Fidelity's New Zero Funds - Free Index Fund Investing Is Here!
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I have to admit I was excited when Fidelity announced their
new Zero Index Funds. They now offer new
Total Market, International, Extended Market, and Large Cap Index Funds with
zero annual expenses. This is a
fantastic development for long term passive investors like myself. Over the long term, the expenses charged by
fund managers can significantly eat into an investor’s returns. For instance, $10,000 invested in the an
S&P 500 index fund over 30 years at an 10% rate of return will have a final
portfolio value of $174,494.02. If that
mutual fund were to charge 1% in fees, the annual return lowers to 9%. After 30 years the portfolio would be worth
only $132,676.78. That’s a significant loss
incurred by the investor.
In addition to their new Zero funds Fidelity has also
lowered fees on their other index funds and expanded their Ishares ETF
offerings. Before I think I paid 0.035%
on their FUSVX S&P 500 Index fund.
They’re now charging .015% or 15 cents versus 35 cents per $1000 dollars
invested annually. I can also now
purchase the Russell 2000 Small Cap (IWM) and Russell Midcap (IWR) index funds
with zero trading fees. Before it was
$4.95 for every trade or just investing in the S&P 600 Small Cap (IJR) and
S&P 400 Midcap (IJH) Index ETF’s which could be purchased free of charge. The only cost effective option for bimonthly
savers was to buy Fidelity’s own Russell Index Mutual funds which can be
purchased free of charge (but are less tax efficient that ETF due to capital
gain disbursements in a taxable account) or buy IJR and IJH ETFs. You can argue that investors are probably
better off with the S&P’s small and midcap indices due to the quality
criteria to be included in their index versus the Russell’s which include all companies but it’s still
nice to have the option.
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