In the relentless war to capture market share by slashing fees on passive market instruments such as index funds and ETFs, it was only a matter of time before someone eventually cut fees to zero. Today, Fidelity did just that.
In a statement, the closely-held Fidelity announced it would offer two new index funds to individual investors with a zero expense ratio. The funds, which will track indexes Fidelity created, will give investors exposure to the total U.S. stock market and an international benchmark.
Fidelity said in the statement it will also cut fees by an average of 35% on its existing index mutual funds, and allow investors to open accounts with no minimum balance required.
In recent years, Fidelity has been engaged in a relentless price-cutting war with Vanguard, BlackRock and Charles Schwab, all of whom have also reduced fees dramatically on index mutual funds and exchange-traded funds.
“Fidelity is once again rewriting the rules of investing to deliver the unparalleled value and straightforward investing options that individuals need and deserve,” said Kathleen Murphy, president of Fidelity’s personal investing business, adding that the firm’s index funds are now priced lower than the cheapest share class available at Vanguard, the longtime leader in low-cost investing. The two zero-fee products will be available Friday. The other pricing changes took effect today.
"We are charting a new course in index investing that benefits investors of all ages – from millennials to baby boomers – and at all affluence levels and stages of their lives. The ground-breaking zero expense ratio index funds combined with industry-leading zero minimums for account opening, zero investment minimums, zero account fees, zero domestic money movement fees and significantly reduced index pricing are unmatched by any other financial services company."
Murphy also told Bloomberg that “we are using our scale to provide more benefits to our clients,” a tactic quite familiar to the likes of Jeff Bezos.
While Fidelity, which manages $2.5 trillion, is best known for its actively-managed funds, in the past few years it has aggressively gone after rivals in the "passive" index arena, and now has about $400 billion in index mutual funds according to Bloomberg.
Russel Kinnel, director of manager research at Morningstar, said the zero-price funds might attract new business. “Fidelity has lots of ways to make money from customers once they are in the door,” he said. “This could work for them.”
It sure could: in kneejerk reaction, shares of its biggest competitors slumped, with BlackRock falling as much as 4.8% on and T. Rowe Price down as much as 4%, the largest decline since April for both firms.
And if zero cost doesn't win you market share, at least it's free marketing as this post confirms.