Efficiency and performance — two of the primary metrics that mutual funds and exchange-traded funds (ETFs) strive to optimize in this multibillion-dollar ecosystem. They’re also determine whether funds should merge. That was covered in a recent white paper from the SEC’s Division of Economic and Risk Analysis (DERA).
The white paper outlined the effects of said mergers, namely the impact on fees. When the merger smoke clears, that’s ultimately what investors want to know. Likewise for advisors who are choosing funds for their clients. The mutual fund and ETF space is highly competitive, leading to fee compression that’s making it more difficult for market entrants to bring their products into this arena. As the data in the DERA paper reveals, while mergers typically come with marketing strategies that tout lower fees, it’s important for investors and advisors to know the mechanics behind these fee reductions.
To extrapolate the data for this study, researchers analyzed over 1,800 mergers between the years 2011 to 2023. Researchers closely examined expense ratios, management fees, and 12b-1 fees. They then broke down the results by fund type according to equity, bond, or mixed. They further categorized results by the type of merger involved (within the same fund family, across fund families, or between share classes).
Achieving Economies of Scale
As the report noted, the decision to initiate a fund merger can come from various reasons, but the primary one is to achieve economies of scale. Combining the assets of a target fund (acquired fund) with a larger, surviving fund (acquiring fund) can help lower the fixed operational costs that come with managing a fund. This includes costs related to legal, audit, custody, and administrative fees — all the work that happens behind the closed doors of a fund, which comprise the expense ratio.
In theory, the merger should result in a lower total expense ratio that benefits investors of the consolidated entity. That in turn makes it more appealing to prospective investors. The result?
“The results show that mergers are generally associated with lower expense ratios and management fees,” the report said. It added that the largest reductions occurred within mixed funds that were part of cross-family mergers as well bond funds that underwent share class consolidations. This may also be true for investors of the acquired fund. though post-merger data is not available.
“Although acquired funds are not observed after the merger (they are absorbed into the acquiring fund) the fact that post-merger acquiring funds (i.e., the consolidated funds) have lower expense ratios than pre-merger acquired funds suggests that investors in the acquired funds may have experienced lower fees, assuming they remained invested in the merged structure,” the paper said. It noted that this fee reduction occurred in all fund types, with equity and mixed funds seeing the largest reductions.
Lower Fees, Better Performance?
However, lower fees doesn’t translate to better performance — the data suggests that fees and performance are mutually exclusive. The paper referenced a study which found that while expense ratios were reduced, gross fund returns could also decrease. That decrease was a result of liquidity restraints and diminishing returns to scale.
Additionally, changes in short-term trading fees or round-trip restrictions (when an investor buys shares of a fund, sells them, and then buys the fund again within a short timeframe) could also affect overall performance. Bond funds, however, did see improved performance following mergers. However, that could be a byproduct of the fee reductions and improved efficiencies achieved post-merger.
“While lower fees may benefit investors, they do not necessarily guarantee higher net returns, as performance can be affected by factors such as decreasing returns to scale or post-merger inefficiencies,” the report said.
Read the Fine Print
As the fund industry moves deeper into 2026, there will be additional pressure on margins. That could increase the pace of fund mergers. The DERA working paper provides evidence that fund mergers are a necessity in a competitive marketplace that requires continuous optimization. This includes removing inefficient products that pave the way for additional mergers to take place.
Summarily, mergers are necessary for survival. Meanwhile, for the investor, they can bring a complex transition that requires closer scrutiny, especially when it comes to fees. For now, however, it appears that mergers are typically a net positive for investors, despite DERA’s limitations in data gathering.
“Despite these caveats, the evidence presented here suggests that fund mergers are often associated with cost savings for investors, particularly in the form of lower expense ratios and management fees for certain types of funds,” the paper said.
Click here to read the full white paper.
Originally published on Advisor Perspectives
For more news, information, and strategy, visit ETFdb.
