Would You Still Invest in Index Funds if All Funds Have an Expense Ratio of ZERO

[pjm123a]

I know it sounds too good to be true. But a recent change to the Fidelity 401K plan I am in has made available a number of funds that have an expense ratio of zero. I do no know if this is temporary or permanent but it is the case for now. There are some funds available that have a non-index and an index version. For instance 2 international funds are: Fidelity Flex International Index Fund (FIFTX) and Fidelity Flex International Fund (FULTX). They have some holdings in common. For instance both have: Nestle, Samsung, Alibaba, TENCENT Holdings. But there are some differences as well. My current thought is to split the international allocation between the managed and index funds whereas prior to this change I strongly favored the few index funds that were available in the plan. So the question is: Would you still keep everything in index funds or put some (or possibly all??) in managed funds if their costs were identical?

[marty998]

For some funds that have just been launched, Fund Managers will agree to rebate expenses in order to keep costs down to an acceptably low level, so as not to be a drag on returns which are used in marketing materials.

Once sufficient scale is achieved, normal expense ratios will return. I do not know enough about the Funds you have mentioned, but the above could be one reason.

International contains a lot of good and a lot of crap. With so much to choose from you would expect a good manager to be able to outperform.

The problem is there is so much data to research because the companies operate everywhere, that you have to find a manager of sufficient scale who will know everything.

Scale tends to lead to big funds, which from a stock selection point of view, tend to gravitate straight back to indexes, and are not as nimble as smaller funds (which have resulting higher volatility and deviations from the index.

I am rambling now without a coherent point of view, but I hope you get the gist of it.

[simonsez]

I'm lazy.  I want to buy and hold and not think.

Give me the index fund with wide market coverage that will do just fine for $400, Alex.

[RangerOne]

If all expense ratios went to zero, the only remaining important factor is probably diversification.

The standard diversification advice given by Bogle is buy and hold the whole stock market. So far no alternative scheme as an alternative to the standard weighting ratios use in most indexes has proven itself to be a more effective way to pick stock.

Indexes and all the funds that follow them offer the simplest ways to buy the whole global stock market with a small subset of funds.

Same goes for a good bond indexes.

So yeah 90% of my nest egg will likely always be in funds that track indexes. Building a portfolio form individual stocks appears to be gambling and nothing but a waste of time when my goal is long term holding and maximum diversification.

I do have some friends caught up in the single stock game. Holding large pieces of Apple or other tech companies. Probably feels good during a long rally like we have had. But if a tech bubble pops there holdings will get annihilated relative to a more balanced portfolio.

I am sure there are stories of people making money gambling on penny stocks and IPOs that went to the moon. But its nothing but gambling and luck.

[GuitarStv]

Hmmm . . . Probably.  My understanding is that fund managers able to beat indexes year after year are a pretty rare breed.

[SeattleCPA]

I'm lazy.  I want to buy and hold and not think.

Give me the index fund with wide market coverage that will do just fine for $400, Alex.

+1

[SeattleCPA]

If all expense ratios went to zero, the only remaining important factor is probably diversification.

The standard diversification advice given by Bogle is buy and hold the whole stock market. So far no alternative scheme as an alternative to the standard weighting ratios use in most indexes has proven itself to be a more effective way to pick stock.

Indexes and all the funds that follow them offer the simplest ways to buy the whole global stock market with a small subset of funds.

Same goes for a good bond indexes.

So yeah 90% of my nest egg will likely always be in funds that track indexes. Building a portfolio form individual stocks appears to be gambling and nothing but a waste of time when my goal is long term holding and maximum diversification.

I do have some friends caught up in the single stock game. Holding large pieces of Apple or other tech companies. Probably feels good during a long rally like we have had. But if a tech bubble pops there holdings will get annihilated relative to a more balanced portfolio.

I am sure there are stories of people making money gambling on penny stocks and IPOs that went to the moon. But its nothing but gambling and luck.

+1

[fattest_foot]

I'd still go with an index fund because I don't have any faith that any fund manager is somehow going to become omnipotent and be able to time any market sector (much less the entire market).

If they could, then we'd have already heard about it and the fee would be entirely irrelevant as every investor in that fund would be the richest group of people on the planet.

[dougules]

There is no free lunch.  How are the fund managers getting paid?

Also, active funds are by definition less diversified. 

[pjm123a]

Just to clarify: These zero expense ratio "flex" funds are part of a Fidelity program called "Portfolio Advisory Services at Work". The idea is that the fund sponsor (ie: my company) pays Fidelity to offer financial advice to plan participants (ie: us employees). Access to these "free" flex funds is part of it. Note that I had no choice. All my prior Fidelity fund balances were transferred to these flex funds and I was signed up for their advisory service. I quickly found out that I had lost all on-line access to move (my) money around within the plan. All I could do is update my profile (personal info and non-Fidelity assets) and they would periodically review my Fidelity holdings and re-balance for me (again at no cost because the company was paying them). Fortunately, I was able to opt out of the "Portfolio Advisory Services at Work" part of the program. This restored my ability to move my money around but I (fortunately) retained access to the "free" flex funds. For the record, I think this program is being offered by Fidelity because they are feeling some heat from Vanguard.