Fidelity zero cost funds

[MRG]

Did anyone see this? It was just announced today. The race to the bottom continues. Perhaps we'll see negative ERs soon?

https://www.businesswire.com/news/h...les-Investing-Deliver-Unparalleled-Simplicity

 

[jazz4cash]

Wow. I’m surprised they haven’t promoted this.

 

[davebarnes]

Thanks for posting this.
Starts on Friday, Aug 3rd.
I have some leftover scraps that I need to move into these funds.

 

[Helen]

I met with a Fido rep (who was nothing more than a dishonest Salesperson) who tipped me off that this was coming.

I wonder if Fido reps are being pushed more to sell products like actively managed portfolios?

 

[Kelor]

How is it possible to have a zero expense ratio?

 

[MRG]

I met with a Fido rep (who was nothing more than a dishonest Salesperson) who tipped me off that this was coming.

I wonder if Fido reps are being pushed more to sell products like actively managed portfolios?

I think so. My last experience was worse than ED Jones.

 

[MrsHaloFIRE]

Echoing the question above: How are they covering their expenses and turning a profit? Or is this a loss leader type of deal?

 

[mickeyd]

How is it possible to have a zero expense ratio?

Its probably impossible to manage an index fund without incurring expenses. Who pays for the postage?

No doubt a loss-leader to get new clients away from VG. It will not work as Fido is paying to subsidize the fund(s). It's not an uncommon practice in this biz. The Johnson family is rich, so they can afford the adventure.

 

[RunningBum]

They make it up on volume!

 

[copyright1997reloaded]

Here's the prospectus (from the SEC filing):
https://www.sec.gov/Archives/edgar/data/35315/000137949118003935/filing836.htm

No management fees. But, this caught my eye:

The fund pays transaction costs, such as commissions, when it buys and sells securities (or "turns over" its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when fund shares are held in a taxable account. These costs, which are not reflected in annual operating expenses or in the example, affect the fund's performance.

The turnover on this fund *should* be rather low.

I also noticed this:

Securities Lending Risk. Securities lending involves the risk that the borrower may fail to return the securities loaned in a timely manner or at all. If the borrower defaults on its obligation to return the securities loaned because of insolvency or other reasons, a fund could experience delays and costs in recovering the securities loaned or in gaining access to the collateral.

Nothing too unusual here, just noting this that they can offset some of their administrative costs by lending securities (and charging margin on them) to other customers.

 

[MrsHaloFIRE]

SO heres an interesting note: I was working a paperwork issue at Fidelity that was vexing me and I finally got a lady on the line to take action and babysit my problem until it was solved. She just called me about 5 mins ago to close the loop and make sure my happiness was happy enough. I told her I was quite content, but peppered her with many question reference this zero fee fund dealio. She said the hour prior she had spent in a meeting learning about them bc they were really hitting the media today and they knew a lot of questions would come up. She told me they literally were attempting to poach specifically from Schwab and Vanguard. They had eliminated all the fees they could and are eating those they couldn't on these funds. I asked her were they going to feed me with one hand and then stab me wth the other with unwanted phone calls trying to push me into a managed account, etc and so forth. She said no, if I wanted to explore that I would need to contact them and they would give me a free consultation and make recommendations, but I would need to initiate it. We shall see how this develops. I like competition that drives innovation and lowers prices.

 

[OldShooter]

If it seems too good to be true ... (you know the rest)

I guess we can enjoy it while it lasts, but these firms do have costs and FIdo and Schwab at least need to make some profits for their shareholders.

It would seem that a FA fiduciary at another firm would legally have to use Fido wherever they would otherwise use a similar fund offered by their own company. Interesting dilemma.

 

[Kelor]

The other thing is that those tickers won't be allowed on anyone else's platform, so Fidelity decreases the likelihood of an ACAT on other balances as well I suppose.

 

[corn18]

"Fidelity said the fee changes will save shareholders approximately $47 million annually."

"In 2017, Boston-based Fidelity reported $18.2 billion in revenue, up 14% from the prior year, and $5.3 billion in operating income, a 54% year-over-year increase, it said in its annual report to shareholders"

$47M / $5,300M = 0.8%

Drop in the bucket.

 

[audreyh1]

I notice on their premium index funds like FSTVX (Fidelity® Total Market Index Fund - Premium Class), which has a 0.015% expense ratio, that the net expense ratio is also 0.015%, so it isn’t being subsidized.

The Fidelity premium index fund fees have been dropping for several years.

So maybe 0.015% is a minimum level for them for premium index funds. These funds have a $10K initial investment. Well, they used to. Now it’s $0? Scratching head.

 

[corn18]

I notice on their premium index funds like FSTVX (Fidelity® Total Market Index Fund - Premium Class), which has a 0.015% expense ratio, that the net expense ratio is also 0.015%, so it isn’t being subsidized.

The Fidelity premium index fund fees have been dropping for several years.

So maybe 0.015% is a minimum level for them for premium index funds. These funds have a $10K initial investment.

The new 0% ER funds have no minimum initial investment.

 

[audreyh1]

"Fidelity said the fee changes will save shareholders approximately $47 million annually."

"In 2017, Boston-based Fidelity reported $18.2 billion in revenue, up 14% from the prior year, and $5.3 billion in operating income, a 54% year-over-year increase, it said in its annual report to shareholders"

$47M / $5,300M = 0.8%

Drop in the bucket.

Shareholders?

 

[audreyh1]

The new 0% ER funds have no minimum initial investment.

Well neither do the premium funds anymore as far as I can see!

1 Minimums have been eliminated for funds that previously required an initial investment of $10,000 or less, as well as for stock and bond index funds that previously had minimums up to $100 million. A very small number of institutionally-priced fixed income and Freedom Index funds will maintain their current investment minimums.

 

[Dtail]

The zero index funds can be found on their site. They advertise for Total Market Index fund and Int'l Index fund.
Now I currently have the existing Int'l fund, so it will be an interesting conversation with my Fidelity rep about the difference and why no advance notification, since I am in the Private Client Group.

 

[MRG]

Well neither do the premium funds anymore as far as I can see!

Price war!

Back 7 years ago(?) my then Fidelity advisor told me they were going after Vanguard. IIRC, prior to the recession Fidelity was and had been #1 in AUM forever. Vanguard blew by them during the recession.

 

[nwsteve]

Vanguard is offering free trading of all ETFs in the market, so Fido needs to be bringing something to "field of play"

 

[Another Reader]

Well neither do the premium funds anymore as far as I can see!

And the expense ratios are now the same. Wonder if they will merge the funds?

 

[corn18]

And the expense ratios are now the same. Wonder if they will merge the funds?

That's the plan. No more fund classes.

 

[Another Reader]

That's the plan. No more fund classes.

Is that stated somewhere on the Fidelity site or in a press release? I don't see it. I had a hard time locating the new funds - had to do a search.

Sounds like I will stay with the existing S&P index fund and I will need to compare the new zero expense total market fund with the total market fund with the management expense.

 

[audreyh1]

And the expense ratios are now the same. Wonder if they will merge the funds?

And what expense ratios are the same? The regular index and premium index still have different expense ratios, with the premium much lower, and they are not zero.

Why would they merge funds?

Sounds like they are doing the new Zero funds in house, while the current index lineup (regular, premium and institutional) is run by Geode Capital Management.