Fidelity Introduces Zero Expense Ratio Index Funds
businesswire.com
businesswire.com
Expense Ratios have been slashed across existing funds: https://www.fidelity.com/mutual-funds/investing-ideas/index-...
Premium, Investor, and Institutional classes are all being merged into 1 class with lower fees and no minimums: https://www.fidelity.com/bin-public/060_www_fidelity_com/doc...
For people holding existing Fidelity index funds, you just start paying less now without having to do anything.
---
As of August 1, 2018, we introduced the following changes, which will be automatically applied to your affected Fidelity accounts:
• Removed account fees and minimums
• Eliminated domestic money movement fees
• Lowered expense ratios on all Fidelity stock and bond index mutual funds
• Introduced two index mutual funds (FZROX and FZILX) with a zero expense ratio
No action is required on your part.
---
I've never paid a fee for domestic money movement (EFTs) so I wonder what that refers to.
Fidelity also has an extremely attractive product in their cash management account (free checking account with ATM reimbursements)
Schwab has this as well, and a better privacy policy than Chase to boot.
That's the worst, BoA is like that too. Chase and Amex seem to work well for me.
Yes, just like Charles Schwab. I wonder why most Americans don't know about this and either pay ATM fees, or endure the hassle of never using an ATM outside of their bank network.
The downside is that you can only invest 10k at a time and you’re illiquid for six months.
https://www.treasurydirect.gov/indiv/research/indepth/ibonds...
https://www.treasurydirect.gov/indiv/research/indepth/ibonds...
The interest "penalty" is simply not getting back the interest accrued in the prior three months.
It might be for wire transfers, which are same-day money transfers.
https://www.bloomberg.com/view/articles/2018-08-02/-metoo-is...
https://www.bloomberg.com/news/articles/2018-08-01/fidelity-...
Why this should be the case? Ideally, you want maximally impersonal bulk markets for buying and selling assets. Finance industry should have smaller and smaller profit margins. Only those relatively rare cases where someone can provide value over others the trend is reversed.
Having a UI that clearly tells you what's going on and doesn't lie to you or use dark patterns seems pretty basic?
The natural development in financial industry with increased automation is to make everyone the worst possible customer for the financial service provider and that's a good thing.
That's how it always is, in every market. Fact of business. Your worst customers are the most price-sensitive and the least loyal - but you can't turn them into better customers by making them pay more in a tiered loyalty structure, that's not how it works. They'll go to a competitor.
Your best (meaning worth investing in) customers on the other hand, WILL pay more. That's not a bad thing. They're happy to do so.
This loss of trust has been happening across the capitalist landscape. Consider job security in the 60s compared to now for another example. As a consumer/employee I personally feel the frustration that's at the root of this - many companies treat their employees and their customers like interchangeable cogs that should be optimized, not like people at all.
But it's clear that the same thing happens in the other direction as well. For all the complaints about the decreasing quality of air-travel, almost everyone I know chooses flights based on cost and time, not service. Walmart was able to drive mom & pop shops out of business because they could sell things cheaper, not because they offered a superior shopping experience.
Perhaps the post-WWII era was a unique aberration. Happening after automation was advanced enough to make things pretty cheap, but before management science had discovered that hyper-optimizing every input and process was a great way to compete on price. Or perhaps this is the result of stagnant wages forcing people to buy from companies they hate because money is tight.
Either way, it seems like relationships are becoming increasingly currency-driven and transactional - the human factor matters less and less in spending, investing, and career decisions.
Almost everyone I know does the opposite, but only to a limited degree. I think it's also more nuanced than equating "quality of air travel" with "service".
I think it's true that the vast majority of people don't actually care how well they're served. Many do, however, care about physical comfort (as evidenced by willingness to pay for coach-plus type seats) and convenience.
Convenience is, arguably, closely linked with time, which you mentioned being something people are paying for. However, time is at odds with cost in at least the sense that airlines are flying jets slower to reduce fuel consumption.
Some people would consider a personal, friendly market more valuable than a maximally efficient one. Finance is a tool to help humans fulfill their values, not the other way around.
Do you a prefer a market where you get a worse price, but your broker smiles at you?
Just like I prefer selling my car on craigslist "priced to sell" to avoid haggling.
Or helping people move for free with no implication that I'm owed a favor later for it. Although I'm not sure we're still in "market world" at that point.
Basically, it's sometimes more efficient to work with people you can trust. It's expensive to build protections that ensure people cannot betray you.
https://www.bloomberg.com/view/articles/2018-01-30/iss-tells...
https://www.bloomberg.com/view/articles/2015-07-22/index-fun...
Wait a second. Lending is not a risk-free activity. These index funds are supposed to be low risk. What happens in a short squeeze situation?
Anyway, loans are marked to market daily with collateral required. Details are here: https://personal.vanguard.com/pdf/ISGSL.pdf
It is absolutely a risk, but I think you err by saying index funds are supposed to be low risk.
Thanks for the link, but I think even with 102% collateral marked to market daily, short sellers could still default and cause the fund to lose gains. It would be a black swan event, but the losses would be much larger than the 3 basis points they claim to gain from lending. Missing a small number of up days in the market has a huge negative effect on returns.
The only time you lose money is if you want to sell and can't because you've loaned out your shares. But with a large index fund, that's extremely unlikely: you can easily lend out a small portion of your shares all the time (say 5%) with virtually no chance that too many customers will want to cash out all at the same time.
Granted, not in the US.
For those of you comparing Fidelity and Schwab for cash management, two things:
1) Fidelity's debit card also reimburses ATM fees worldwide, but lists a 1% foreign transaction fee for purchases. This doesn't apply to ATM withdrawals, which don't count as purchases and are, in fact, 0%.
2) Schwab's interest rate on cash in their checking account is 0.25% last time I checked. Fidelity's is similar, but they count purchased money market funds as liquid, withdrawable cash, and automatically liquidate shares when needed without intervention by you. So the effective interest rate on cash is somewhere between 1.55% and 1.9%, depending on which money market fund you choose. Schwab also has money market funds, but they're not treated as liquid cash. You must manually sell shares, wait until settlement clears, and then transfer funds into your checking account, which is a pain in the ass.
3) Not directly related to cash management, but useful nonetheless: Fidelity advertises $4.95 brokerage trades. Every time I've called and asked, "Can you give me free trades?," they give me free trades (usually 10-20) as a "goodwill" perk. It's a 60 second phone call. Don't pay for trades!
EDIT: Perhaps notable for those who live in high tax states like NY or CA, interest income from Fidelity's "Treasury Only" money market funds is exempt from state taxes. Interest earned from a typical checking account or CD is state taxable. You can also purchase municipal money market funds which are exempt from state and federal taxes, but they have a lower yields.
Source: Fidelity is my primary bank account.
A bonus is I get paid a day early, Fidelity makes my paycheck available a day before payday for some reason.
Also, free wire transfers? That sounds almost unbelievable.
Does the Regulation D six withdraw a month limit apply? Might depend on the money market fund you choose?
This is probably why Schwab doesn't offer the same feature, because Schwab is a bona fide bank and offers true bank accounts to complement their brokerage accounts.
Schwab is the worst.
(I am a Fidelity customer who just kind of fell into holding funds with them, and I'd like to know why other options are good or bad.)
Wait, so are you saying you can get up to 1.65% interest on a withdrawable cash fund? Perhaps I'm confused - are you including a penalty for liquidating the shares in that, or just assuming you never liquidate?
I'm getting slightly better than that, but that's in a 5 year CD with a large minimum deposit. The penalty for liquidating is the previous 6 months of interest.
https://www.lmcu.org/personal/banking/checking-accounts/max-...
https://www.myconsumers.org/personal/checking
No penalties for liquidating, some minor requirements (use it for at least one bill and a couple purchases each month) to get the interest rate each month.
Selling short calls would leave them open to the risk of shares being called away and would be an entirely different fund. You can buy ETFs that do this, some distribute the premium and others roll it into the fund's cash.
It's true that if something is free you are the product... but even when you're paying you may be getting sold on the side.
This is untrue. Per iShares(https://www.ishares.com/us/literature/brochure/securities-le...):
> Q: How much of the securities lending proceeds are paid to iShares ETFs?
> A:. iShares ETFs receive 71.5-80% of the income generated from securities lending depending on the asset class held. For example, iShares ETFs that predominantly hold US equities receive 71.5% of the income from securities lending. All other funds (i.e., fund-of-funds and funds that invest predominantly in fixed income or international equities) receive 80% of the income from securities lending. Once the aggregate securities lending income exceeds a certain income threshold amount, each iShares ETF will receive an increased percentage of the income above original levels, i.e. from 71.5% to 75% for US equity iShares and from 80% to 85% for all other iShares, for the remainder of that calendar year.
By the way, Fidelity isn't making money off of securities lending on these funds, or at least has pledged not to. I still wouldn't use the funds, though.
What happens in the future if passive indexing falls out of favor, there's an exodus out of index funds, and Fidelity jacks up fees? If you're investing in a taxable account, you'd (presumably) incur a capital gain to leave the fund. At Vanguard, expenses may increase, but they won't seek to profit off of you. In a tax-advantaged account, I suppose the Fidelity funds are fine.
I'm curious to hear tanderson92's answer, though.
There is always a profit motive. The company itself may be customer owned but the employees are still trying to make money. I’m not saying that it’s wrong. It just is.
Also, Vanguard as a corporation is owned by its fund shareholders as opposed to external shareholders while Fidelity is owned by a private group. I don't trust any company enough to lock up my money with them and possibly have to pay capital gains tax to switch later, if they decide to raise fees or make the investment not align with shareholders in some respect. As whitepoplar says, they're a profit-seeking entity. Due to the inverted corporate ownership structure of Vanguard this is not a concern. This argument also applies to iShares.
Wait, what? What does this actually look like for you on your taxes? This sounds like something that would be out of your hands/tax responsibility.
tl;dr: basically they just never have to sell shares with built-in capital gains so you rarely see a capital gains distribution when you use Vanguard index funds.
> "Fidelity is not receiving any revenue from the Fidelity ZERO Index funds for securities lending. Nor is Fidelity currently receiving any portion of the income that is generated from securities lent out." --Fidelity August 1, 2018
However, their securities lending practice is significantly less efficient than Vanguard: their total stock market index fund returned only 40% of securities lending revenue to the fund while Vanguard returned 94%. The difference there is in broker rebates -- how much of the interest on loan collateral posted by the borrower goes back to the borrower. For some reason Vanguard seems to be doing a much better job on this (possibly Fidelity is much more aggressive in loaning out shares so receives less benefit).
Cool, I didn't know this. Do you have a link?
The ER for Vanguard still only 0.15%, which is about $12/mo per $100k invested.
https://investor.vanguard.com/mutual-funds/fees
> Admiral Shares
> * $10,000 for most index funds and tax-managed funds.
> * $50,000 for most actively managed funds.
> * $100,000 for certain sector-specific index funds.
When I was getting started, it took awhile before I was diversified beyond a single fund (currently not using the target date funds), then eventually getting up to admiral shares.
> Last time I looked I didn't think it did, so you would need more than $10k if you want to do the sensible thing and not have 100% of your assets in stocks.
Looking through all their target date funds, none have more than 90% stocks. The 2015-2040 funds have 60% to 15% bonds, with all later dates at 10%.
[1] https://investor.vanguard.com/mutual-funds/list#/mutual-fund...
You can't have a sane portfolio of admiral shares with only $10k because you would have to be invested 100% in a single asset class which is never a good idea.
So, the rule is not investing for 5+ years, but only investing as much as you can loose without feeling like a soon-dead human....
ERs are a pure marketing gimmick once you get down to early 2000s-era Vanguard fees. Beyond that the devil is in the details with how incentives are aligned for those managing, including security lending practices which can either juice returns to completely offset those minimal fees or buy those yachts that the clients never seem to have, and especially for index funds you have tracking error which adds several basis points for/against you depending on manager competence in accurately sampling the index while minimizing several forms of risk, latency/frequency in updating positions that are a discrete approximation of continuous compounding, and the hugely overlooked problem that large institutional investors have to use complicated derivative orders, exchange dark pool agreements, swaps, and other methods of obscuring huge pool transactions where HFT will gnaw away at basis points here and there knowing that those large blocks of shares must be rebalanced at specific times to meet predetermined liquidity demands.
Don't misunderestimate the activeness of passive index funds. :)
I used to work there. They are pretty transparent in most of their ranks about the salary ranges. However, people at the top are paid an unknown amount of money. Probably an obscene amount, disguised through alternative compensation methods.
And I say this as a Vanguard customer for over a decade now, and I will probably continue to purchase funds from them for many reasons. But don't be fooled by thinking that they are doing some sort of public service by being "not-for-profit".
Vanguard is doing a sort of public service: http://freakonomics.com/podcast/stupidest-thing-can-money-re...
Sort of. The funds own Vanguard. So shareholders of those funds own Vanguard.
When a for-profit company has money in the bank after paying all the expenses, they get to call it "profit".
When a non-profit company has money in the bank after paying all the expenses, they get to call it "reserves".
Executives in both sectors are tasked with bulking those up to ensure the long-term survival of the org.
I used to have my accounts split between Fidelity and Vanguard. But after several botched transactions where Vanguard reps gave me inaccurate information about their own processes, and lost or claimed to have never received multiple mailed signed documents (with difficult-to-obtain Medallion signatures), I switched everything to Fidelity and am much happier. I have never failed to get a knowledgeable/expert person on the phone whenever I've called Fidelity, which is a stark contrast to my experience with Vanguard.
To be transparent, I work at M1 Finance, and I invest in a few Fidelity ETF's; still not sure how I feel about this one.
Where could I find this? I havent seen it anywhere and have been half-worried they will either jack up prices or sell-out customers hanging like CapitalOne/ShareBuilder did. What is their short term and long term revenue model that would make their [awesome] product sustainable?
Aside: I love M1, especially after CapitalOne/ShareBuilder left their customers hanging.
That said, for a manager of many ETFs, the fixed costs are much lower because they can be spread across multiple funds.
It's more complex than just simply measuring fees.
These are some additional factors to consider:
Tracking Error
Capital Gains
Securities lending
Mutual Ownership Structure
https://personal.vanguard.com/pdf/ISGSL.pdf
https://www.ishares.com/us/literature/brochure/securities-le...
Correct, VTSAX would probably perform better by a small margin, but it's also hard to compare given that everyone rolls their own "Total Market Index" with slightly different stock composition. At the very least, you're getting more of your money back to you.
> how do these funds decide what percentage to return back to the fund vs keep?
Depending on how much money they want to make :)
vanguard is actually a mutually owned firmed, the only one. So they have little incentive to tax themselves. When you buy vanguard funds, you are also buying ownership of vanguard.
> Why wouldn't Fidelity keep 100% of these fees, and then charge a negative fee?
Because people have no idea how any of this works and "0% expense" rings out. They can make more money this way.
Most of that 60% for Fidelity's funds don't end up back in Fidelity's pockets either, but instead in the pockets of the people who borrowed stock from Fidelity investors in the form of rebates. You can understand this like: the borrower puts up 100-105% of the collateral and so should get some portion of the short-term rate on that cash. It's not clear why the disparity exists between Vanguard and Fidelity though.
iShares is truly different where they actually take 15-30% of profits for themselves.
They are only available for their customers, but it's a great way to get new customers. They don't have any extra fixed fees either, so it's not a scam. It's just good marketing.
1) The bank still makes some money charging a fee to lend the shares in the ETF to short sellers.
2) Fidelity sees this as a loss leader for higher-priced funds and traditional investment advice / wealth management.
1) They lend the stock to shorters and make money off the interest.
2) They get people into their ecosystem. As most people don't keep a dozen different accounts, they can get people to start using their checking and savings accounts (where Fidelity makes money from lending a fraction of the balance). People might also be more likely to use their loan products, credit cards, or other services, which are obviously benefical to Fidelity.
There's likely other benefits to them as well, especially given that index funds don't require any real human oversight.
Edit: Given other info posted, it's really just #2. This is a loss leader to get customers.
But; it seems like a poor marketing decision; You're attracting people who want no fees and subscribe the the Random Walk Model - then you prove the Random Walk Model. I don't see how this encourages people to go into more different funds.
Maybe for asset allocation for near term cash volatility.
But that doesn't mean they all are. Schwab is also both my bank and my active investment broker of choice. The reason for that is because it's nice to have all my stuff in one place, viewable from a single screen.
- Reorganization fee (?): $39 (Vanguard: $0)
- Late Settlement Fee: $25 (Vanguard: 0)
So that's how they make money off of this. It's index funds, the payday loan edition.
Besides which, these fees are 0.25-0.39% each on a 10k account. I bet most of their accounts are much larger, and so the fees are proportionally smaller. Suppose you're charged $39 every three years - hard to imagine on that fee schedule - on your 10k account, that's around 0.13% per year. And that's a crazy high estimate for a relatively small brokerage account. It's not a way for Fidelity to stay in business.
A $3M account that pays an extra 0.1% per year is dinged for $3,000 a year, every year. The cumulative compounded effect over 20 years is north of $75K.
Thanks!
Changing your fund allocations within your 401(k), in general, doesn't trigger any penalties and is not a withdraw.
That being said, I haven't had a 401k with Fidelity in 3 years and don't recall if I had access to "everything" or if the fund choices are limited.
I am planning to take a look at my own Fidelity accounts this weekend and see if they've surfaced these index funds well. It seemed encouraging from the email this morning.
A Random Walk Down Wall Street was published in 1973 and studied decades of data and funds. Jack Bogle started Vanguard in 1974. And 8 years ago, most every newspaper published a cycle of how the S&P 500 almost always beats active investing, especially after fees.
So, a small%, only if you like paying active funds money to not make you money.
tldr; Unless you're retiring in the next 10 years; the lowest fee broad index is your best investment with something resembling "diversity" and risk resembling slight "diversity"
To answer your question, why on Earth would it be a terrible idea? They are two index funds - total market index and international index. Investing in low cost index funds is generally considered the best way to invest for the average person.
Furthermore, with 401(k)s you can freely trade without having to worry about triggering capital gains taxes, so there's no reason not to move the entirety of your investments in these asset classes fully over to the new funds in a 401(k).
If so, more please!
But Vanguard is not-for-profit company because it's owned by its shareholders.
I think capitalism works in a lot of situations and I'm not against it, but there are certain scenarios where the "free market" logic doesn't really work or apply because of various reasons. In medicine it seems to be a race to higher prices.
Really the answer is a balance somewhere in the middle, but my point is that the free market does work, when it’s allowed to. The problem in the US is that the market is highly distorted by Medicaid and Medicare reimbursement rates as well as opaque price competition.
Isn't every company owned by its shareholders, for-profit or not?
To be pedantic, I don't know if you would classify that as not-for-profit or not, but the point is there isn't some external entity trying to make a profit off of you.
Also, Fidelity is one of many index fund owners and my understanding is that their market share is lower than competitors.
No clue where the top is going to be, but it feels like this one is going to be uglier than 2008.
Pretty sure an asset bubble (which we've experienced many times in the past) will not be worse than the entire financial system melting down.
https://www.youtube.com/watch?v=_vdB7gphtyo
The TL;DW is that in many different studies, index funds preform better in the very long term than almost any managed fund. Why pay some monkeys to manage your money when an even distribution over a bunch of common stocks does just as well?
First, most funds have goals other than beating the index, so if the index is your goal we should ignore them. However why is the index your goal? If you are far away from retirement (or whatever your reason for investing is), then the index is a good goal, but as you get closer to retirement you need to have an asset allocation that won't drop in value right when you need the money. The index will not do that for you.
Second, of those that attempt to match/beat the index, some of them do beat the index year after year. IF you can get in one of them you are better off. Note that IF is in all caps - this is a big if, very few managed funds beat the index on a regular basis. However if some fund manager beats the index year after year, that manager ought to be worth a lot of money to you (so long as after expenses he beats the market)
After considering the above, most of my money is in a target date retirement fund with a low expense ratio. I know I'm not going to beat the index, but as I get older they balance things. I know someone invested all in an index who retired right before a crash, the crash combined with his withdrawals to live cut his principal enough that he is now broke. (I suspect he didn't have enough savings to retire in other than best case scenarios, but even so his required capital to retire is higher in a stock index). I do have some play money in an index fund, if things go well I'll retire early on that cash, if things go bad, at least my normal retirement is not in trouble.
This seems like a testable hypothesis. If experience pays dividends, or if novices pay a penalty, you'd expect to find this to persist over time.
I was suggesting that the rare great manager regardless of experience will do well over long time periods. Those managers do not pass their experience/knowledge on to those who take over from them.
For whatever rare managers who do well over long periods of time, why isn't that knowledge transferable? I can think of two possibilities:
1. They have had an incredible run of luck. When you have process with randomness baked in, and thousands of managers, someone is expected to beat the average 10 years in a row.
2. A well cultivated network of insider information, or other nefarious means. Madoff claims to have started his Ponzi scheme in the early 90's, and it took multiple decades for that to be uncovered. Similarly, Cornblum and Grmovsek took 14 years to be discovered.
Say your goal is to have a mix of stocks/bonds/cash that gets more conservative the closer you get to retirement. Would an actively manage fund on average beat a fund with the same mix of investments where each component was an index?
However I don't want to sped a large amount of time managing my accounts. A fund that always comes in at just less than what the index would is worth it just because I don't have to think.
Not thinking is in fact an import part of my investment plan. People who don't think about their investments too much don't make as many bad decisions. https://www.businessinsider.com/forgetful-investors-performe...
My employer uses fidelity for retirement plans (so I'm a customer, whether I like it or not), and I'm bombarded by emails/communications very regularly to sign up for various services from fidelity for 'planning for my future'. These services ultimately cost a lot of money. Many of my coworkers have signed up.