Fidelity Investments has taken another aggressive move to cut fees and minimums for its index funds, introducing two index funds with a zero expense ratio and no minimum investment. In addition, Fidelity is eliminating the minimum investment for 21 other index funds and consolidating their expense ratios so that there will be one fee for retail and institutional investors.
Kathleen Murphy, president of Fidelity Investments’ personal investing business, in a statement said the firm’s latest move is “rewriting the rules of investing to deliver the unparalleled value and straightforward investing options that individuals need and deserve.”
Starting Friday, August 3, the Fidelity ZERO Total Market Index Fund (FZROX) and Fidelity ZERO International Index Fund (FZILX) will be available to individual investors for no fee and no minimum investment.
In addition, there will be no investment minimum for 21 other index funds, including equity and bond funds, and retail investors will be charged the same lower expense ratios as institutional investors. The retail and institutional share classes of these funds will be consolidated under one single share class with one single trading symbol.
Fidelity has also eliminated investment minimums on all its Fidelity mutual funds and 529 plans, including funds sold directly to consumers or through a financial advisor — changes that take effect immediately. Only a small number of institutionally priced fixed income and Freedom Index funds will maintain their current investment minimums.
“The groundbreaking zero expense ratio index funds combined with industry-leading zero minimums for account opening, zero investment minimums, zero account fees, zero domestic money movement fees and significantly reduced index pricing are unmatched by any other financial services company,” said Murphy.
Fidelity said the average asset-weighted annual expenses across its stock and bond index funds will decline 35 basis points, with some index funds charging as little as 0.015%.
Fidelity calls out Vanguard and Schwab in its press release, showing that investors either pay more in fees for comparable funds or require higher minimum investments.
It notes in its press release that all of Fidelity’s stock and bond index mutual funds and sector ETFs will now have a total net expense lower than all of Vanguard’s comparable funds available to individuals, advisors and institutional investors (except those shares only available to institutional investors), and that nine out of 10 Fidelity’s index funds will beat the prices of comparable Schwab funds (the 10th index fund is a tie).
While Fidelity’s new ZERO Total Market Index Fund has no minimum or next expense fee, Vanguard’s Total Stock market Index Fund (VTSMX) has a next expense ratio of 14 basis points and a $3,000 minimum investment for Investor Shares and charges 4 basis points with a $10,000 minimum for Admiral Shares. Schwab’s Total Stock Market Index Fund (SWTSX) charges 3 basis points but has no minimum investment.
Asked whether Vanguard was considering lowering expenses and minimums for its index funds in response to Fidelity’s latest cuts in both, a Vanguard spokesman told ThinkAdvisor that the fund giant “will continue to lower the cost of investing on our index and active funds, as we have for the past 40 years.” The Fidelity fee and minimum cuts do not apply to any actively managed funds.
He said in Vanguard’s view Fidelity’s move is “another example of the ‘Vanguard Effect,’ “a term Morningstar has used to describe efforts by other fund companies to compete with Vanguard on cost.
Todd Rosenbluth, director of ETF and mutual fund research at CFRA, an independent research firm, said Fidelity’s move to lower fees and minimums on index funds “is a sign that the battle to gather index-based assets has expanded beyond ETFs to mutual funds.”
He expects to see continued fee compression among mutual fund companies including those that charge higher fees than Fidelity, Schwab and Vanguard. As for financial advisors, they will “have to be able to explain why their clients are paying more for comparable funds,” said Rosenbluth.
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