The First Free Index Funds
This week Fidelity launched free index funds, the first company to do so. As Bloomberg reports they’re playing catch-up to Vanguard when it comes to the low-cost index fund space, and this is an unprecedented move.
Sure, as many on the web have pointed out, they’re definitely going to be using these no-fee funds as a “loss leader” to get customers to buy other profitable assets.
Sometimes there is such a thing as a free lunch. To me this is the same as credit card companies giving points and free stuff for using their card. The points and/or miles they’re giving you are indeed free if and only if you pay your credit card bill every month and the card has no annual fee. That’s what I do and I get free stuff.
Same with these Fidelity funds. If you put your money in them and do not also open other Fidelity accounts that have fees (as I’m sure Fidelity wants you to), then you are playing the game correctly. As far as I can see you can get a free lunch here.
Sure, Fidelity can just announce that they’re instituting fees on these funds a year or two down the road, but that might not go over well. In my mind they would have to keep these at no fee for at least a good while or it would seem like bait-and-switch and would alienate customers.
Additionally, while Vanguard requires a minimum investment of $3000 to open an account, Fidelity does not require a minimum at all. You can open an account with $10 if you choose.
What Does This Save You?
I saw this making the news rounds yesterday heavily and I saw many in the FI/FIRE community roll their eyes after the one-hundreth mention.
But I haven’t seen any of these masters of snark actually break down what it really means in numbers. I try to go the extra mile at Accidental FIRE, so I’m going to show an example of what these no-fee funds will save you as compare to Vanguard.
Let’s assume you’re just starting out. You have $3,000 to invest (since I want to compare to Vanguard and that’s their minimum for VTSMX – remember, VTSAX is the admiral shares and requires a $10,000 minimum, but has a much lower fee)
If you invest $3k with the Fidelity Total Stock Market Index Fund (FZROX) and keep it for 20 years, assuming a 7% return you’d have $11,609 after 20 years.
The same $3k invested in VTSMX which has a .14% operating expense would see you with $11,288 after 20 years.
So $11,609 – $11,288 = $321
Over 20 years this no-fee index fund could save you $321. Not huge or life altering, but as I always joke if I saw $321 laying on the ground I’d pick it up 🙂
Now let’s do it for the Fidelity Fund versus VTSAX. To get in VTSAX you must invest $10k, so assuming the same 7% return, $10k in the FZROX fund over 20 years would grow to $38,697
In VTSAX, which has a .04% operating expense, you’d have $38,388.
$38,697 – $38,388 = $309
Basically you’re likely to save about $300 over 20 years in each scenario.
Is that enough to switch to Fidelity? For me, no. And probably not for anyone invested with Vanguard. But if you’re just getting started, it might be worth a look.
To me the bigger factor than the zero fee here is the no minimum investment amount. Many in the FIRE community have high paying jobs and don’t have any issues finding $10,000 smackaroos to open an account.
But they forget that in the real America the median family income is $58,000, and many or I’d guess most people simply can’t do that. Nor can they find $3,000 to open a VTSMX account. So being able to open a no-fee index fund with only $500 bucks is a valuable thing from my standpoint.
Now to be clear I’m a Vanguard guy, always have been. I’ve been investing with them since 1995. But if I were just starting out I would consider this offer for sure.
What say you AF readers – will any of you be switching to Fidelity because of this or perhaps opening a new account with them?
*Fidelity does advertise on this site through a third-party advertising company but Accidental FIRE has no direct business relationship with Fidelity and is not in any Fidelity affiliate programs.
Honestly I’ve moved more towards etfs for their tax efficiency. Then your talking about .03 or .04 difference and better tax terms. So no, not rushing to buy these.
With free trade ETFs you can do really well and keep things low, very true
To me, this more of a testament to the positive influence Vanguard has had in keeping the other guys honest. Who knows where we’d be without old Bogsy.
Yep, as the Bloomberg article highlights it’s Fidelity trying to keep up with Vanguard and Schwab. Competition is a great thing!
I’m glad you did the math because psychologically I thought the difference would be larger. Of course with higher amounts invested that $300 difference could climb much higher.
Is there a way you can post a spreadsheet that would allow individuals to input their real numbers and see the difference after 20 yrs?
Very true, if the numbers were way larger the difference gets larger too. I used the Bankrate calculator to do the math so didn’t cook up a spreadsheet myself. You can try here – https://www.bankrate.com/calculators/retirement/mutual-funds-fees-calculator.aspx
I’ll check these funds out. My kid’s Roth IRA is there, but it only has $600. We invested in a no fee ETF from iShare.
The no-fee ETFs are a great option. I think beginners get confused by ETFs a bit and avoid them
I’m so heavily vested in Vanguard …. or maybe even more so just the idea of vanguard. My mind just doesn’t know how to handle it lol. Seriously, Vanguard has been like our superhero for so many years… so far, i’m doing nothing.
But i feel like it is because im so emotionally tied to vanguard. (i know, pretty dumb lol).
I think i pay anywhere from .03% to .08% in my different Vanguard index funds. I’d definitely be saving quite a bit of money in the long run by moving.
The difference in fees isn’t too bad, but with a huge portfolio it could add up. Problem is once you have that large portfolio, if it’s not in a tax-protected vehicle you’d get killed if you tried to transfer to Fidelity on taxes. For tax deferred accounts, it might be worth it.
i use td ameritrade but don’t buy index funds with them. all my index funds are in the work 401k. i i was starting out i would surely consider fildelity with no minimum. it’s best to just get started and not wait. i still favor individual stocks in the brokerage accounts and will be rightfully flogged by the community for this outrage.
exactly, the no minimum is a big value to starters. and tack on the no-fee and it becomes very attractive to newbies.
The FIRE community and jcollins worship VTSAX way too much. I think the FIRE clan is doing their readers a disservice by recommendeding US only investing. The be all end all index fund is Vanguard Total World By tilting any other way, you’re betting.
JL Collins’s theory is that the large American companies that constitute most of the US market have so much global presence and business and are so dependent on foreign sales and currencies that you don’t need to own foreign stocks. You’re getting them built in.
It would be interesting to see numbers run on that, and I think he might have had them in his book. I do own Vanguard Total International, but it’s not a big part of my portfolio.
Every 0.01% in fees on a million dollar portfolio costs $100 per year. However, in a taxable account, tax efficiency may prove to be more important than the 0.04% difference in cost between the new Fidelity funds and Vanguard’s equivalent funds.
Comparing the tax efficiency of Fidelity’s current Total Stock Market Offering with Vanguard’s using Morningstar’s comparison tools, you’ll see that Vanguard has consistently outperformed Fidelity in this category.
The tax-adjusted 10-year returns of VTSAX is 10.22%, while Fidelity’s equivalent FSTVX is 9.86%.
https://www.physicianonfire.com/wp-content/uploads/2018/08/FSTVXversusVTSAX.png
I’ll be sticking with Vanguard, but I like the downward pressure this puts on mutual funds across the board.
Cheers!
-PoF
Yep, tax efficiency is indeed a big factor to consider. I’m sticking with Vanguard as well, but as mentioned in the post I think the no minimum factor combined with no fees is still very attractive to new investors who don’t have $3000 to get started. If it gets some noobs in the game then it’s a good thing.
And as you stated it’s also competition in action, which is always good for the consumer.
Why would there be a difference in tax liability for an index fund? Could you please elaborate?
This does a decent job of explaining it – https://money.usnews.com/investing/articles/2016-12-07/index-funds-can-pack-a-tax-punch
WCI went into some detail in today’s post: https://www.whitecoatinvestor.com/expense-ratios/
“Vanguard has a HUGE advantage here, as it can “flush” its capital gains out by using its ETF share class, which Fidelity and Schwab do not have.”
My hubby had a question – someone mentioned both these funds lend out to short sellers. But Vanguard returns all the money back where as Fidelity only returns 50% of the money back. Not sure if that’s true but it’s one difference I think.
Interesting. I couldn’t find info on how Vanguard does securities lending different from Fidelity, but this article shows that they do and that they sometimes even beat the index they’re tracking because of it. – https://www.fool.com/investing/general/2016/03/06/how-some-index-funds-are-beating-the-index.aspx
I think that this is an encouraging sign and certainly it will be very attractive to rate tarts who go after the lowest trackers. 0.00% – wha’ts not to like?
Trouble for me is that I have some funds in VWRL that charges 0.25%/annum – is it worth selling and buying again to benefit, and how long to reach that?
Overall, anything which puts pressure on the market to get more efficient and reduce the costs to consumers is a good thing. Heopfully this will put pressure on other providers to reduce ETF charges across the board.
You’d have to run some serious numbers to see if it’s worth selling your shares, paying the taxes, and reinvesting in another fund.
And I agree, I like the competition and the pressure they put on each other to do better!
I have it down as something to do – but it doesn’t get to the top of my list. 🙂
Yep, $300 isn’t enough for me to make the switch. I freaking hate setting up new accounts, so it would have to be significant for me to make that effort.
I’m with you, hate getting new stuff. That’s partly why I keep delaying travel hacking but a weak excuse
Why I’m such a slow travel hacker for sure!
Thanks for doing the math. I am surprised that the differences over 20 years are not larger. I am with Schwab and their comparable index funds is at 0.03%. Hopefully Fidelity’s move gets all the other players to think about lowering their rates even more. Every little bit helps!
Schwab is a solid company, I still have one small account with them and they’ve always been great. And competitive with the others.
I love this break down, thanks for doing this! I won’t be switching anytime soon, but considering this for my younger sister (still in college). She doesn’t have the means to get VTSAX yet, but I wanted to get her started. Schwab was our initial plan for her, then this came out so reconsidering.
Awesome, the no minimum thing is a big value-add.
It will be interesting to see if many investors will switch. The battle over who offers the lowest expenses is heating up. It is a great benefit for investors. We use the Fidelity index funds in my wife’s 403b. They were good and just got better.
Capitalism and competition are good things 🙂
Dude! I’m already with Fidelity for the most part, so no issue for me. I just called to switch funds, but found out that they removed fees on some existing funds too. Since I’m already fully invested in their fund FSTVX, I can leave it all there because they’ve made this one few free also.
Cheers! Joel
Boo-yah, sounds like a great deal!
A worthwhile comparison. As you point out, competition is a great thing!
I’m with Vanguard now, and while I’m all about efficiency and optimization, won’t be making the switch to Fidelity. Vanguard ETF’s like VTI have expense ratios of just .04%, which beats the ER’s of even the Admiral shares of their mutual fund offerings. And unlike mutual funds, ETF’s have no minimum investment threshold other than the share price ($147.17 as of yesterday’s close for VTI).
Vanguard has my loyalty for two reasons – one, they pioneered the low-cost index fund investing movement; and two, they maintain a unique shareholder owned business model. The interests of Vanguard investors are always front and center, with company profits passed on to owners of Vanguard funds. Fidelity, by contrast, is not investor-owned, and thus has wholly different incentives regarding profit and operation.
To my mind, the Vanguard is like Aldi, which offers excellent value across the board with pricing just above cost. Fidelity is like a higher-priced grocery chain offering a loss-leader product to get you in the door, with the intent of overcharging you on a host of other products and services.
Nothing wrong with sniping the loss leader if you can, but which would you rather trust? I’ll stick with Vanguard for now. It will be interesting to see how long Fidelity maintains the current free offering, and what effect the move has on competitors. Will be watching with interest!
I’m sticking with Vanguard too, and I love the comparison to Aldi – it’s another favorite of mine!