NEWSLETTER

Written by Jimmy Becker

Fidelity goes to zero

There was news last week in the personal finance world:

Fidelity announced that they’re offering two new mutual funds that have no fees — one is for the total US stock market and one is for the total non-US stock market.

You can read their announcement as well as the New York Times reporting of it. I offer a few comments and observations:

1. It’s not all of their funds, just two new ones. However, Fidelity now offers a nearly full slate of low cost index funds that are competitive with Vanguard. Fidelity is clearly responding to the pricing pressure that Vanguard has applied to the entire industry.

2. Fidelity’s competitors will respond. Expect a race to zero with other mutual fund companies. They won’t be happy about it but they’ll have little choice. As the old saw goes, when elephants fight, the grass gets trampled.

3. Fidelity chose the dog days of summer to make this announcement. It’s almost as if they didn’t want to shout it too loudly. On the one hand, they want a competitive alternative to Vanguard’s low cost index fund offerings to attract new investors; on the other hand, they hope their existing investors do not shift to these lower cost options. While that would benefit customers, it would cost Fidelity dearly. Good luck with that strategy.

They could have simply reduced the fees on their existing funds to zero instead of creating new ones but they chose not to do that for reasons that may be evident.

4. This will have a positive effect for 401K participants. Employers will feel pressure to offer lower cost investment options in their plans. It is going to be increasingly difficult to defend high cost 401Ks when Fidelity and others offer free options.

5. This will put pressure on financial advisors and their fees. Astute clients will be asking more questions about how advisors justify their high cost fees.

This is good news for investors. As I’ve written about elsewhere, small changes in fees have big effects over long periods.

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Update:  Fidelity has cut the expense ratio on a total of 21 of their index funds and claim that all of them are now lower cost than Vanguard. Interesting. You can see Fidelity’s comparison chart here.

Update #2: Fidelity offers two more index funds with zero fees. You can see their statement here, including another comparison chart showing costs lower than Vanguard.