We document a robust anomaly in the fee setting of U.S. mutual funds: ESG funds charge net expense ratios 11.5 basis points lower than those of conventional funds across providers, and 6.5 basis points lower within provider. Using panel data from 2011-2024, we show this fee gap persists across data sources, ESG classifications, and market segments. A Hotelling-style model of horizontal differentiation predicts that funds with higher returns and stronger differentiation should command higher fees. ESG funds have outperformed peers net-of-fees and exhibit greater textual differentiation, but nonetheless charge lower fees. The result is inconsistent with standard theories of fee setting based on performance signals or competitive differentiation.
