Fidelity no-fee funds

If you pay attention to the investment news, you may have heard about Fidelity’s no-fee index funds.  Fidelity No Fee Funds  These funds are made up of proprietary indexes that Fidelity has created in-house.  There is no expense ratio on these funds.  They also are not available on their 401K platform or outside vendors recordkeeping platforms.

Normally if it sounds too good to be true, it is.  In this case, the answer is maybe.  If you just want broad based market coverage for your retail brokerage accounts, then this could be a good avenue to pursue.  Now one might ask the question, Isn’t Fidelity a for profit company?  The last time we checked the answer was still yes.  The Johnson family has done quite well for themselves in the investment management space.  The main issue was that Fidelity was bleeding assets to competitor Vanguard.  This is the definition of a “loss leader”.

Fidelity will forgo tens of millions of dollars in index management fees with the hopes that they can bring more accounts on their platform and eventually cross sell higher margin products.  So if you have money sitting in money market, Fidelity makes money off that.  If you go with a NTF (non-transaction fee fund) for some of your assets outside of the core allocation to the free index funds, Fidelity will make money off that.

For Vanguard to make a comparable move would cost them in the hundreds of millions of dollars.  They are a much larger provider of index offerings.  They also have to pay the manufacturer of those indexes (vs. Fidelity’s approach of crafting their own).  At the end of the day, this competition is good for consumers.  After the race to the bottom in fees, firms are going to have to differentiate themselves on value.  #401k #403b #fiduciary