Fidelity Index Fund Classes - Investor vs Advantage vs Institutional, etc?

[jeromedawg]

Hey guys,

As I started digging around in the index funds Fidelity offers, I noticed there's quite a few and I'm not quite sure how to differentiate them aside from the expense ratios and fees. It's seems Institutional offers the lowest fees, then Advantage, then Investor. Are there any more classes beyond this? It seems to me that it would make the most sense investing in Institutional based on the fees alone and the fact that it's still an index fund. Is there any reason why I wouldn't want to invest in an Institutional class fund more than the Advantage, Investor, and whatever other classes are out there? Oh yea, there's "Institutional Advantage" too (FXAIX).

My 401k plan at my current company offers FXAIX, so I invested fully in that. For my Roth IRA I just plopped down a large amount into FSTVX though. I went with FSTVX over FSTMX because I was willing to invest at least $10k+ so figured why not. But should I have gone with FXAIX instead since the fees are even lower? Oh and then there's FXSIX, which I think is what my wife's 401k offers through her company, and that I invested her fully in for that.

Or are all these Spartan Index Funds pretty much the same thing, the variance fees being pretty insignificant at the end of the day? For simplicity, I'm assuming it's better just to stick with one of these for the most part? I guess the trouble is picking which one and why one might pick one over the other. It's not immediately clear to me so hopefully someone can clear that up? I don't want to repeat the same/similar mistake I made about "diversification" that I initially made LOL

[Dr. A]

Different classes for the same fund is just a way that the company can offer a lower expense ratio to higher-balance investors.

I.e. the "Investor" fund may have a minimum balance of $2,500 for an ER of 0.20, whereas the "Advantage" has a minimum balance of $10,000 with an ER of 0.15, and the "Institutional" class may have a minimum balance of $1,000,000 for an ER of 0.05. However, the funds are exactly the same otherwise, and (I believe) the money is actually managed as one big pot.

Vanguard has operated this way for a while, but I've only noticed Fidelity doing it recently. If you have an investment in a lower "class" than you are eligible for, they will actually automatically upgrade your shares to the higher class.

They also offer higher classes for their larger 401(k) plans. So, while the Institutional shares normally have a minimum balance of $1,000,000, but if, say your company's 401(k) has a total balance of $10M, they may offer Institutional shares as part of the plan.

Bottom line, you should buy into the highest class for which you are eligible, because the only difference is expense ratio.

[pistachio]

I.e. the "Investor" fund may have a minimum balance of $2,500 for an ER of 0.20, whereas the "Advantage" has a minimum balance of $10,000 with an ER of 0.15, and the "Institutional" class may have a minimum balance of $1,000,000 for an ER of 0.05. However, the funds are exactly the same otherwise, and (I believe) the money is actually managed as one big pot.

Vanguard has operated this way for a while, but I've only noticed Fidelity doing it recently. If you have an investment in a lower "class" than you are eligible for, they will actually automatically upgrade your shares to the higher class.

Do you know if this is true for Fidelity too with auto-upgrading at the end of the quarter like Vanguard? I noticed one of my Investor funds is almost past the minimum needed for Advantage class.

[Dr. A]

I do. It just happened to me in the last few weeks. After one of my funds broke through the threshold, they sent me a letter saying that they would exchange the funds on X day unless I contacted them and told them not to.

It was just a plain vanilla IRA. May not be true with 401(k), because I think the fund classes they offer there are based on total assets under management across the plan.

[astvilla]

For learning purposes, what is the reasoning behind offering investors different classes of investments like Investor, advantage/admiral, or institutional? It just seems to try to get people to invest more for less fees but is that all there is? Because 10K isn't really a whole lot i think. And how significant are the differences in fees between the classes? Is it even worth considering when deciding to invest?

[Dr. A]

From the fund's perspective, it's about competition and economy of scale. As a single investor's balance grows, it doesn't cost much more for the fund to manage that money, so they offer a sort of quantity discount to try to keep you from going to the other guy. Really, in Fidelity's case, they offer it because Vanguard does, and they need to keep their fees in line with the competition.

The difference is small for index funds (because the fees are so small to begin with), but probably bigger for managed funds.

For an individual investor, it's probably not a deciding factor, but it is nice to know I'll get to keep a few extra bucks automatically as my balance grows.

If, however, you're managing a$10M trust, now each tenth of a percent is worth $10,000 a year, so it's got some weight in the decision process.