Fidelity fires zero-fee salvo at Vanguard
Mutual fund giant Vanguard has long led the way in cutting costs for retail investors — until now.
Suddenly, it’s Fidelity’s turn to take on Vanguard — and Fidelity just went to zero fees first.
Fidelity has launched two mutual funds with no fees. Fidelity ZERO Total Market Index Fund (FZROX) and Fidelity ZERO International Index Fund (FZILX) are now available with no fees to individual retail investors who purchase shares through a Fidelity brokerage account. The Boston-based investment giant also slashed fees on some existing index-based stock and bond funds, according to a news release.
Publicity stunt? Yes, but competitors such as the robo-adviser Betterment say these fee wars will continue raging.
“There has been a consistent march toward lower fees between fund providers, and Vanguard has always been competitive,” said Betterment senior portfolio researcher Adam Grealish. “I expect that to continue.”
One challenge Vanguard faces: Proceeds from Vanguard’s stock lending are plowed back into their funds, to the benefit of shareholders. But other fund companies use proceeds from stock lending as a revenue source. Revenue from stock lending allows fund companies to lower expense ratios because they are able to offset lost revenue.
“One advantage of the fee charged by Vanguard is that what you see is what you get. Revenue has to come from somewhere, and Vanguard puts it on its price tag. Broadly, this means that investors have to consider more aspects of a fund to understand its full cost,” Grealish said. He called the concept similar to an airline lowering its fare, then charging for a carry-on bag.
Of course, fees aren’t everything. Investors should consider both expense ratio as well as performance vs. the benchmark index the fund seeks to track.
Fidelity’s new mutual funds are not using a brand-name index like the S&P 500 or Dow Jones, and that helps reduce costs, since fund companies may have to pay licensing fees.
“I would expect moving away from name-brand indexes to be a trend that continues,” Grealish said.
Does Betterment have any plans to introduce no-fee products? No.
Fidelity, a Boston-based firm, is a fierce rival of the Malvern-based fund giant Vanguard, and posted a chart in a news release highlighting the fee differences between the two (Fidelity oversees roughly $2.5 trillion in assets, and Vanguard roughly $5 trillion).
We investors may actually one day earn money — say, on a mutual fund rebate? — if we choose one firm over another. Yes, it’s a joke, but can more zero-fee funds be far behind? What will Vanguard do to respond? We asked for comment but didn’t hear back by press time.
“If they had been thinking strategically, Vanguard should have welcomed Fidelity to the low-cost arena and used it to promote the fact that they’ve been low cost across their entire platform for years,” said Dan Wiener, editor of the Independent Adviser for Vanguard Investors newsletter.
“Welcoming Fidelity would have been a huge win for Vanguard and would have stolen all the attention and refocused it on them.”
Separately, Vanguard changed the name and mandate on one of its precious metals funds. Originally called Gold & Precious Metals at its 1984 inception, the fund was renamed Precious Metals in 2001 and then recast again as Precious Metals & Mining in 2004. M&G Capital Management was the outside portfolio manager on the fund but has been fired and replaced by Wellington Management, which takes over with a new mandate under the name Global Capital Cycles.
CEO Tim Buckley said the restructuring took into account both “performance and usage.” Vanguard will provide more information in the fund’s July semiannual report, but that won’t be available until at least mid-September. Precious Metals & Mining currently has $2.3 billion in assets, which, while less than half its size at its April 2011 peak of $5.7 billion, “is remarkable given the horrific performance its shareholders have suffered,” Wiener added.