated that the emergence of active and alternative ETF strategies, which are more expensive than broad index strategies, is largely responsible for the increase in fees.