In a move announced Wednesday, August 1st, Fidelity Investments Inc shocked the investment community by introducing a world’s-first: a ZERO fee index fund.
Investing, it seems, is getting cheaper.
The move comes as just the latest addition to an ongoing “fee war” between the biggest brokerage and mutual fund providers in the industry. Fidelity, Vanguard, BlackRock and Charles Schwab have long been one-upping one another, hoping to have the lowest fees in the industry.
Now, what once seemed impossible has become reality: an index fund with zero management fees, zero upfront fees, and zero investment minimum.
Fidelity ZERO Index Funds
In the August 1st announcement, Fidelity outlined plans for 2 new index funds:
Fidelity ZERO Total Market Index Fund (FZROX), which seeks to track the broad US stock market.
Fidelity ZERO International Index Fund (FZILX), which seeks to track the broad international stock market.
Both funds have a 0.00% expense ratio, zero minimum to invest and no minimum to open an account.
While the zero expense ratio is obviously the most significant, it’s also quite impressive that Fidelity has chosen to offer these funds with a $0 minimum investment. For comparison, many fund providers require a minimum of $2,500, pricing many people out of investing in these funds.
Proprietary Indexing
Most index funds track a particular established index, such as the S&P500. To do this, they pay licensing fees to the company who manages the index (in this case, Standard & Poors). This fee is passed on to individual investors in the form of higher expense ratios, which also include a percentage for the index fund provider.
One way Fidelity is able to eliminate these fees altogether is by creating their own index to track. Schwab and several others have done the same, leading index providers to change their strategy.
Lowered Fees Across the Board
In addition to these two new zero-fee index funds, Fidelity also announced that they would be slashing expense ratios on existing mutual fund products. A Fidelity rep stated that fees would be slashed by an average of 35%.
In addition to lower fees, Fidelity also will now allow new clients to open accounts with no minimum investment required. Fidelity specifically called out competitors, noting the now-significant differences not only in fees, but in investment minimums.
A Win for Investors
The move is widely considered to be a significant win for investors of all shapes and sizes. Never before has it been possible to gain exposure to essentially the entire global stock market, while paying nothing in fees. The elimination of minimum account balances should also help spur new investors to make their first investment.
Shares in Fidelity’s chief rivals, BlackRock and Schwab, dipped on the news of the announcement. Many analysts believe that rivals will soon follow suit, offering zero-fee funds of their own.
No matter how this all plays out, one thing is certain: the news is a huge win for investors seeking to lower expenses and simplify the investing process.
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