Fidelity's New Zero Funds - Free Index Fund Investing Is Here!
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.
So why is Fidelity foregoing profits to help out the little guy investor? Trust me they’re not-the idea is steal market share from other brokerages like Vanguard and Schwab. Also, most investors don’t just invest in a single fund-while they’re perusing the Fidelity website they’ll likely invest in other Fidelity funds that do charge fees.
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.