Fidelity zero expense ratio index funds and no fee stocks?

[nancy33]

We have about 300 k in mutual funds in an old 401 k at Fidelity and the fees are I believe .19 percent. So I found out I can roll this over to an IRA at Fidelity and there are zero fee index funds options and zero fee stock trades? No annual fees? This sounds better than Vanguard? What is the catch? Fidelity is going to have some sales person contact me   We escaped from Edward Jones so I am leery. We have more assets at Vanguard right now but if these are zero fees why stay at a Vanguard? Thank u for any advise
Now the Fidelity local financial planner guy wants to meet with us.

[MDM]

Now the Fidelity local financial planner guy wants to meet with us.

That's one "catch" - Fidelity may attempt to upsell you to higher fee funds.

Otherwise, differences of a few hundredths of a percent (aka basis points) make little practical difference.

See Fidelity vs Vanguard - Bogleheads.org and related threads for varied opinions.

[Indexer]

Catch #1:  Fidelity will try to upsell you.

Catch #2:  Index tracking? How well do they track the index? Some index funds don't buy every holding in the exact percentages as a way to cut costs. When the expense difference is 0.03% it wouldn't take much tracking error to blow up any savings. Fidelity is using an in house index, aka not an official index, for the zero cost funds in order to save money. Since the funds are new I can't tell you how well they will track over the long term.

Catch #3: Securities lending income? Mutual funds can lend out stock they hold to short sellers and earn interest in the process. Since big index funds tend to hold securities forever short sellers love to borrow from them because they know it's unlikely the fund will want the stock back during the period the short seller needs to borrow it. As a result, many index funds make substantial revenue from lending income. Does Fidelity give this income back to the investors? Fidelity's official answer is that they give some of it back. That would be a great way to get the expenses to zero. Charge zero, but then pocket the securities lending income. Vanguard gives the lending income back to investors(their owners) as larger dividends. For really big funds like VTSAX and VTI the lending income covers a large portion of the expenses, so instead of costing 0.03% VTI is really about 0.01% after you account for the securities lending income. Some funds actually bring in so much securities lending income that they are paying you to own them. Example: VEXAX has a stated ER of 0.07%, but it's outperformed it's benchmark by a steady 0.09% for almost 20 years thanks to it's securities lending income.

Catch #4:  Taxes(doesn't matter in IRA):  Vanguard manages taxes remarkably. VTSAX hasn't had a cap gains distribution in almost 20 years, and VTI shouldn't ever have one since it's an ETF. Fidelity doesn't have the same track record and their index funds routinely distribute year end capital gains. Several of them are expected to distribute 2019 cap gains.


I'm sticking with the Vanguard funds. The great record of index tracking, staying tax efficient, giving back the securities lending income, and investing with a company I trust is worth 0.03% for me.

[2sk22]

I have both IRA and brokerage accounts at Fidelity. They seem to have a good collection of no-fee index funds. I have never received any kind of an upset in the 25 years that I have my account with them.

[kenner]

Same here--happy with Fidelity's selection of zero-fee funds, no upsells in the years I've had an account with them, and my parents have been with them since before I was born and had no isses. 

I do find it kind of funny that when Vanguard was the one with the lower fees their cheering squad here insisted that that was the only thing that mattered and anyone who said otherwise obviously didn't know what they were talking about.  Now that Fidelity has some lower fee funds, well, now there's a host of other factors we're supposed to consider.  Personally I didn't and don't particularly care what other people invest in (I've actually got both Fidelity and Vanguard funds where they make sense for particular accounts), but the about-face is amusing.

[Villanelle]

Catch #1:  Fidelity will try to upsell you.

Catch #2:  Index tracking? How well do they track the index? Some index funds don't buy every holding in the exact percentages as a way to cut costs. When the expense difference is 0.03% it wouldn't take much tracking error to blow up any savings. Fidelity is using an in house index, aka not an official index, for the zero cost funds in order to save money. Since the funds are new I can't tell you how well they will track over the long term.

Catch #3: Securities lending income? Mutual funds can lend out stock they hold to short sellers and earn interest in the process. Since big index funds tend to hold securities forever short sellers love to borrow from them because they know it's unlikely the fund will want the stock back during the period the short seller needs to borrow it. As a result, many index funds make substantial revenue from lending income. Does Fidelity give this income back to the investors? Fidelity's official answer is that they give some of it back. That would be a great way to get the expenses to zero. Charge zero, but then pocket the securities lending income. Vanguard gives the lending income back to investors(their owners) as larger dividends. For really big funds like VTSAX and VTI the lending income covers a large portion of the expenses, so instead of costing 0.03% VTI is really about 0.01% after you account for the securities lending income. Some funds actually bring in so much securities lending income that they are paying you to own them. Example: VEXAX has a stated ER of 0.07%, but it's outperformed it's benchmark by a steady 0.09% for almost 20 years thanks to it's securities lending income.

Catch #4:  Taxes(doesn't matter in IRA):  Vanguard manages taxes remarkably. VTSAX hasn't had a cap gains distribution in almost 20 years, and VTI shouldn't ever have one since it's an ETF. Fidelity doesn't have the same track record and their index funds routinely distribute year end capital gains. Several of them are expected to distribute 2019 cap gains.


I'm sticking with the Vanguard funds. The great record of index tracking, staying tax efficient, giving back the securities lending income, and investing with a company I trust is worth 0.03% for me.

I definitely don't consider myself to be savvy when it comes to the ins and outs of investing, largely because I don't think I particularly need to be.  Catch #3 was new info for me, and very interesting  I had no idea that was a thing.  Thanks!   Today, I learned a thing!

[jim555]

300K, why not buy 200 stocks directly now that stock trades are free in a lot of brokerages.  No fee investing taken literally.  Some advantages are, you control what losses or gains you realize.  No more surprise year end distributions.

[reeshau]

Charles Schwab, which kicked off the zero trading fee wave, can afford to do it because a vast majority of its profit comes from the spread on cash balances in its accounts--more accounts, more cash sitting at .01%.

Schwab's case is the most extreme; the move makes sense because it hurts their competition more.  But they all have other ways to make money on your holdings.