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FIDO's Zero Cost Index Funds
Old 11-02-2018, 05:57 AM   #1
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FIDO's Zero Cost Index Funds

Has anyone jumped on any of these, thoughts, suggestions, etc. Been thinking about putting a sizable chunk in FZROX Total Market Index fund some point here in the near future. Appreciate any and all responses in advance.
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Old 11-02-2018, 06:03 AM   #2
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Several good threads over on bogleheads on this subject:
https://www.bogleheads.org/forum/viewtopic.php?t=255598
https://www.bogleheads.org/forum/viewtopic.php?t=258808

My opinion: these are great funds. One reason they're cheap is that they use a proprietary Fidelity Index. Except for the first day or so, they've pretty much tracked funds that track similar, well known indices. If I were in another fund that tracked a similar index and it was already very low cost, I probably wouldn't sell it to buy one of these because at the end of the day, the total cost per year different wouldn't be all that much. And definitely not in a taxable account if doing so created a taxable event. But if I were looking to get into a total market fund and I wasn't already, this would be a good way to go. I'm considering such for an account for my kid.
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Old 11-02-2018, 06:49 AM   #3
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I read some of the Bogleheads threads. It appears there is uncertainty whether the Fido funds will track with Vanguard performance. While they are tracking the same/similar indexes, will Fido trade as efficiently as Vanguard? There was also a question raised about Fido possibly loaning the shares to garner income. Apparently Vanguard does this but uses the income to reduce fees. In the end, the fee difference is $500 per million per year (assuming a fee of 5 basis points). I think several of the Bogleheads were waiting to let the new funds have a track record before considering a move. Sounds reasonable to me.
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Old 11-02-2018, 07:12 AM   #4
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I read some of the Bogleheads threads. It appears there is uncertainty whether the Fido funds will track with Vanguard performance. While they are tracking the same indexes, will Fido trade as efficiently as Vanguard? There was also a question raised about Fido possibly loaning the shares to garner income. Apparently Vanguard does this but uses the income to reduce fees. In the end, the fee difference is $500 per million per year (assuming a fee of 5 basis points). I think several of the Bogleheads were waiting to let the new funds have a track record before considering a move. Sounds reasonable to me.
They're not tracking the same index. Fidelity's zero fund total market index fund tracks a propriety Fidelity index. Vanguard's lowest cost total market index fund tracks VTSAX (e/r 0.04%) which is $400 per million and tracks the CRSP US Total Market Index. By contrast, Fidelity's other Total Market index fund (FSTVX which will become FSKAX after close of business today) has an e/r of 0.015% which is $150 per million and tracks the Dow Jones US Total Market Index.

There are a number of total market indices out there. Here's a link of historical returns for various indices.

https://www.bogleheads.org/wiki/US_t..._index_returns

The difference in the various index returns is negligible and there's no reason to expect that the index that that Fidelity uses is going to be that much different.


And indeed, if you look at the daily performance of VTSAX vs. FZROX since the middle of August (to get past the first days of startup with FZROX), there is almost no difference in performance.
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Old 11-02-2018, 07:44 AM   #5
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^^^Thanks. Yes, I caught the index difference and revised my post to indicate, "similar" indexes. The Bogleheads made the point that any tracking error could be negative or positive. For the small amount of money involved, personally I would still wait a couple of years to see how the funds perform.
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Old 11-02-2018, 07:49 AM   #6
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^^^Thanks. Yes, I caught the index difference and revised my post to indicate, "similar" indexes. The Bogleheads made the point that any tracking error could be negative or positive. For the small amount of money involved, personally I would still wait a couple of years to see how the funds perform.
The good news is that there is more consensus among the index providers as to what constitutes "total market", unlike small cap value, mid cap blend, etc. Because of that, as long as I didn't have a taxable event involved, I'd probably go with them today.
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Old 11-02-2018, 08:24 AM   #7
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A friend of mine sold off some farmland and asked me where to put his money. I had him put 20% in each of the "Free" fidelity funds.
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Old 11-02-2018, 09:01 AM   #8
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Originally Posted by flintnational View Post
I read some of the Bogleheads threads. It appears there is uncertainty whether the Fido funds will track with Vanguard performance. While they are tracking the same/similar indexes, will Fido trade as efficiently as Vanguard? There was also a question raised about Fido possibly loaning the shares to garner income. Apparently Vanguard does this but uses the income to reduce fees. In the end, the fee difference is $500 per million per year (assuming a fee of 5 basis points). I think several of the Bogleheads were waiting to let the new funds have a track record before considering a move. Sounds reasonable to me.
Just like with Vanguard funds the bulk of the income on loaning (90%) goes back into the funds less admin fees (10%). None of that income goes to Fidelity parent.
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Old 11-02-2018, 09:03 AM   #9
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^^^Thanks.
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Old 11-02-2018, 09:14 AM   #10
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^^^Thanks. Yes, I caught the index difference and revised my post to indicate, "similar" indexes. The Bogleheads made the point that any tracking error could be negative or positive. For the small amount of money involved, personally I would still wait a couple of years to see how the funds perform.
If you need to track history to check, simply compare the Fidelity Index Premium institutional fund version that does have a small ER. They use the same index.
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Old 11-02-2018, 09:27 AM   #11
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My biggest question is whether this is just a Fido marketing move, a sincere decision on their part to compete even more aggressively for business at the ultra-low cost end--but one that will be reversed when new managers take over, or an enduring commitment that will last as long as I do. The "zero cost" thing strikes me as a bit of flash/gimmick, and means these are either loss-leaders or they are making money on the "float."

With Vanguard, we have a decades-long track record, a corporate culture, and even a unique corporate legal structure that give me confidence that their commitment to rock-bottom costs is gonna endure.
I've got money at both places. The stuff at Fido is in a tax deferred account, so there would be no tax hit for me to move it on a moment's notice, and that's the way I like it. The stuff with a lot of accrued cap gains is at Vanguard, and there's no way I'd move that to Fido. Even if I were starting a new account with after-tax money subject to cap gains, I'd go to Vanguard rather than risk getting locked in at Fido and having them decide to change their approach. The difference in costs isn't much, not worth the tax risk.
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Old 11-02-2018, 09:35 AM   #12
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I have a "windfall" coming in June 2019 as the last distribution from a trust. I am thinking of opening a taxable account at Fidelity and using the Total Market funds for the investment. All of my current investments are at Vanguard, and I would only be investing new money at Fidelity. I think the "no minimum" is the best part of these new funds at Fidelity. Perfect for kids just starting out and people with smaller nest eggs. The expenses on lower asset amounts are usually much higher than "admiral" funds. This will lower costs for everyone invested.
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Old 11-02-2018, 09:50 AM   #13
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Just like with Vanguard funds the bulk of the income on loaning (90%) goes back into the funds less admin fees (10%). None of that income goes to Fidelity parent.
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Old 11-02-2018, 09:53 AM   #14
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My biggest question is whether this is just a Fido marketing move, a sincere decision on their part to compete even more aggressively for business at the ultra-low cost end--but one that will be reversed when new managers take over, or an enduring commitment that will last as long as I do. The "zero cost" thing strikes me as a bit of flash/gimmick, and means these are either loss-leaders or they are making money on the "float."

With Vanguard, we have a decades-long track record, a corporate culture, and even a unique corporate legal structure that give me confidence that their commitment to rock-bottom costs is gonna endure.
I've got money at both places. The stuff at Fido is in a tax deferred account, so there would be no tax hit for me to move it on a moment's notice, and that's the way I like it. The stuff with a lot of accrued cap gains is at Vanguard, and there's no way I'd move that to Fido. Even if I were starting a new account with after-tax money subject to cap gains, I'd go to Vanguard rather than risk getting locked in at Fido and having them decide to change their approach. The difference in costs isn't much, not worth the tax risk.
I think it’s safe to say the zero cost funds are a loss leader designed to attract new business. They aren’t available for all investors and aren’t offered through 401K plans, etc, but only directly to retail investors.

However, Fidelity is also competing aggressively for business at the ultra-low cost index business end because they reduced ALL their index funds to the lowest ERs available undercutting Vanguard Admiral index funds and Schwab index funds.

They have also eliminated minimums and other fees on almost all their mutual funds that might discourage a small investor from starting an account.

I’m not too worried about bait and switch. Fidelity has never pulled such a trick in the past. I think they are more focused on streamlining their operation and maintaining/growing market share. I already own several premium index funds which have had lowered ERs over the years and are now so low that they are essentially negligible IMO. Their regular total market index fund has an ER of .015%.
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Old 11-02-2018, 09:55 AM   #15
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repost

I may be assuming incorrectly but... FZROX will be managed by the same company (Geode Capital Management), that manages FSTMX which still charges a fee. The assumption that the holdings will be similar may be well off. Since FZROX just started, they have no track record but FSTMX has a record going back to 1998. 10 year returns of FSTMX, which includes the 37% crash in 2008 is 10.67% annually. If you calculate 15 years (2003), itís even better returns. The holding look very similar.

https://fundresearch.fidelity.com/mu...tion/31635T708

https://fundresearch.fidelity.com/mu...tion/315911404

Both FZROX and FSTMX Prospectus say:

"Principal Investment Strategies

Normally investing at least 80% of assets in common stocks included in the Dow Jones U.S. Total Stock Market Index℠, which represents the performance of a broad range of U.S. stocks.
Using statistical sampling techniques based on such factors as capitalization, industry exposures, dividend yield, price/earnings (P/E) ratio, price/book (P/B) ratio, and earnings growth to attempt to replicate the returns of the Dow Jones U.S. Total Stock Market Index℠ using a smaller number of securities.
Lending securities to earn income for the fund."
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Old 11-02-2018, 10:00 AM   #16
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It’s a fact that the zero funds are managed by the same Geode Capital Management that manages all the Fidelity index funds.

Geode Capital Management is a privately owned Fidelity spinoff founded in 2001. Perhaps it was done that way to reduce the overhead rather than keepng it in-house.
https://www.thinkadvisor.com/2003/08...20181002110131
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Old 11-02-2018, 10:13 AM   #17
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I’m not too worried about bait and switch. Fidelity has never pulled such a trick in the past. I think they are more focused on streamlining their operation and maintaining/growing market share. I already own several premium index funds which have had lowered ERs over the years and are now so low that they are essentially negligible IMO. Their regular total market index fund has an ER of .015%.
So how does this work out in the long term for Fido? If their low-cost funds are break-even or money losers for them and will be a growing proportion of their business, they have all these B&M storefronts in up$cale areas, they don't have the advantage of volume over Vanguard (which is over twice as large), the Johnson family probably expects to make some money every year--how will they compete going forward? Maybe they are counting on money made on high-cost managed funds and on any money they can make through their brokerage business. If so, they're fighting the general trend (increasing amounts of money to index funds) and they'll need to push those high-cost funds fairly aggressively. It will be a bit analogous to the lotteries run by US states: "These are bad products that rip you off, but we're counting on you to still buy them so we can fund our schools."


They must have considered all of this, and probably know what they are doing. But seeking market share for it's own sake isn't a winning strategy. Their decades-long approach (better customer service, wider investment options, slightly higher fees than VGD) is one I can better understand, but maybe that wasn't working.
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Old 11-02-2018, 10:20 AM   #18
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I guess they don’t expect the AUM to be that huge since they are only two of several index offerings and limited to direct retail investors.

They also offer commission free purchases of new issue treasuries and CDs. Another loss leader.

I guess they know the rest of their business makes up for these.
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Old 11-02-2018, 10:31 AM   #19
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If you need to track history to check, simply compare the Fidelity Index Premium institutional fund version that does have a small ER. They use the same index.
BTW recently, Fidelity reduced the e/r on many of their index funds. For example, all of their total market index funds now have the same e/r. And as of close of business today, many of the separate classes of their index funds will be consolidated into a single ticker.
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Old 11-02-2018, 10:57 AM   #20
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BTW recently, Fidelity reduced the e/r on most of their funds. For example, all of their total market index funds now have the same e/r. And as of close of business today, many of the separate classes of their index funds will be consolidated into a single ticker.
OK, so that’s happening today. I knew it would be in Nov. All 4 classes of index fund are switching to the institutional premium class ticker. All index fund ERs were already reduced to the lowest a few months ago.

This is independent of the zero funds.
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