Mark your calendar: Fidelity is offering two 0% expense ratio mutual funds (FZROX and FZILX) starting August 3, 2018. Zero! Zilch! FZROX is a total US stock market index fund and FZILX is an international index fund that invest in both developed and emerging market international stocks. FZILX is especially interesting, because foreign stock funds, especially those that invest in emerging markets, tend to charge higher fees. VEU, for example, which is similar to FZILX, charges 0.11% expense ratio. FZILX is a game changer.
This is truly historic moment in the history of investing and the mutual fund industry. For many years, mutual fund companies like Fidelity, Schwab, and Vanguard have battled each other by slashing management fees in a race to zero, and we are finally here! While 0% is not too different from 0.02% (the lowest expense fund currently available), it is very significant psychologically.
First, investing in individual stocks directly is no longer a cheaper option. When you can buy a mutual fund that charges no fees under management and get instant diversification, it makes little sense to bother buying individual stocks and risk underperforming the market.
Second, actively managed mutual funds that charge high fees become increasingly harder to justify given the zero cost alternative now available.
Third, the pressure is on for the other fund companies to match or beat Fidelity's offer. ETFs that charge no fees might become available. More specialized funds, such as those in small cap stocks (my favorite), may become available for no fees. Even better, we may even see mutual funds that charge negative expense ratios! That's right, they would actually pay you to invest in them! Impossible? Well, the idea of a mutual fund charging no fees seems an impossibility not too long ago, but it has become a reality now.
Critics might say that this may be too good to be true and Fidelity could change its fee structure after it attracts enough assets under management (AUM). True, but it is unlikely since the funds make enough through security lending already and the zero fee funds act like loss leaders to attract clients that may buy other higher margin products from the firm. In the end, should Fidelity decide to start charging fees, one can always vote with one's feet and get out immediately.
You can check out the details about the new fee-free mutual funds here.
I plan to start investing in them soon and reduce my individual stock purchases. There is still a place for investing outside of these two funds, as I could reduce my tax liability buying zero and low dividend yield stocks and small cap stocks. Total US stock market has a dividend yield around 2% and international stocks yield around 3%. On the other hand, small cap stock index (IJR) yield just slightly above 1%, and historically return better than large cap stocks. No dividend stocks like BRK.B, GOOGL, WAT, FISV, and BIIB are even better and do not generate mandatory tax liabilities at all. If only Fidelity could offer no fee mutual funds that have no or very low dividend yield, then I'd be all in! Fidelity, are you listening?
N.B. I am not compensated at all for recommending Fidelity products. This post is meant solely to raise awareness and help my readers make informed decisions on their own journeys to total freedom.
Let me know what you all think. Thanks for reading!
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