In a first for mutual funds, Fidelity Investments announced that they have introduced two index mutual funds that have a zero expense ratio — FZROX (Fidelity ZERO Total Market Index Fund) and FZILX (Fidelity ZERO International Index Fund).
Of course, since these are both brand new funds, they do not have any history to go on as to how well they are faring on the market, however, the ability of Fidelity to offer such funds is a huge shot-across-the-bow in terms of pushing others to offer similar funds, especially Vanguard.
But for those of us who follow a Bogleheads’ philosophy of going for index funds and keeping costs low, going from a low-cost fund with an expense ratio of 0.2-0.5%, for instance, will this be a huge benefit over the long term?
Let’s use an example…
Let’s assume you invest $2000 a month for 20 years using a low-cost fund and your friend does the same using one of Fidelity’s no-cost funds. I’ll go ahead and add in an assumed 8% growth rate of your investment. Using these numbers, you’ll end up with the following:
|Plan||Fund Expenses||FV after 20 years|
|Low-Cost Fund||0.4% Expense Ratio||$1,185,894.44|
|No-Cost Fund||0.0% Expense Ratio||$1,128,267.82|
So what’s the difference? $57,626.62.
Admittedly, that’s not a huge difference: around 5% change. However, I think in retirement, that could easily be another year of funds to go around, another cruise around-the-world-for-your-whole-family, or another year of college paid for a grandchild.
In the end, we’re truly splitting hairs here, but ultimately, I applaud Fidelity’s new offerings very much, especially since they’re on index funds, which require no human intervention anyway.
It’ll be interesting to see how many others offer no-cost funds in the future, particularly Vanguard, since they’ve been pushing the low-cost funds as well.
However, let’s dig into what’s in each of these funds…
FZROX – Fidelity ZERO Total Market Index Fund
This fund objective reads: “The fund seeks to provide investment results that correspond to the total return of a broad range of U.S. stocks.”
This is very similar to their FSTVX fund, but instead of a 0.015% expense ratio, they’ve eliminated it to 0.0%. They went from ultra-low-cost to nil. Definitely more of a marketing push.
Of course, one should note, Fidelity’s “Total Market” isn’t the total market, it’s just the US Domestic market.
FZILX – Fidelity ZERO International Index Fund
The objective for this fund states: “The fund seeks to provide investment results that correspond to the total return of foreign developed and emerging stock markets.”
As with the total market index fund, this is roughly analogous to their FSIVX fund with a 0.045% expense ratio, which is also ultra-low-cost. So again, to move from FSIVX to FZILX is not really something that must be urgently done, and frankly, would only make a substantial (measurable?) difference after many years (decades) of investing.
What to do?
If you’re already in a ultra-low-cost fund, you might as well keep it there. There probably would be a huge capital gains cost incurred in just moving to these funds.
However, if you’re a new investor, I’d strongly consider using these funds to start your investing journey. You have a long road ahead and every little bit counts!