Fidelity goes to zero with new ETFs

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Fidelity Investments has taken the ETF price war to its logical conclusion by launching a pair of zero-fee options in the US last week. Fidelity says investors in its ‘Zero Total Market Index’ and ‘Zero International Index’ ETFs will pay nothing “regardless of how much they invest in either fund, while gaining exposure to nearly the entire global stock market”.

At the same time, Fidelity said in a statement last week that it would slash fees on its traditional passive managed funds by an “average asset-weighted” 35 per cent, pricing some as low as 0.015 per cent.

According to Fidelity, the changes would save investors about US$47 million in fees each year in a pitch aimed directly at the leading passive manager, Vanguard.

“With this action, 100 per cent of Fidelity’s stock and bond index mutual funds and sector ETFs will have total net expenses lower than all of Vanguard’s comparable funds that are available to individuals, advisors and institutional investors,” the Boston-based firm says.

Fidelity is the world’s fourth-largest fund manager behind BlackRock (US$6.3 trillion), Vanguard ($5 trillion) and State Street (US$2.8 trillion), recent research from Pension & Investments magazine shows. Both Fidelity and State Street have lost ground somewhat over the last year as BlackRock (via its iShares ETF range) and Vanguard garnered the lion’s share of the growing passive funds market.

Vanguard and BlackRock have engaged in mutual rounds of fee reductions over the last year or two but Fidelity’s zero-fee ETFs fast-forward the race to the bottom for index managers.

Kathleen Murphy, Fidelity head of personal investing, said in a statement: “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.”

However, Fidelity is not running a charity: the manager saves on ETF costs by using in-house index construction (rather than paying fees to FTSE or MSCI, for example); and, would profit out of securities lending to short-sellers, according to US press reports.

A Reuters report noted listed fund manager share prices dropped following the release of Fidelity’s zero-fee ETFs

“Publicly-traded asset managers whose shares declined on Wednesday [last week]included BlackRock, which closed down 4.6 percent, Legg Mason Inc, down 4.3 percent, and T. Rowe Price Group, down 1.5 percent,” the Reuters report says.

– David Chaplin, Investment News NZ

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