Fund Spy

What Fidelity's No-Cost Index Funds Mean for Investors

Russel Kinnel

Fidelity shook the investment landscape last week when it announced that it would offer two index funds with zero expense ratios: Fidelity Zero Total Market Index (FZROX) and Fidelity Zero International Index (FZILX). And not months in the future, but right away--they went live on Friday! Also striking is that Fidelity removed investment minimums.

I have a couple of thoughts on why Fidelity would do this and what it means for investors. I'll start with the industry view first.

2) Investors with Fidelity accounts who want to lower their overall costs. If you have an account with Fidelity but don't have index funds, you can add one or both and lower your costs. I wouldn't worry that much about overlap if you already have large-cap funds. I would worry about taxes, though, so if you are in a taxable account, be mindful of the potential tax implications for selling any existing holdings to move into these funds.

3) Younger investors still building their portfolios. Sometimes investors start out by buying the exciting stuff and leaving their core a little neglected. Well, here's your chance. You can build up your core with the no-cost and low-cost index funds. And with no minimums at Fidelity, you really don't have an excuse.

If you don't have a Fidelity account and you are happy where you are, it probably doesn't make sense to move. If you already own some very low-cost index funds, you may well get a fee cut in the near future for reasons I've outlined. Also, a few basis points are big news, but they won't have a huge impact on your bottom line. Chances are you'll see some benefits just by staying pat. In addition, the taxes on selling holdings in a taxable account could well be greater than any cost savings.

To illustrate the modest stakes for your portfolio, let's look at the growth of a $10,000 investment in  Fidelity Total Market Index (FSTVX),  Schwab Total Stock Market Index (SWTSX), and  Vanguard Total Stock Market Index (VTSAX). Over the years, the three have changed leadership on fees, and investment minimums have changed, too. For the past 10 years, $10,000 in Vanguard Total Stock Market Index would have grown to $28,520, while the Schwab fund would have grown to $28,460 and the Fidelity fund to $28,350. And the differences at times were greater than they are today. So, keep costs low and save as best you can, but don't worry too much about a couple of basis points.

In the bigger picture, as my colleague Jeff Ptak pointed out last week, costs are coming down across the investment landscape. Just as you should review your portfolio and your goals on a yearly basis, it makes sense to see if there are some major cost savings available to you that weren't there before. And you'll want to look at all the costs, not just those of the cheapest index funds.

Russel Kinnel does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.