Several factors have contributed to the trend, including expense ratios varying inversely with fund assets, a shift toward no-load share classes for long-term mutual funds, economies of scale, investor preferences, and competition from ETFs.
Most comparable ETFs continue to be less expensive than mutual funds. But it’s a mistake to assume that all ETFs are cheaper.
For example, mutual fund Fidelity® 500 Index Fund (FXAIX) has a net expense ratio of 0.015%, and it has no transaction fee on Fidelity.com.2 That compares favorably with similar ETFs, such as the SPDR S&P 500 ETF (SPY) with an expense ratio of 0.09% and the iShares Core S&P 500 ETF with an expense ratio of 0.03%. It is worth noting that Fidelity offers zero expense ratio index mutual funds.
Of course, expense ratios aren't the only thing to consider when evaluating ETF costs. Tracking error, which is a measure of how well the ETF tracks the performance of a benchmark, can affect the total return of an ETF. If you are looking to simply emulate the performance of a benchmark, like the S&P 500® Index, it may be prudent to seek out ETFs with low tracking error.
Bid-ask spread is another factor that can affect your total cost. An ETF with a wider bid-ask spread—the difference in price between what a buyer is willing to pay and what a seller is willing to receive as payment—may be more costly, all else being equal. You can find an ETF’s bid-ask spread, along with its tracking error and other trading costs, on Fidelity.com on an ETF’s snapshot page. By comparison, mutual funds trade at the net asset value and the buyer/seller is not subjected to a bid-ask spread.