Fidelity launches no-fee index funds

“The funds are called the Fidelity Zero Total Market Index Fund (FZROX) and the Fidelity Zero International Index Fund (FZILX). They are the industry’s “first self-indexed mutual funds with a zero expense ratio” and will be directly available to individual investors.”

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Certainly a compelling offer but they aren’t a charity…where in the backend will they make their money?

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Yeah I’m curious how they’re paying for it too.

I found this article that was speculating on the topic :

So 3 points:

  1. There are other funds at 0.0x% fees so 0.00% isn’t much different.
  2. They can make money on securities lending
  3. The funds are only available to fidelity direct retail customers so their motive is to capture clients.
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I’m guessing it serves two main purposes:

  1. Lead generation - I bring my money over to Fidelity to put into these funds, but eventually will be interested in buying other funds with fees.
  2. Retention - it may prevent current customers from taking money out to go to lower cost options like Vanguard.
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Skill in running index funds counts.

I have some FSTVX, Fido’s total stock market index fund, and it generates much larger cap gains distributions every year than my VTSAX, Vanguard’s total stock market index. I am a buy and hold guy so the taxes on the distributions reduce my return.

The Vanguard expense ratio is 0.04% so on a 100K holding that is $40/year. I pay a lot more than that in cap gains taxes on the FSTVX distributions.

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Just got an email that they’re getting rid of other fees as well. But the fees they’re getting rid of, didn’t seem to apply before. They got rid of account fees and minimums, but I’ve never paid account fees and not aware of any minimums - I’ve had $0.30 in one of my accounts for over 2 years and haven’t been charged a fee.

They also said they eliminated “domestic money movement fees.” Does this include wire transfers?

Interestingly, I don’t see any mention of the removal of the fees to transfer out/close accounts.

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Securities lending is pretty profitable especially for small cap and foreign stocks. For big US stocks, I don’t think it’ll matter much.

Generally speaking, at this point it doesn’t matter much whether you pay 5bp or 0bp - that’s only savings $50/year/$100k invested. Just like a free trade instead of a $3-5 trade is getting pretty small in absolute dollars. Once costs are low, picking your investment and getting good execution matters more. For these latter purposes, its easy to benchmark one S&P500 fund or whatever against another for tracking error and out/underperformance. It’s not nearly as easy to decide how you would have done if you bought something similar to but not quite the SP500 so you didn’t have the expense of paying the index licensing fees, rebalancing costs, turnover costs of being in a fund with more active traders than yourself, etc.

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Apparently both of these fees are gone, the account closure and cash transfer ones.

https://www.bogleheads.org/forum/viewtopic.php?p=4050687#p4050687

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https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/press-release/Fidelity-Redefines-Investing.pdf

https://www.fidelity.com/mutual-funds/investing-ideas/index-funds
and the two pdfs linked from this page. One of which is the Index Methodology Document.

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That’d seem like a good strategy to attract new clients, but they also market it to current customers including people with large accounts so maybe BostonOne is also right on this move. Retention (by winning the race to 0) and prospect of some clients eventually moving to more actively managed accounts are probably driving this PR move.

Effectively the ER of actively-managed funds would subsidize that of those 0% ER funds. For investors willing to pay the premium because they are convinced of the added value, rolling in an extra 0.03% ER is not a deal breaker where as some low-cost investors will aggressively chase down the lowest ER available on the market.

It may also be indicative of how low their actual costs have gotten on those broad index funds where charging a tiny fee or not has become mostly irrelevant and definitely worth the bragging rights.

I recently did the $200 bonus for a new Fidelity account. This is a perfect fund to park my $400 in since it needs to sit for 9 months. At least until the market tanks!

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Does anyone know the answer here?

If wires are included, does that include international wires?

3% for currency transaction, otherwise free. https://www.fidelity.com/trading/commissions-margin-rates and click on the fee information tab.

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Thanks for the notice.

~ Vanguard will offer commission-free trading on all of its ETFs.

~ The nation’s largest bank, J.P. Morgan, will launch an app that allows you to make stock trades for FREE.

Now this is a race to the bottom I can actually get behind !

The Vanguard PR is nearly all ETFs, not just Vanguard ones. Only a few like leveraged and inverse ETFs are excluded from their new free trading etf program.

https://www.prnewswire.com/news-releases/vanguard-brings-unrivaled-access-to-etfs-with-launch-of-industrys-largest-commission-free-platform-300700163.html

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