- Fidelity offers zero fee index funds.
Can you believe it?
They're such a kind, privately held company
that's willing to give up a bunch of profit
to help out the little guy investor like you and me.
- So you're telling me there's a chance? Yeah.
- Ah, not so fast.
- What?! - As with most things,
there's a bit of a catch,
and the Fidelity zero fee index funds are no different.
So, let's go through
what you need to know about these things,
then we'll stack up each one to its fee based competitor.
Before we get too deep into it,
I need to say that I am by no means
implying that you should sell these index funds
if you currently hold them.
You could be investing in much worse financial products,
like anything that Cathie Wood has her name attached to.
I'm basically going to be giving you
a peak behind the curtain of these zero fee index funds
to show you what isn't so obvious on the surface,
In 2018, Fidelity started offering
four different index funds
where they charge you $0 to own them.
These four funds consist of a large cap, total US market,
extended market and international index fund.
At first glance, this seems like an odd thing to do,
because they already offer an S&P 500, total US market,
extended market and international index fund
where they charge you to own them.
Yes, the fees for these funds are extremely cheap as it is.
But by offering these zero fee funds,
they're in direct competition with themselves.
I can promise you
they're not doing this out of the goodness of their hearts.
To help uncover why they're doing this
we just have to follow the money,
but not the money that they don't make from these funds,
the potential money that they could make
in other areas of their business
by offering you these zero fee funds.
These funds are what you would consider
to be a loss leader for Fidelity.
Kind of like how Costco
sells their rotisserie chickens for a loss
to the tune of being out
$30,000,000 to $40,000,000 per year.
The goal for Costco, and Fidelity in this case,
is to get you into their ecosystem
so that they can sell you
on more profitable products and services.
If you are already through the doors of Costco
to buy your unhealthy, corn-fed, GMO, rotisserie chicken,
then you're more likely to buy additional items.
If you are already investing in Fidelity's zero fee funds,
then you're more likely to use them first
if you are looking for a financial advisor,
annuity, life insurance or more expensive funds.
This of course won't work for every customer.
But the lost leader business model
doesn't need to have a 100% success rate.
They just need a small portion of people
to buy these more expensive products and services.
Once Fidelity has you in the doors
and investing into their funds,
they lock you into their umbrella even more
by penalizing you
if you wanna move to a different investment platform.
These Fidelity zero fee funds are exclusive
to their investing platform
and cannot be bought on
or transferred to any other platform.
With their other fee based index funds,
you can transfer those out of Fidelity
and onto any other platform
like Vanguard, Charles Schwab or any of the others.
They'll usually come with a transfer fee,
but this is par for the course no matter where you go
and which fund you decide to move.
With these zero fee funds, you have to sell them
if you wanna move your investment somewhere else,
which means that you might have to pay capital gains taxes
if they're held within a taxable investment account.
It might not be a big deal to you right now,
but if for some reason at a point in the future
you become unhappy with Fidelity, then you're screwed.
Before I tell you my biggest issue
with these zero fee funds,
please help and support this channel,
and my dog, Molly, who actually just tore up her leg
and had to get stitches, by hitting that thumbs up button.
The word index fund gets thrown around a lot
by these large investment institutions nowadays
because of how successful they've been over the years.
At this point, a lot of people understand
the power of investing in index funds.
But not all index funds are created equally,
and it's not so obvious unless you know what to look for.
Technically, you could create
your own custom stock market index.
And if I wanted to create a fund that tracks your index,
then I could call it an index fund.
The problem is that you are most likely an unknown person
with an unknown track record and an unproven process.
There's a couple levels of trust
that need to exist within this whole process
between the financial index provider,
the index fund and the investor.
My fund needs to trust your indexing process,
and the potential investors within my fund
needs to have some level of trust
in how my fund attracts your index.
There's a few different
well-known and trusted financial index providers
that index fund creators
like Fidelity, Vanguard and Charles Schwab
pay a licensing fee to
to create their fee based index funds.
The Fidelity zero fee index funds are a lot different
in that they don't want to have to pay the licensing fee
to these trusted index providers
because they need to cut corners
to reduce the cost to run their funds.
Because if they're still doing a bunch of work
and you are not paying them to do that work,
they're gonna cut corners wherever they can.
But they still need to track some sort of index
to be able to call themselves an index fund.
To do that, Fidelity has created their own internal index,
which is what their zero fee funds track.
This might not seem like a big deal,
but their indexing methods
haven't been around for very long,
which means that they are unproven.
I'm also not sure how I feel about Fidelity
creating the index that their zero fee funds track.
Having an unassociated third party index provider
at least gives a little bit of separation of power
within the whole process.
To show you why I'd prefer
75% of the fee based Fidelity index funds
over the zero fee index funds,
let's compare them against each other
so I can show you the biggest differences.
For the total market index
we have the zero fee index fund FZROX
and the comparable fee based index fund FSKAX.
The stock style for both are pretty close
so there's really no issue there.
Next, we can look at the total holdings for each one.
The zero fee fund holds 2,655 stocks,
while the fee based fund holds 3,998.
For me, I want my index funds,
especially my total market index funds,
to hold as many stocks as possible.
The zero fee fund fails to do this.
Lastly, the portfolio turnover for each is different.
This is important to know
because the higher portfolio turnover
means more stocks are being bought and sold
which is going to cost you money.
The zero fee fund is at 4%,
while the fee based fund is at 3%.
Not a huge difference,
but for me, I prefer to keep this as low as possible.
I also like the option of investing in the fund
that charges 0.015% to track a larger number of stocks,
instead of only sampling 2,600 stocks
like the zero fee fund does.
For the large cap index,
we have these zero fee index fund FNILX,
and the comparable fee based index fund FXAIX.
The stock style for both of these
are pretty darn close as well
so there's nothing too concerning here.
Since both of these are large cap only
we see that the total holdings are about the same,
which it should be.
For the portfolio turnover,
we see that the Fidelity S&P 500 index fund is at 2%,
while the zero fee large cap fund is at 5%.
I personally choose to pay the extra 0.015%
to hold the true S&P 500 index fund.
We see the biggest divergence
with the extended market index funds.
For this comparison
we have these zero fee index fund FZIPX
and the fee based index fund FSMAX.
As you can see, the stock styles are way different.
The stock style for FSMAX
is more in the mid and small cap range
with a tilt towards growth.
FZIPX is more in these small cap stocks
with a tilt towards value.
The sector breakdown for the fee based fund
has more money going into technology,
while the zero fee fund
has more money going into everything else except tech.
Once again, the fee based fund holds more stocks,
which I like, at 3,703 of them,
while the zero fee fund only holds 2,143 stocks.
The turnover ratios make me sick just looking at them.
18% for the fee based fund and 25% for the zero fund.
I am not a huge fan of any extended market funds,
so I prefer to stay away from both of these.
The last zero fee fund that we have
is the international index fund FZILX.
We'd wanna compare it
to the fee based international index fund FSPSX.
Stock style for both are basically identical.
The sector exposure between them both
are all over the place.
So, I'll throw up a screenshot
so you can pause the video to see it for yourself.
The holdings are a lot different than you'd think.
The zero fee fund holds 2,377 stocks,
while the fee based fund only holds 832 of them.
One of the big reasons the zero fee fund holds more stocks
is because it encompasses
both developed and emerging markets,
while the fee based fund excludes emerging market stocks
and only focuses on developed market.
Believe it or not,
I kind of like the zero fee international index fund
a little bit more
because I prefer developed and emerging market stocks
to get more diverse exposure.
The only things I don't like about it
is the 8% turnover ratio,
as well as the fact
that you're kind of stuck in the Fidelity ecosystem
if you hold these zero fee fund.
Make sure to hit that thumbs up button
to support the channel before you go.
If you wanna see my preferred Fidelity index funds
or Vanguard ETFs that you can purchase
on the Fidelity platform,
then watch these videos to your left next.
I'll see you in the next one, friends. Done.