Tuesday, August 07, 2018

Fidelity zero cost funds

Fidelity shook the investment landscape last week when it announced that it would offer two index funds with zero expense ratios: Fidelity Zero Total Market Index (FZROX) and Fidelity Zero International Index (FZILX). And not months in the future, but right away--they went live on Friday! Also striking is that Fidelity removed investment minimums.

I have a couple of thoughts on why Fidelity would do this and what it means for investors. I'll start with the industry view first.

Loss Leaders

Schwab and Fidelity can afford to offer index funds below their cost because they will make it up with all the other funds and brokerage services that clients will buy. Fidelity has a unique position in the industry in that it is a big player in brokerage, 401(k)s, and both actively and passively managed funds. In addition, Fidelity has always wanted to be the biggest and best. Other parts of the business remain quite profitable. In fact, Schwab and Fidelity have been pushing costs higher in their No Transaction Fee networks by charging fund companies--not investors--ever more to be on their platforms. Thus, I would guess Schwab will follow suit with its own fee cut.

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