Fidelity: When Zero does not mean free

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Northern Flicker
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Fidelity: When Zero does not mean free

Post by Northern Flicker » Sun Sep 01, 2019 11:15 pm

There was a fair bit of buzz about Fidelity Zero funds, with some believing that they are loss leaders, providing investors with a free lunch. There are ways in which mutual fund companies can charge expenses to funds without having to account for it in the expense ratio. One is by keeping some of the securities lending revenue earned by securities lending activities in a fund. This does not seem to be in play for the Fidelity Zero funds.

Another ploy most mutual fund companies use, including Vanguard, is soft dollar arrangements with brokers. In these arrangements, fund companies pay a higher commission to brokers to execute transactions than would normally be charged just to execute the requested trade. In return for the extra cost, the brokers supply services, data, research reports, sometimes even computer hardware, various other things. That the fund may do this will be described in the so-called Statement of Additional Information. The text therein will point out that the goods and services received are commensurate in value with the extra cost paid in the commissions.

But the goods and services received are used to administer the fund. For mutual funds with non-zero expense ratios, having some of the administration costs covered by these extra paddings in the transaction costs means that these costs are not accounted for in the expense ratio of the fund, so that the fund company can advertise a lower expense ratio and/or book more profit from the expense ratio charged off to the fund.

In the case of a Fidelity Zero fund, where there is no expense ratio, it would mean that some or all of the administrative costs are being charged to the fund through padding of the transaction costs. However, it would be unlikely that all of the administrative cost could be covered this way, much less a profit, unless the fund were paying for services for other Fidelity mutual funds through padding of the transaction cost.

I looked at the Statement of Additional Information for FZROX, the Fidelity Total US Stock MarketIndex fund purported to have zero cost, and low and behold, paying costs associated with other funds by the assets in FZROX through padded broker commissions that receive goods or services used to administer those other funds is contractually allowed in the Statement of Additional Information. Here is some text extracted from there with some relevant text highlighted in red:
The Acquisition of Brokerage and Research Products and Services

Brokers (who are not affiliates of FMRC) that execute transactions for a fund may receive higher compensation from the fund than other brokers might have charged the fund, in recognition of the value of the brokerage or research products and services they provide to Geode.

Research Products and Services. These products and services may include, when permissible under applicable law: economic, industry, company, municipal, sovereign (U.S. and non-U.S.), legal, or political research reports; market color; company meeting facilitation; compilation of securities prices, earnings, dividends and similar data; quotation services, data, information and other services; analytical computer software and services; and investment recommendations. In addition to receiving brokerage and research products and services via written reports and computer-delivered services, such reports may also be provided by telephone and in person meetings with securities analysts, corporate and industry spokespersons, economists, academicians and government representatives and others with relevant professional expertise. Geode may request that a broker provide a specific proprietary or third-party product or service. Some of these products and services supplement Geode's own research activities in providing investment advice to the funds.

Execution Services. In addition, products and services may include, when permissible under applicable law, those that assist in the execution, clearing, and settlement of securities transactions, as well as other incidental functions (including, but not limited to, communication services related to trade execution, order routing and algorithmic trading, post-trade matching, exchange of messages among brokers or dealers, custodians and institutions, and the use of electronic confirmation and affirmation of institutional trades).

Mixed-Use Products and Services. Geode may use commission dollars to obtain certain products or services that are not used exclusively in Geode's investment decision-making process (mixed-use products or services). In those circumstances, Geode will make a good faith judgment to evaluate the various benefits and uses to which they intend to put the mixed-use product or service, and will pay for that portion of the mixed-use product or service that does not qualify as brokerage and research products and services with their own resources (referred to as "hard dollars").

Benefit to Geode. Geode's expenses would likely be increased if it attempted to generate these additional products and services through its own efforts, or if it paid for these products or services itself. Certain of the brokerage and research products and services Geode receives are furnished by brokers on their own initiative, either in connection with a particular transaction or as part of their overall services. Some of these products or services may not have an explicit cost associated with such product or service.

Geode's Decision-Making Process. Before causing a fund to pay a particular level of compensation, Geode will make a good faith determination that the compensation is reasonable in relation to the value of the brokerage and/or research products and services provided to Geode, viewed in terms of the particular transaction for the fund or Geode's overall responsibilities to the fund or other investment companies and investment accounts. While Geode may take into account the brokerage and/or research products and services provided by a broker in determining whether compensation paid is reasonable, neither Geode nor the funds incurs an obligation to any broker, dealer, or third party to pay for any product or service (or portion thereof) by generating a specific amount of compensation or otherwise. Typically, these products and services assist Geode in terms of its overall investment responsibilities to a fund and other investment companies and investment accounts; however, each product or service received may not benefit the fund. Certain funds or investment accounts may use brokerage commissions to acquire brokerage and research products and services that may also benefit other funds or accounts managed by Geode.
So it seems that Fidelity can hide the expense ratio for the zero funds by paying extra transaction costs to brokers to receive goods and services back, not only for the administration of the zero fund but for other funds you may never have even heard of, much less invested in. This lack of transparency makes it extremely difficult to know what the de fact expense ratio of a so-call zero fund might be, but my opinion is that you can rest assured that it is not zero.
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nedsaid
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Re: Fidelity: When Zero does not mean free

Post by nedsaid » Sun Sep 01, 2019 11:29 pm

The way to tell is to check the Zero Funds vs. similar index funds. From what I have seen the Zero Funds are tracking pretty well. I know Fidelity uses its own proprietary indexes for these funds but they in effect will be very similar to the better known indexes. By comparing performance vs. similar indexes, this will give us a pretty good idea of the expenses. Most folks here believe the Zero Funds are loss leaders.
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Re: Fidelity: When Zero does not mean free

Post by Vanguard Fan 1367 » Sun Sep 01, 2019 11:29 pm

At one time I owned a Fidelity Total Market Index fund with .07 percent expense ratio. That fund blessed me financially greatly and the .07% is close enough to zero to make me happy.

I hope that their zero funds are a win for them and a win for the investors. I appreciate openness in charges.

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Re: Fidelity: When Zero does not mean free

Post by Northern Flicker » Sun Sep 01, 2019 11:37 pm

nedsaid wrote:
Sun Sep 01, 2019 11:29 pm
The way to tell is to check the Zero Funds vs. similar index funds. From what I have seen the Zero Funds are tracking pretty well. I know Fidelity uses its own proprietary indexes for these funds but they in effect will be very similar to the better known indexes. By comparing performance vs. similar indexes, this will give us a pretty good idea of the expenses. Most folks here believe the Zero Funds are loss leaders.
I understand that many believe they are loss leaders. But I suspect they have not read the SAI. The point of the posting is that it does not at all appear that they are in fact loss leaders.

Comparing to other index funds will show that they are not collecting high amounts, but you would not be able to show they are a loss leader that way. One fund can take more securities lending risk than a second fund and book more securities lending revenue, so there is no way to establish expense level by fund performance.
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Re: Fidelity: When Zero does not mean free

Post by TheEleven » Mon Sep 02, 2019 12:18 am

The SEC has designated this class of financial product as PDNZ* funds.

*Pretty Darn Near to Zero

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Re: Fidelity: When Zero does not mean free

Post by stlutz » Mon Sep 02, 2019 12:24 am

A few notes:

--For Fidelity Total Market Fund (the non-Zero fund), brokerage commissions amounted to an expense of .001% for the fund in 2018. If the Zero fund paid double ( a wild exaggeration), it would be .002%. Obviously one will have to wait until the funds have been in operation for a year before we see the actual amount.

--Pretty much every fund complex (including Vanguard) uses soft-dollar arrangements. The extent to which they can be used is less than, say, 15 years ago.

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Re: Fidelity: When Zero does not mean free

Post by whodidntante » Mon Sep 02, 2019 1:29 am

I just figured I would buy into the ZERO International fund and see if the Vanguard cult could spot shenanigans.

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Northern Flicker
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Re: Fidelity: When Zero does not mean free

Post by Northern Flicker » Mon Sep 02, 2019 1:57 am

stlutz wrote: --Pretty much every fund complex (including Vanguard) uses soft-dollar arrangements. The extent to which they can be used is less than, say, 15 years ago.
Sure, but are you aware of any other funds where investors in fund A are paying for expenses in fund B through soft dollar arrangements?
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Re: Fidelity: When Zero does not mean free

Post by usagi » Mon Sep 02, 2019 3:22 am

whodidntante wrote:
Mon Sep 02, 2019 1:29 am
... Vanguard cult....
Ain't that the truth.

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Re: Fidelity: When Zero does not mean free

Post by Nate79 » Mon Sep 02, 2019 6:10 am

Northern Flicker wrote:
Sun Sep 01, 2019 11:37 pm
nedsaid wrote:
Sun Sep 01, 2019 11:29 pm
The way to tell is to check the Zero Funds vs. similar index funds. From what I have seen the Zero Funds are tracking pretty well. I know Fidelity uses its own proprietary indexes for these funds but they in effect will be very similar to the better known indexes. By comparing performance vs. similar indexes, this will give us a pretty good idea of the expenses. Most folks here believe the Zero Funds are loss leaders.
I understand that many believe they are loss leaders. But I suspect they have not read the SAI. The point of the posting is that it does not at all appear that they are in fact loss leaders.

Comparing to other index funds will show that they are not collecting high amounts, but you would not be able to show they are a loss leader that way. One fund can take more securities lending risk than a second fund and book more securities lending revenue, so there is no way to establish expense level by fund performance.
You didn't really show anything except what the language of the SAI allows. You don't know whether or not they are a loss leader. The proof is in the pudding - what is the performance vs an index. If they are tracking well the index I'm not sure why anyone cares how the fund company is getting paid.

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Re: Fidelity: When Zero does not mean free

Post by BuddyJet » Mon Sep 02, 2019 6:56 am

The Zero funds can still be a loss leader with the soft Monet letting them lose a bit less.

Another piece of evidence to support the loss leader theory is that buyers have to be individuals. Trusts and companies are prevented from buying.

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Re: Fidelity: When Zero does not mean free

Post by coingaroo » Mon Sep 02, 2019 7:28 am

Even Vanguard does this, there's no difference. Wait a year and see what the brokerage expenses actually are. I doubt it will be significant whatsoever.

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Re: Fidelity: When Zero does not mean free

Post by Ferdinand2014 » Mon Sep 02, 2019 8:28 am

Northern Flicker wrote:
Sun Sep 01, 2019 11:15 pm
There was a fair bit of buzz about Fidelity Zero funds, with some believing that they are loss leaders, providing investors with a free lunch. There are ways in which mutual fund companies can charge expenses to funds without having to account for it in the expense ratio. One is by keeping some of the securities lending revenue earned by securities lending activities in a fund. This does not seem to be in play for the Fidelity Zero funds.

Another ploy most mutual fund companies use, including Vanguard, is soft dollar arrangements with brokers. In these arrangements, fund companies pay a higher commission to brokers to execute transactions than would normally be charged just to execute the requested trade. In return for the extra cost, the brokers supply services, data, research reports, sometimes even computer hardware, various other things. That the fund may do this will be described in the so-called Statement of Additional Information. The text therein will point out that the goods and services received are commensurate in value with the extra cost paid in the commissions.

But the goods and services received are used to administer the fund. For mutual funds with non-zero expense ratios, having some of the administration costs covered by these extra paddings in the transaction costs means that these costs are not accounted for in the expense ratio of the fund, so that the fund company can advertise a lower expense ratio and/or book more profit from the expense ratio charged off to the fund.

In the case of a Fidelity Zero fund, where there is no expense ratio, it would mean that some or all of the administrative costs are being charged to the fund through padding of the transaction costs. However, it would be unlikely that all of the administrative cost could be covered this way, much less a profit, unless the fund were paying for services for other Fidelity mutual funds through padding of the transaction cost.

I looked at the Statement of Additional Information for FZROX, the Fidelity Total US Stock MarketIndex fund purported to have zero cost, and low and behold, paying costs associated with other funds by the assets in FZROX through padded broker commissions that receive goods or services used to administer those other funds is contractually allowed in the Statement of Additional Information. Here is some text extracted from there with some relevant text highlighted in red:
The Acquisition of Brokerage and Research Products and Services

Brokers (who are not affiliates of FMRC) that execute transactions for a fund may receive higher compensation from the fund than other brokers might have charged the fund, in recognition of the value of the brokerage or research products and services they provide to Geode.

Research Products and Services. These products and services may include, when permissible under applicable law: economic, industry, company, municipal, sovereign (U.S. and non-U.S.), legal, or political research reports; market color; company meeting facilitation; compilation of securities prices, earnings, dividends and similar data; quotation services, data, information and other services; analytical computer software and services; and investment recommendations. In addition to receiving brokerage and research products and services via written reports and computer-delivered services, such reports may also be provided by telephone and in person meetings with securities analysts, corporate and industry spokespersons, economists, academicians and government representatives and others with relevant professional expertise. Geode may request that a broker provide a specific proprietary or third-party product or service. Some of these products and services supplement Geode's own research activities in providing investment advice to the funds.

Execution Services. In addition, products and services may include, when permissible under applicable law, those that assist in the execution, clearing, and settlement of securities transactions, as well as other incidental functions (including, but not limited to, communication services related to trade execution, order routing and algorithmic trading, post-trade matching, exchange of messages among brokers or dealers, custodians and institutions, and the use of electronic confirmation and affirmation of institutional trades).

Mixed-Use Products and Services. Geode may use commission dollars to obtain certain products or services that are not used exclusively in Geode's investment decision-making process (mixed-use products or services). In those circumstances, Geode will make a good faith judgment to evaluate the various benefits and uses to which they intend to put the mixed-use product or service, and will pay for that portion of the mixed-use product or service that does not qualify as brokerage and research products and services with their own resources (referred to as "hard dollars").

Benefit to Geode. Geode's expenses would likely be increased if it attempted to generate these additional products and services through its own efforts, or if it paid for these products or services itself. Certain of the brokerage and research products and services Geode receives are furnished by brokers on their own initiative, either in connection with a particular transaction or as part of their overall services. Some of these products or services may not have an explicit cost associated with such product or service.

Geode's Decision-Making Process. Before causing a fund to pay a particular level of compensation, Geode will make a good faith determination that the compensation is reasonable in relation to the value of the brokerage and/or research products and services provided to Geode, viewed in terms of the particular transaction for the fund or Geode's overall responsibilities to the fund or other investment companies and investment accounts. While Geode may take into account the brokerage and/or research products and services provided by a broker in determining whether compensation paid is reasonable, neither Geode nor the funds incurs an obligation to any broker, dealer, or third party to pay for any product or service (or portion thereof) by generating a specific amount of compensation or otherwise. Typically, these products and services assist Geode in terms of its overall investment responsibilities to a fund and other investment companies and investment accounts; however, each product or service received may not benefit the fund. Certain funds or investment accounts may use brokerage commissions to acquire brokerage and research products and services that may also benefit other funds or accounts managed by Geode.
So it seems that Fidelity can hide the expense ratio for the zero funds by paying extra transaction costs to brokers to receive goods and services back, not only for the administration of the zero fund but for other funds you may never have even heard of, much less invested in. This lack of transparency makes it extremely difficult to know what the de fact expense ratio of a so-call zero fund might be, but my opinion is that you can rest assured that it is not zero.
Much ado about nothing. What brokers are you referring to if one buys a zero fund directly online for free from Fidelity? I personally do not own zero funds. I own FXAIX (Fido 500 index fund) at an ER of .015. It has tracked the S&P 500 to within 1 basis point over the past 10 years (14.69 vs 14.70). I am extremely pleased. It is also managed by Geode and has the same wording in the SAI.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

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Re: Fidelity: When Zero does not mean free

Post by Jack FFR1846 » Mon Sep 02, 2019 8:44 am

So some of you may remember that a couple days after Zero started, I took my Fidelity equity position and split it in half, putting half in FZROX. Not long after that, Fidelity nixed its balance based ER range of equity funds, lowering the ER in the process, resulting in FskaX. I kept both funds, side by side in my account for a year, watching Zero outperform kaX consistently. At about the year point, I had determined that Zero was returning more and was doing it consistently and I sold my fskaX position and went 100% FZROX for equity.

There seems to be periodic warnings and calls here that Fidelity is somehow sneakily adding fees or taking out profits and that zero isn't zero. Bunk. It's pretty simple for me to look at the numbers and for a year, the side by side numbers favored zero. I also have VTI, SCHB and SPTM, and they all follow fskaX pretty closely. When you get right down to it, FZROX is very close as well.

So contrary to this thread suggests, there's no secret Knights Templar conspiracy to add fees or subtract profits when you buy a zero fund. And, of course, if I were to call Fidelity right now (Labor Day), they'd answer and be available for my questions. Who will answer the phone at Vanguard? Nobody. It's not banker's hours, so they're not there.


*edited for corrected fund ticker
Last edited by Jack FFR1846 on Mon Sep 02, 2019 11:56 am, edited 1 time in total.
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Re: Fidelity: When Zero does not mean free

Post by student » Mon Sep 02, 2019 8:57 am

Jack FFR1846 wrote:
Mon Sep 02, 2019 8:44 am
So some of you may remember that a couple days after Zero started, I took my Fidelity equity position and split it in half, putting half in FZROX. Not long after that, Fidelity nixed its balance based ER range of equity funds, lowering the ER in the process, resulting in FXNAX. I kept both funds, side by side in my account for a year, watching Zero outperform NAX consistently. At about the year point, I had determined that Zero was returning more and was doing it consistently and I sold my FXNAX position and went 100% FZROX for equity.

There seems to be periodic warnings and calls here that Fidelity is somehow sneakily adding fees or taking out profits and that zero isn't zero. Bunk. It's pretty simple for me to look at the numbers and for a year, the side by side numbers favored zero. I also have VTI, SCHB and SPTM, and they all follow FXNAX pretty closely. When you get right down to it, FZROX is very close as well.

So contrary to this thread suggests, there's no secret Knights Templar conspiracy to add fees or subtract profits when you buy a zero fund. And, of course, if I were to call Fidelity right now (Labor Day), they'd answer and be available for my questions. Who will answer the phone at Vanguard? Nobody. It's not banker's hours, so they're not there.
Thanks for the update.

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Re: Fidelity: When Zero does not mean free

Post by nedsaid » Mon Sep 02, 2019 9:43 am

What people have forgotten here is that Vanguard had index funds that actually beat its benchmark by just a hair, in effect these funds have been free to the investor too. Perhaps Vanguard was making enough from securities lending to offset the expense ratio. Perhaps skilled trading and the use of options and futures had something to do with this as well. When index funds track or almost track their index, that is plenty well good enough for me. The fees on many of these index funds and ETFs are so low, they may as well be free.
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Re: Fidelity: When Zero does not mean free

Post by afan » Mon Sep 02, 2019 9:43 am

I am sure Fidelity modeled the zero funds before launching them and had an idea of whether they would be profitable. I am sure Fidelity has followed their performance and knows whether it is making money on them. I am sure Fidelity considered the value of holding on to assets that otherwise would have gone to low cost funds with competitors.

So, no need for speculation, the true value of the funds to Fidelity is known. They just will not tell the public.

But should one care? If over time the funds do about as well, after tax, as other funds based on similar indexes, then I see no reason to care. I can't buy shares in Fidelity itself, so its profitability is not important to me.

Vanguard is more transparent. If managing VTI costs a few basis points and that cost is covered by lending revenue then the effective cost is also zero or negative. Fidelity's costs should be similar to Vanguard. So net cost should be zero to slightly negative.

Differences in performance are likely to be dominated by slight differences in the composition of the indexes.

I don't care about calling Vanguard on the weekends. I can go for years without calling at all. So I would not pay 0.0000001% of assets for that service. I like Vanguard because it is upfront about its costs and structure. But Fidelity is just fine for investment performance. If you are in a tax advantaged account then you can dump a fund or company if you decide they are extracting hidden fees. Until that happens, why worry about it?
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Re: Fidelity: When Zero does not mean free

Post by AlwaysaQ » Mon Sep 02, 2019 9:52 am

Jack

You may want to edit your post and change FXNAX to FSKAX. FXNAX is a bond fund.

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Re: Fidelity: When Zero does not mean free

Post by willthrill81 » Mon Sep 02, 2019 9:53 am

If we examine the first 12 months (Sep., 2018 - Aug., 2019) of FZROX's performance to VTSAX's (Vanguard's Admiral TSM fund), VTSAX slightly outperformed FZROX (CAGR = 1.32% vs. 1.30%). The difference could be due to FZROX's higher costs, lower tracking error for Vanguard, or just a fluke.
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Re: Fidelity: When Zero does not mean free

Post by Ferdinand2014 » Mon Sep 02, 2019 10:07 am

Jack FFR1846 wrote:
Mon Sep 02, 2019 8:44 am
So some of you may remember that a couple days after Zero started, I took my Fidelity equity position and split it in half, putting half in FZROX. Not long after that, Fidelity nixed its balance based ER range of equity funds, lowering the ER in the process, resulting in FXNAX. I kept both funds, side by side in my account for a year, watching Zero outperform NAX consistently. At about the year point, I had determined that Zero was returning more and was doing it consistently and I sold my FXNAX position and went 100% FZROX for equity.

There seems to be periodic warnings and calls here that Fidelity is somehow sneakily adding fees or taking out profits and that zero isn't zero. Bunk. It's pretty simple for me to look at the numbers and for a year, the side by side numbers favored zero. I also have VTI, SCHB and SPTM, and they all follow FXNAX pretty closely. When you get right down to it, FZROX is very close as well.

So contrary to this thread suggests, there's no secret Knights Templar conspiracy to add fees or subtract profits when you buy a zero fund. And, of course, if I were to call Fidelity right now (Labor Day), they'd answer and be available for my questions. Who will answer the phone at Vanguard? Nobody. It's not banker's hours, so they're not there.
FXNAX is the total bond fund. Do you mean FSKAX?
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Re: Fidelity: When Zero does not mean free

Post by Ferdinand2014 » Mon Sep 02, 2019 10:09 am

willthrill81 wrote:
Mon Sep 02, 2019 9:53 am
If we examine the first 12 months (Sep., 2018 - Aug., 2019) of FZROX's performance to VTSAX's (Vanguard's Admiral TSM fund), VTSAX slightly outperformed FZROX (CAGR = 1.32% vs. 1.30%). The difference could be due to FZROX's higher costs, lower tracking error for Vanguard, or just a fluke.
Or the different index. 2500 vs 3606 stocks for a minimal large cap tilt with FZROX.
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Re: Fidelity: When Zero does not mean free

Post by nisiprius » Mon Sep 02, 2019 10:18 am

Image

I file all of the discussions of expense ratios < 0.05% under the heading "a silly millimeter longer." Always remember that what matters with expense ratios is absolute differences in ER, not ratios between ERs. 0.04% should not be thought of as a not "a fifth of" 0.20%, it should be thought of as 0.16% "lower."

Taking everything at face value, Fidelity Zero funds are not infinitely better than 0.04%, they are 0.04% better.

When most mutual fund investors were paying 1-2%, and Vanguard's expense ratios were 0.25%-0.50%, the cost difference was compelling.

Once ER's got down into 0.05% territory and below, you are faced with a Zen question: how much should I care if I suspect a company is ripping me off by an amount that I can't notice and can't prove?

My perception is that Fidelity's index fund efforts have always been sincere, "if you can't beat 'em, join 'em." The shenanigans, if there are shenanigans, isn't in the funds themselves, but in the hope that they can switch you to other Fidelity products. I remember back when there was a pair of corresponding index funds, and Vanguard's had an 0.10% ER, while Fidelity's had an "0.20% gross, 0.10% net," contractually capped ER. People talked in the forum talked about the possibility of Fidelity jacking up the ER later down the road... but it never happened.

As with nonsensical claims that Vanguard is somehow "hiding" as much as 1.4% in expenses, I feel that one of the virtues of index funds is that you can just look and see if there is tracking error. If there isn't, then either there aren't hidden expenses, or else there are also hidden sources of revenue that make up for them. (Years ago William J. Bernstein noted that if you calculated returns before expenses, Vanguard index funds were beating their indexes by a few basis points; at the time he hypothesized that Vanguard had "transactional skill," but I think nowadays it's assumed that the source is securities lending?)

Fidelity of course obfuscates things with the Zero funds by using their own indexes and sampling, but hey.

Blue: Fidelity ZERO Large Cap Index Fund, FNILX.
Orange, the S&P 500 itself.
Green, the Vanguard 500 Index fund, Admiral shares (0.04% ER).
Yellow, the Vanguard Large-Cap Index Fund, which like FNILX is tracking an index constructed strictly by market cap--Fidelity's I think is the 500 largest, Vanguard's is about 600? (Checking: 606).

----> I have cheated (but just a bit) <----

by excluding the first day of FNILX's operation, starting at 9/14/2018 instead of 9/13/2018. It's not unusual to see glitches in the first few days of a fund's existence. I think it's reasonable to say "most investors don't, and shouldn't buy a fund within the first few days after inception."

Source

Image

FNILX: $10,283.20 ("zero" expenses, 500 largest stocks)
S&P 500 TR: $10,274.32 (truly zero expenses, "leading companies in leading industries")
VFIAX: $10,271.80 (0.04% ER, tracks the S&P 500)
VLCAX: $10,271.10 (0.05% ER, tracks the CRSP large-cap index, 600-or-so largest stocks)

Now, it's been roughly a year, and 0.05% of $10,000 = $5, so expense ratio differences could account for a five-dollar scatter. In this case, I think the impressive thing is how closely all three mutual funds matched the S&P 500. The fact that the Vanguard funds were two or three dollars short, and that the Fidelity ZERO fund is almost nine dollars higher really isn't very interesting, but it does suggest that if Fidelity is hiding costs, it's all "lost in the noise."

One could always worry about the integrity of the company and the possibility of future shenanigans, and past integrity is no sure guaranty of future integrity, but that's getting awfully subjective.

(Disclosure, I had a Fidelity account in parallel with my Vanguard account for almost a decade, and I sorta like Fidelity--but decided I like Vanguard more and eventually consolidated everything to Vanguard).
Last edited by nisiprius on Mon Sep 02, 2019 10:24 am, edited 1 time in total.
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Re: Fidelity: When Zero does not mean free

Post by nedsaid » Mon Sep 02, 2019 10:24 am

Wow, Nisiprius. I am so ancient that I remember when cigarettes were advertised on television. Now you have made me angry, that silly jingle will be running in my head all day. Yes, I saw that commercial and yes, I still remember that jingle which is based on a famous song. Maybe someone can come up with the title of that song. Sort of like how the "Frito Bandito" song stole the tune from a Mexican folksong. I still remember advertising campaigns from 50 years ago.
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Re: Fidelity: When Zero does not mean free

Post by nedsaid » Mon Sep 02, 2019 10:30 am

whodidntante wrote:
Mon Sep 02, 2019 1:29 am
I just figured I would buy into the ZERO International fund and see if the Vanguard cult could spot shenanigans.
This is sort of getting into Area 51. Perhaps Fidelity is hiding the UFO that crashed and the alien bodies. Art Bell's ghost has got to be stirring. While secret Federal agencies scour Fidelity headquarters in Boston, they will also be looking for all those hidden fees.

Sort of remember the thread about how mutual fund transactions are sometimes off a penny because fund shares are calculated out to three decimal points. Rounding error. Folks were wondering what Vanguard was doing with those extra pennies. Somehow I had the mental image of Vanguard executives in a secret room full of pennies tossing coins into the air like Scrooge McDuck. The reality is that the rounding error is sometimes in favor of the shareholder and fund companies will round that third decimal point for fund shares up. There are no pennies that Vanguard or any other fund company keeps as it all evens out. So no, Vanguard doesn't have a secret room or vault where they keep all those pennies.
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Re: Fidelity: When Zero does not mean free

Post by JoMoney » Mon Sep 02, 2019 10:57 am

There are other ways a fund can sneak in hidden costs, like through cross-trading between funds when one fund is buying and another selling, or the parent company selling shares from their own stock. In some instances this is allowed to occur outside of an exchange, and the "price" may be determined in other ways. It's sometimes touted as a benefit because this may save transaction expenses and provide another source of liquidity, but there is also a risk of the price used being unfair. The company may even be allowed to charge a fee for this exchange even though it didn't go through an external broker/exchange.

Among the nice thing about true "index" funds relative to more esoteric funds, is it's easy enough to check and see how well the fund is tracking the index, and whether it's within a reasonable margin of "expense".

FWIW, In addition to the "Zero" Large Cap fund, Fidelity also offers a 0.015%ER fund that explicitly tracks the S&P 500 index FXAIX
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Re: Fidelity: When Zero does not mean free

Post by nedsaid » Mon Sep 02, 2019 11:01 am

JoMoney wrote:
Mon Sep 02, 2019 10:57 am
There are other ways a fund can sneak in hidden costs, like through cross-trading between funds when one fund is buying and another selling, or the parent company selling shares from their own stock. In some instances this is allowed to occur outside of an exchange, and the "price" may be determined in ways other ways. It's sometimes touted as a benefit because this may save transaction expenses and provide another source of liquidity, but there is also a risk of the price used being unfair. The company may even be allowed to charge a fee for this exchange even though it didn't go through an external broker.

Among the nice thing about true "index" funds relative to more esoteric funds, is it's easy enough to check and see how well the fund is tracking the index, and whether it's within a reasonable margin of "expense".

FWIW, In addition to the "Zero" Large Cap fund, Fidelity also offers a 0.015%ER fund that explicitly tracks the S&P 500 index FXAIX
Not an expert on SEC regulations but it would seem there would be restrictions on self-dealing. I wondered about the very thing you brought up and another Boglehead commented on it. Foggy memory doesn't recall the post word for word but there seem to be restrictions that limit internal trading within a firm. Not saying it isn't done but surely there are regulations regarding this.
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Re: Fidelity: When Zero does not mean free

Post by JoMoney » Mon Sep 02, 2019 11:06 am

nedsaid wrote:
Mon Sep 02, 2019 11:01 am
JoMoney wrote:
Mon Sep 02, 2019 10:57 am
There are other ways a fund can sneak in hidden costs, like through cross-trading between funds when one fund is buying and another selling, or the parent company selling shares from their own stock. In some instances this is allowed to occur outside of an exchange, and the "price" may be determined in ways other ways. It's sometimes touted as a benefit because this may save transaction expenses and provide another source of liquidity, but there is also a risk of the price used being unfair. The company may even be allowed to charge a fee for this exchange even though it didn't go through an external broker.

Among the nice thing about true "index" funds relative to more esoteric funds, is it's easy enough to check and see how well the fund is tracking the index, and whether it's within a reasonable margin of "expense".

FWIW, In addition to the "Zero" Large Cap fund, Fidelity also offers a 0.015%ER fund that explicitly tracks the S&P 500 index FXAIX
Not an expert on SEC regulations but it would seem there would be restrictions on self-dealing. I wondered about the very thing you brought up and another Boglehead commented on it. Foggy memory doesn't recall the post word for word but there seem to be restrictions that limit internal trading within a firm. Not saying it isn't done but surely there are regulations regarding this.
It is heavily regulated... and as I mentioned it is touted as having advantages, so not necessarily nefarious
There is a academic research paper that suggests some evidence that in some situations it's detrimental
Cross Trading by Investment Advisers: Implications for Mutual Fund Performance
...we find that different measures of cross trading (total, principal, and agency cross trading) are significantly negatively related to the performance of adviser fund portfolios...
...The insensitivity of flows to different TCT measures may in part reflect a lack of investor attention to, or appreciation for, the adverse impact of such conflicts on client fund performance...
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Re: Fidelity: When Zero does not mean free

Post by Ferdinand2014 » Mon Sep 02, 2019 11:09 am

JoMoney wrote:
Mon Sep 02, 2019 10:57 am
There are other ways a fund can sneak in hidden costs, like through cross-trading between funds when one fund is buying and another selling, or the parent company selling shares from their own stock. In some instances this is allowed to occur outside of an exchange, and the "price" may be determined in other ways. It's sometimes touted as a benefit because this may save transaction expenses and provide another source of liquidity, but there is also a risk of the price used being unfair. The company may even be allowed to charge a fee for this exchange even though it didn't go through an external broker/exchange.

Among the nice thing about true "index" funds relative to more esoteric funds, is it's easy enough to check and see how well the fund is tracking the index, and whether it's within a reasonable margin of "expense".

FWIW, In addition to the "Zero" Large Cap fund, Fidelity also offers a 0.015%ER fund that explicitly tracks the S&P 500 index FXAIX
It’s why I exclusively use FXAIX. It’s also one of many reasons I use the S&P 500 as my equity holdings. I know with certainty it tracks its index exactly. Anything else is irrelevant.
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Re: Fidelity: When Zero does not mean free

Post by Gleevec » Mon Sep 02, 2019 11:10 am

I think everyone is missing the point on Fidelity Zero funds (or even their other index mutual offerings now). The difference between 0.015% vs 0.04% vs zero is trivial and the debates around are not useful

The fact that there is $0 minimum to invest in mutual funds at Fidelity is the real innovation here. Most of the country isn’t on this messageboard or have $3k lying around to meet Vanguard minimums or have time to understand what a limit vs stop loss order would be for a commission free ETF.

They do know that they can put $20 a month into a total stock market fund with no extra costs or without needing to build up to $3k, and I think that’s very powerful for a large part of the population we don’t encounter on this message board
Last edited by Gleevec on Mon Sep 02, 2019 11:11 am, edited 1 time in total.

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Re: Fidelity: When Zero does not mean free

Post by Ferdinand2014 » Mon Sep 02, 2019 11:11 am

Gleevec wrote:
Mon Sep 02, 2019 11:10 am
I think everyone is missing the point on Fidelity Zero funds (or even their other index mutual offerings now). The difference between 0.015% vs 0.04% vs zero is trivial and the debates around are not useful

The fact that there is $0 minimum to invest in mutual funds at Fidelity is the real innovation here. Most of the country isn’t on this messageboard or have $3k lying around to meet Vanguard minimums or have time to understand what a limit vs stop loss order would be for a commission free ETF.

They do know that they can put $20 a month into a total stock market fund with no extra costs, and I think that’s very powerful for a large part of the population we don’t encounter on this message board
Bingo. Actually every single Fidelity index fund is a zero minimum now. There are no share classes anymore.
Last edited by Ferdinand2014 on Mon Sep 02, 2019 11:14 am, edited 1 time in total.
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Re: Fidelity: When Zero does not mean free

Post by nedsaid » Mon Sep 02, 2019 11:11 am

We do seem to be like Elmer Fudd hunting for that wascawy wabbit. Except the rascals are the mutual fund companies hiding fees. I am sure there are a lot of subtle tricks that fund companies use to make a buck, but hey, this is America. Turning a buck is almost written in our DNA.
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Re: Fidelity: When Zero does not mean free

Post by willthrill81 » Mon Sep 02, 2019 11:19 am

Ferdinand2014 wrote:
Mon Sep 02, 2019 10:09 am
willthrill81 wrote:
Mon Sep 02, 2019 9:53 am
If we examine the first 12 months (Sep., 2018 - Aug., 2019) of FZROX's performance to VTSAX's (Vanguard's Admiral TSM fund), VTSAX slightly outperformed FZROX (CAGR = 1.32% vs. 1.30%). The difference could be due to FZROX's higher costs, lower tracking error for Vanguard, or just a fluke.
Or the different index. 2500 vs 3606 stocks for a minimal large cap tilt with FZROX.
Correct. It's probably impossible to say with confidence at this point why the tiny difference has existed.
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Re: Fidelity: When Zero does not mean free

Post by Vanguard Fan 1367 » Mon Sep 02, 2019 11:21 am

nedsaid wrote:
Mon Sep 02, 2019 11:11 am
We do seem to be like Elmer Fudd hunting for that wascawy wabbit. Except the rascals are the mutual fund companies hiding fees. I am sure there are a lot of subtle tricks that fund companies use to make a buck, but hey, this is America. Turning a buck is almost written in our DNA.

I appreciate Vanguard pioneering the trip away from the front end loads, assets under management fees, 12B1 fees, and expense rations around 1 percent. You are right, we are looking at virtually nothing with these low fee index funds, I am glad that they don't take away 2 percent or more of my return each year.

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Re: Fidelity: When Zero does not mean free

Post by H-Town » Mon Sep 02, 2019 11:25 am

Northern Flicker wrote:
Sun Sep 01, 2019 11:15 pm
So it seems that Fidelity can hide the expense ratio for the zero funds by paying extra transaction costs to brokers to receive goods and services back, not only for the administration of the zero fund but for other funds you may never have even heard of, much less invested in. This lack of transparency makes it extremely difficult to know what the de fact expense ratio of a so-call zero fund might be, but my opinion is that you can rest assured that it is not zero.
Isn't Fidelity Brokerage Services is the broker of the zero fund? With the economy of scale, Fidelity Brokerage service can give zero funds a "discount" to utilize those resources. This is why you can't buy Fidelity zero funds anywhere else aside from Fidelity.

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Re: Fidelity: When Zero does not mean free

Post by whodidntante » Mon Sep 02, 2019 11:53 am

Gleevec wrote:
Mon Sep 02, 2019 11:10 am
I think everyone is missing the point on Fidelity Zero funds (or even their other index mutual offerings now). The difference between 0.015% vs 0.04% vs zero is trivial and the debates around are not useful

The fact that there is $0 minimum to invest in mutual funds at Fidelity is the real innovation here. Most of the country isn’t on this messageboard or have $3k lying around to meet Vanguard minimums or have time to understand what a limit vs stop loss order would be for a commission free ETF.

They do know that they can put $20 a month into a total stock market fund with no extra costs or without needing to build up to $3k, and I think that’s very powerful for a large part of the population we don’t encounter on this message board
Yep and Schwab has done the same. Fidelity has also eliminated account fees and has some significant product offerings that I value such as:
1) no-cost HSAs with first-dollar investing
2) free wire transfers
3) a 2% cashback credit card and periodic spending bonuses on top of that
4) a free CMA account with ATM rebates that I use as my primary checking account
5) phone support hours that I don't have to think about
6) low-cost and no-cost index funds, both mutual funds and ETFs.
7) can keep cash in any Fidelity MMF and it will be liquidated automatically to meet debits

If you go there and buy a million-dollar position in Contrafund so they can make lots of money off you, that is your poor judgment. The only actively managed fund I have there is SPRXX where I keep 2-3 weeks cash in my CMA account. The ER is higher than Vanguard Prime and this is the only "Fidelity tax" I pay to get the advantages listed above.

Money is sticky, so Fidelity does not pose an existential threat to Vanguard. But I think Fidelity offers significant value to an investor and can be better than Vanguard for some and is better for me. If that changes, I'll go to Vanguard. It's not personal.

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Re: Fidelity: When Zero does not mean free

Post by stlutz » Mon Sep 02, 2019 11:57 am

Northern Flicker wrote:
Mon Sep 02, 2019 1:57 am
stlutz wrote: --Pretty much every fund complex (including Vanguard) uses soft-dollar arrangements. The extent to which they can be used is less than, say, 15 years ago.
Sure, but are you aware of any other funds where investors in fund A are paying for expenses in fund B through soft dollar arrangements?
Of course. Here is a typical scenario: The manager gets a data feed that is used for managing a number of funds. For example, all of the Fidelity Zero funds are self indexed. That means Geode (the manager) needs data to construct those indexes. They could pay for that feed in cash, or they can agree to conduct a certain number of trades through a brokerage that the data feed firm partners with.

So, Geode receives one product that is used for managing a number of funds and then the trades they agree to route to that broker are spread among a number of funds as well.

And for the record, I'm in agreement with those who argue that brokerage commissions should be required to be included in a fund's expense ratio. But we should know a) that that cost is very small (rounds down to 0.00% for an index fund) and that the marginal cost of the soft dollar arrangement is even smaller.

The impact of what you're talking about in the worst case might delay one's retirement date by about 45 seconds if they use Fidelity Zero for their entire investing career.

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Re: Fidelity: When Zero does not mean free

Post by Jack FFR1846 » Mon Sep 02, 2019 11:57 am

AlwaysaQ wrote:
Mon Sep 02, 2019 9:52 am
Jack

You may want to edit your post and change FXNAX to FSKAX. FXNAX is a bond fund.
edited. Thanks. I'm so used to opening my fidelity account to get the ticker, I forgot that I don't have that fund anymore.
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Re: Fidelity: When Zero does not mean free

Post by Jack FFR1846 » Mon Sep 02, 2019 11:59 am

Ferdinand2014 wrote:
Mon Sep 02, 2019 10:07 am

FXNAX is the total bond fund. Do you mean FSKAX?
Yup

oops
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Re: Fidelity: When Zero does not mean free

Post by nedsaid » Mon Sep 02, 2019 12:16 pm

Vanguard Fan 1367 wrote:
Mon Sep 02, 2019 11:21 am
nedsaid wrote:
Mon Sep 02, 2019 11:11 am
We do seem to be like Elmer Fudd hunting for that wascawy wabbit. Except the rascals are the mutual fund companies hiding fees. I am sure there are a lot of subtle tricks that fund companies use to make a buck, but hey, this is America. Turning a buck is almost written in our DNA.

I appreciate Vanguard pioneering the trip away from the front end loads, assets under management fees, 12B1 fees, and expense rations around 1 percent. You are right, we are looking at virtually nothing with these low fee index funds, I am glad that they don't take away 2 percent or more of my return each year.
In the past, quite a bit of our investment returns were whittled away by friction: commissions, bid/ask spread, account fees, taxes, etc. The frictional costs have been coming down dramatically over the years, for most investors even the tax drag has been reduced. Lots of folks in the 0% or 15% Capital Gains tax bracket. Conditions have never been so favorable for the small investor.
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Re: Fidelity: When Zero does not mean free

Post by Iridium » Mon Sep 02, 2019 12:23 pm

willthrill81 wrote:
Mon Sep 02, 2019 9:53 am
If we examine the first 12 months (Sep., 2018 - Aug., 2019) of FZROX's performance to VTSAX's (Vanguard's Admiral TSM fund), VTSAX slightly outperformed FZROX (CAGR = 1.32% vs. 1.30%). The difference could be due to FZROX's higher costs, lower tracking error for Vanguard, or just a fluke.
The difference is composition of the indexes they follow. FZROX actually beat its index by 2 basis points. VTSAX has been consistently underperforming its index by 1 or 2 basis points, though August's index value is not available from Vanguard yet. The difference in how the funds perform against their index almost exactly matches the difference in expense ratio (+0.02 vs -0.02 and 0 vs 0.04, respectively).

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Re: Fidelity: When Zero does not mean free

Post by Northern Flicker » Mon Sep 02, 2019 12:44 pm

usagi wrote:
Mon Sep 02, 2019 3:22 am
whodidntante wrote:
Mon Sep 02, 2019 1:29 am
... Vanguard cult....
Ain't that the truth.
Hardly. I own funds from providers other than Vanguard, and even have a Fidelity account.I am maybe a truth-in-advertising cult member. I’m not saying that the Fidelity zero products are more expensive than other index funds, or bad products, but I do believe that the zero ER is a marketing misrepresentation. Not sure whether the Vanguard cult or Fidelity cheerleaders is a larger group though.
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Re: Fidelity: When Zero does not mean free

Post by nedsaid » Mon Sep 02, 2019 1:11 pm

Northern Flicker wrote:
Mon Sep 02, 2019 12:44 pm
usagi wrote:
Mon Sep 02, 2019 3:22 am
whodidntante wrote:
Mon Sep 02, 2019 1:29 am
... Vanguard cult....
Ain't that the truth.
Hardly. I own funds from providers other than Vanguard, and even have a Fidelity account.I am maybe a truth-in-advertising cult member. I’m not saying that the Fidelity zero products are more expensive than other index funds, or bad products, but I do believe that the zero ER is a marketing misrepresentation. Not sure whether the Vanguard cult or Fidelity cheerleaders is a larger group though.
I own Vanguard ETFs and I have an account at Fidelity. I am probably a Fidelity cheerleader as I have been very pleased with my experiences there. My view of the Fidelity ZERO Funds was that they were a loss leader and a gimmick and I chose to invest in Fidelity's conventional index funds, which are still amazingly cheap. Pretty much, good deals tend not to last and I was skeptical of these products. I might be giving those ZERO funds another look. One thing for certain, we shouldn't be shocked that Fidelity is not a charity, they are in it to make money. They are hardly being run by the Little Sisters of the Poor.

I will say that the more I learn about the ZERO funds, the more that I am impressed. For a tax deferred account, they are a perfectly fine investment. I probably would not recommend them for a taxable account as these funds won't transfer to another custodian and I wonder if at some point the ZERO funds would be discontinued. My guess is that they are here to stay. This concept is looking less and less gimmicky to me as Vanguard has had index funds that slightly beat their index for years. If you exactly track the index or slightly beat the index with your index fund, you have in essence a zero expense ratio.
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Re: Fidelity: When Zero does not mean free

Post by usagi » Mon Sep 02, 2019 1:34 pm

Northern Flicker wrote:
Mon Sep 02, 2019 12:44 pm
usagi wrote:
Mon Sep 02, 2019 3:22 am
whodidntante wrote:
Mon Sep 02, 2019 1:29 am
... Vanguard cult....
Ain't that the truth.
Hardly. I own funds from providers other than Vanguard, and even have a Fidelity account.I am maybe a truth-in-advertising cult member. I’m not saying that the Fidelity zero products are more expensive than other index funds, or bad products, but I do believe that the zero ER is a marketing misrepresentation. Not sure whether the Vanguard cult or Fidelity cheerleaders is a larger group though.
Note the way I had edited the post, you were removed as a subject. I just acknowledged, in agreement, what I perceived as the general tenor of the forum as a whole, in not just this thread but in many posts of various posters.

It is interesting (to me). Consider an inert company somehow has acquired a persona due to a charismatic person who greatly influenced that company decades ago, but who also ended up at loggerheads with them over time. Yet that company evokes a visceral response in many that is normally reserved for a sentient being. Human psychology is interesting to me and I'll leave it at that.

Cheers.

P.S. I have a bias. I am pro John Bogle (I really like the moniker Saint John Bogle for him) but in general I am anti-Vanguard based on decades of experience with them. I don't really have a preference between Schwab, Fidelity, T Rowe Price, TIAA, Dodge, and Cox, FirstTrade among others.
Last edited by usagi on Mon Sep 02, 2019 1:44 pm, edited 2 times in total.

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Re: Fidelity: When Zero does not mean free

Post by SevenBridgesRoad » Mon Sep 02, 2019 1:40 pm

nedsaid wrote:
Mon Sep 02, 2019 10:24 am
...Now you have made me angry, that silly jingle will be running in my head all day. Yes, I saw that commercial and yes, I still remember that jingle which is based on a famous song. Maybe someone can come up with the title of that song...
https://open.spotify.com/track/507PYw4O ... 6jnAm?nd=1

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Re: Fidelity: When Zero does not mean free

Post by nedsaid » Mon Sep 02, 2019 1:42 pm

SevenBridgesRoad wrote:
Mon Sep 02, 2019 1:40 pm
nedsaid wrote:
Mon Sep 02, 2019 10:24 am
...Now you have made me angry, that silly jingle will be running in my head all day. Yes, I saw that commercial and yes, I still remember that jingle which is based on a famous song. Maybe someone can come up with the title of that song...
https://open.spotify.com/track/507PYw4O ... 6jnAm?nd=1

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Thank you. I knew someone would come up with it.
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Re: Fidelity: When Zero does not mean free

Post by nedsaid » Mon Sep 02, 2019 2:00 pm

usagi wrote:
Mon Sep 02, 2019 1:34 pm
Northern Flicker wrote:
Mon Sep 02, 2019 12:44 pm
usagi wrote:
Mon Sep 02, 2019 3:22 am
whodidntante wrote:
Mon Sep 02, 2019 1:29 am
... Vanguard cult....
Ain't that the truth.
Hardly. I own funds from providers other than Vanguard, and even have a Fidelity account.I am maybe a truth-in-advertising cult member. I’m not saying that the Fidelity zero products are more expensive than other index funds, or bad products, but I do believe that the zero ER is a marketing misrepresentation. Not sure whether the Vanguard cult or Fidelity cheerleaders is a larger group though.
Note the way I had edited the post, you were removed as a subject. I just acknowledged, in agreement, what I perceived as the general tenor of the forum as a whole, in not just this thread but in many posts of various posters.

It is interesting (to me). Consider an inert company somehow has acquired a persona due to a charismatic person who greatly influenced that company decades ago, but who also ended up at loggerheads with them over time. Yet that company evokes a visceral response in many that is normally reserved for a sentient being. Human psychology is interesting to me and I'll leave it at that.

Cheers.

P.S. I have a bias. I am pro John Bogle (I really like the moniker Saint John Bogle for him) but in general I am anti-Vanguard based on decades of experience with them. I don't really have a preference between Schwab, Fidelity, T Rowe Price, TIAA, Dodge, and Cox, FirstTrade among others.
Hopefully we can keep the rivalries on this forum fun and in perspective. I am reminded of the "Tastes Great" and "Less Filling" beer commercials and I often refer to the Indexers vs. Factor Tilters as "Yankee Fans" vs. "Red Sox Fans." We even have groups that are fans of certain companies, particularly Vanguard and Fidelity, but I see folks discuss Schwab and other discount brokers here. There is even a bit of Ferri vs. Swedroe here. One poster referred to the Swedroe fans as "Sweathogs", bringing me back to memories of the Welcome Back Kotter TV show. Sometimes I feel like Arnold Horshack, sticking my hand up to get the teacher's attention.

The rivalries add fun and needed debate to the forum. Something about human nature that we tend to congregate in our own tribes. So hopefully there won't be hard feelings here as the competition for ideas is needed here.
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Re: Fidelity: When Zero does not mean free

Post by fwellimort » Mon Sep 02, 2019 2:03 pm

Sometimes, I feel like this forum has this mindset of "if it ain't Vanguard, it's a sham".

While I can't remark much about Fidelity Zero funds, from what I have noticed, a lot of people who make an account with Fidelity for the Zero funds (including I to a certain degree) end up purchasing single stocks, other fidelity funds, and utilize fidelity's cash management/credit card.

By just encouraging new users to join the platform, even if the new user purchases and sells stocks say twice a year, that's already almost 4.95*4 = $19.80. That kind of money if a fund is 0.04% fee would take almost $50k.
And then there's the incentive of new users purchasing other funds outside the zero funds like a Fidelity Technology (non-index) fund. Or the Contrafund, etc.
Then there's the checkings/savings account with Cash Management. Many users I feel would end up staying with the default cash rate (virtually 0%) as they sign up for the 2% credit card. And even if the users do end up switching to say SPRXX, there are still fees on SPRXX on which Fidelity would profit off of.

I honestly see the Zero funds like the rotisserie chickens in Costco. A great product that makes users join the platform.
It's basically what Amazon does. Allure people into Prime. Then as people use the other services, there would be more profit than before.
I mean the difference between say 0.015% and 0% is so negligible that the benefits of alluring more users with "Zero funds " and "2% cashback credit card" would end up profiting Fidelity more. Just imagine how much money Fidelity could have access to in its checkings/savings account with all the bank money out there.

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willthrill81
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Re: Fidelity: When Zero does not mean free

Post by willthrill81 » Mon Sep 02, 2019 2:37 pm

fwellimort wrote:
Mon Sep 02, 2019 2:03 pm
Sometimes, I feel like this forum has this mindset of "if it ain't Vanguard, it's a sham".
A number of people here certainly do have that mentality. Part of it is because many here hold Bogle in such high regard that they feel a degree of loyalty to Vanguard as a result. And historically, Vanguard has been the one leading the charge for lower fees and expenses all along.

That being said, even if that weren't the case, we should always be cautious when someone is offering us something for free. Seldom do such things come without strings attached. I'm not saying that this is the case with the Fidelity zero funds, but a certain degree of skepticism is probably warranted.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

usagi
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Re: Fidelity: When Zero does not mean free

Post by usagi » Mon Sep 02, 2019 5:34 pm

nedsaid wrote:
Mon Sep 02, 2019 2:00 pm


Hopefully we can keep the rivalries on this forum fun and in perspective. I am reminded of the "Tastes Great" and "Less Filling" beer commercials and I often refer to the Indexers vs. Factor Tilters as "Yankee Fans" vs. "Red Sox Fans."
My current favorite rivalry is the Chicken Triangle formed by the venerable Chik-Fil-A, Popeyes, Wendy's good natured fight for spicy chicken sandwich supremacy.

illumination
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Re: Fidelity: When Zero does not mean free

Post by illumination » Mon Sep 02, 2019 6:09 pm

I could easily see this product simply being a loss leader, without any "tricks" to the consumer.

Look at this way, Vanguard charges .03% expense ratio for their total market ETF: VTI. So for every $1,000,000 in assets, there's $300 in fees.

Is it really so outlandish that Fidelity would "eat" the $300 it costs to manage a million dollars to get that client and hopefully sell them other services over their lifetime? And someone with $100k, it would be $30 in fees. It's like when banks would give you a toaster to open a savings account. It's really not an outlandish incentive.

It's WAY cheaper than television advertising or other marketing.

Just as an example, I have a friend that was telling me what his company spends on Facebook advertising to land a single client, and what Fidelity is doing sounds downright cheap to get new customers.

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