- Fidelity Investments is introducing two core equity index mutual funds covering the U.S. and international markets without any management fee.
- The fee war in the index fund and ETF space has been intense with leaders Vanguard Group, Schwab and BlackRock iShares engaged in an endless battle to be the low-fee leader.
- Experts have long expected that a major fund company would make the move soon to offer core index funds without any fee.
Fidelity Investments just beat all of the low-fee index fund competition to a move long expected: It will be the first fund company to offer core index funds without any management fee.
On Wednesday, Fidelity announced the Fidelity Zero Total Market Index Fund and the Fidelity Zero International Index Fund will be available to investors on Friday. "Investors will pay a 0.00 percent fee, regardless of how much they invest in either fund, while gaining exposure to nearly the entire global stock market," Fidelity said in a release.
The major index fund companies and discount brokers have been engaged in what investing experts call an "endless" fee war, with Vanguard Group, Charles Schwab and BlackRock's iShares ETF families constantly setting new bars for the lowest management fees on core ETFs. Lately, some of the biggest Wall Street banks have been encroaching on their turf as well, with Goldman Sachs and J. P. Morgan introducing ETFs with competitive expense ratios.
Many index fund and ETF experts have argued that it would ultimately make sense for fund managers to offer the "building blocks" — the core market exposures — for free and charge fees for less generic investment products as individuals and advisors fill out their portfolios.
"Investors are increasingly fee-conscious and shifting toward passive products," said Todd Rosenbluth, the director of ETF and mutual fund research at CFRA. "While ETFs get much of the attention from a competitive perspective, demand for index mutual funds remains strong. Fidelity's move makes it easier and cheaper to invest in well-diversified mutual funds."
It is not a surprise that the first zero-fee fund comes in a traditional index fund portfolio rather than ETF. Vanguard Group founder Jack Bogle has noted that the only investment category growing as fast, if not faster than ETFs, is traditional index funds. Rosenbluth said it is less likely that a zero-fee ETF comes soon. "This is self-indexed and is part of a family leveraging its scale," he said of the Fidelity move and the fact that it does not need to pay a licensing fee to a third-party index company, such as S&P, FTSE or MSCI.
Fidelity also announced that it is lowering fees on other core mutual funds by an average of 35 percent and will charge no investment minimums to access the lower and no-fee funds. Expense ratios will go as low as 0.015 percent, Fidelity said, and it specifically compared its new pricing to Schwab and Vanguard portfolios and brokerage account policies in its release, claiming it will now offer lower fees than all of Vanguard's comparable funds and 9 out of 10 comparable Schwab funds.
Kathy Murphy, president of Fidelity's personal investing business, said in an interview on CNBC on Wednesday afternoon that focusing on the inability to make money from no-fee funds misses the point about how the company can best leverage its scale with customers.
"We look at long-term relationships with clients and we benefit from clients having a relationship of 30 to 40 years with us. This isn't the first thing we have made free to investors. We have tools and research and billpay, the overall relationship provides value."
Fidelity has over 30 million clients and $7 trillion in assets, and Murphy said the zero-fee funds and related decisions to lower fees and remove account minimums and fees will appeal to all investors. "No barriers or nuisance fees," Murphy said. "A full range of investors from millennials to baby boomers and people just starting out. ... They all want a more simple, straightforward approach."
Fidelity is the second-largest provider of index mutual funds in the U.S. after Vanguard.
While iShares has been among the ETF providers engaged in the low-fee battle, a BlackRock spokeswoman said it does not view this Fidelity move as competition, as it has an established relationship with Fidelity to highlight its ETFs and offer them free of trading commissions, and that is being expanded from 70 to 240 ETFs. "This, and the other actions Fidelity has taken, mean that it will be even easier for investors to access iShares ETFs," BlackRock said in a statement.
Fidelity did not mention the increase in the number of iShares ETFs to be offered commission-free among the pricing and account changes highlighted in its Wednesday release.
BlackRock shares, and other fund manager stocks with a long history running mutual funds appealing to retail investors and financial advisors, such as Franklin Resources, Legg Mason and Federated Investors, were down significantly on Wednesday, with losses of more than 4 percent. But BlackRock made the case that this latest move in the fee war may be more about Fidelity versus Vanguard and Schwab — less than 5 percent of BlackRock's non-ETF index assets are in traditional index mutual funds.
Many mutual fund experts say low-fee funds have been the most significant tool individual investors have at their disposal in reaching wealth and retirement goals since fees take a huge toll on potential investment returns over time, but they also have cautioned — especially as the fee war has intensified and moved closer to zero — that a fund's expense ratio should not be the only reason that an investor chooses a particular portfolio.
This story has been updated to include comments from Fidelity and BlackRock.