Fidelity Investments raced ahead of the competition by becoming the first company to launch index fund at zero fees.
Fidelity recently launched 2 funds namely the Fidelity Zero International Index fund and Fidelity Zero Total Market Index fund, wherein the investors would not be charged a single penny irrespective of their investment in either of the funds, while they get an exposure to the global stock market.
Investment fund companies have been in a continuous feud, with major players such as the Vanguard group, iShares, Schwab and the ETF groups going on a fee reducing spree on core ETFs. Then again prominent banks on Wall Street joined the bandwagon taking away a share in the slice with J.P. Morgan and Goldman Sachs offering ETFs on extremely competitive charges.
While Vanguard is about to reintroduce its brokerage services by offering free trading on virtually all the ETFs in the market at no fees, Fidelity took the game a notch up by offering index mutual funds for zero fees. Several index fund experts have taken Fidelity’s business decision positively and have advocated that fees be charged for other generic products as the clients fill up their portfolio, while the staple funds are offered at no cost.
Todd Rosenbluth, director Mutual Fund and ETF research, CFRA opines that investors are extremely fed sensitive and are turning to passive investments. He says that while ETFs are garnering all the attention for being competitively priced, index mutual funds remain in high demand. As such, Fidelity’s decision makes sense as it will help investors make diversified investments. He also added that the market won’t witness any introduction of zero-fee ETFs at least in the near future. Fidelity’s move to coming up with zero fee index fund will help the company further consolidate its position as it doesn’t incur licensing fees to 3rd party companies such as the MSCI, FTSE or S&P.
Apart from introducing 2 zero fee index funds, Fidelity would also be reducing its fees by 35% on an average on other mutual funds. Also, it is waiving off the investment minimums on the lower and zero fee funds. This reduction in fees will bring down the expense ratio to about 0.015%, thus taking the fees lower than what its competitors are offering. When compared to Vanguard, Fidelity charges lower fees for all its funds in similar categories. Likewise, when compared to Schwab, Fidelity charges lower funds for 90% of its funds in similar categories. It is noteworthy that Vanguard is the largest index mutual fund provider in the US, followed by Fidelity.
Fidelity’s President Kathy Murphy(personal investing) said by offering no-fee funds, the company is actually leveraging the scale with its customers. This is in sync with the company’s policy of creating long-lasting relationships with its customers spanning over 30 to 40 years and this is beneficial for the company. The company has also been providing value to its customers via tools, knowledge bank, bill pay and more.
With $7 trillion in assets, reaching more than 30 million clients, its move to introduce zero fee funds, lowering the fees for other products and doing away with account minimums will greatly appeal to all kinds of investors, from people who’ve just started investing to the millennial and baby boomers. It’s a straightforward, simple approach to investing and investors are going to welcome it.
iShares is being a part of the ongoing price war amongst the ETF providers, BlackRock spokesperson said that their company and Fidelity enjoy the great business relationship and that they have been highlighting Fidelity’s ETFs, which have now grown from 70 to 240. The spokesperson further opined that Fidelity’s move will give an easier access to iShares ETFs to its investors.
Fidelity’s press release, however, had no mention of an increase in iShare ETFs to be offered free of commission.
Following the release by Fidelity, BlackRock Shares and those of Franklin Resources, Federated Investors and Legg Mason went down, losing over 4%. However, BlackRock clarified that Fidelity’s fee war had more to do with Schwab and Vanguard as BlackRock’s exposure to traditional index mutual funds stands at less than 5%
Investors naturally emerge as winners as fees are being lowered by major players in the market. Lower fees can have far-reaching consequences on the investor’s bottom line and the retirement or investment goals that they may have. However, experts say that lower fees should not be the only criteria while choosing a particular portfolio.