Current thoughts on Fidelity Zero funds - especially International Index

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kirk1299
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Current thoughts on Fidelity Zero funds - especially International Index

Post by kirk1299 »

A couple of years back, it seemed like the launch of Fidelity Zeros were very disruptive.

The zero fee international index - which includes EM exposure - seemed particularly good value.

I find it interesting that AUM for these funds seems relatively low, and it doesn't seem like they come up much on this forum either.

Any current thoughts on these funds? If you aren't using them in your index strategy, why not? Is there a fatal flaw with either the index itself or the execution of it that somehow makes it a less good deal than it appears on the surface (the requirement to have a Fidelity brokerage account is not a particularly harsh one).
Soon2BXProgrammer
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by Soon2BXProgrammer »

i have no objections using it in a qualified account so that you can change your mind later without a huge tax burden.

They are a loss leader product from Fidelity, which could change their minds at a later date. I want to be able to change my mind at a later date.

Fidelity keeps more of the securities lending revenue then Vanguard as an example. (this matters for all accounts, but maybe is a wash with not having a fund fee vs keeping securities lending revenue).

Also, the ZERO funds as they are mutual funds, and not ETFs and not from vanguard, do not benefit from the etf creation/redemption process to remove gains from the fund. (this matters for a taxable account, not from a qualified account)

when something is free, you are the product.
Last edited by Soon2BXProgrammer on Fri Oct 16, 2020 9:45 am, edited 2 times in total.
BogleMelon
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by BogleMelon »

kirk1299 wrote: Fri Oct 16, 2020 9:34 am
and it doesn't seem like they come up much on this forum either.
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tibbitts
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by tibbitts »

kirk1299 wrote: Fri Oct 16, 2020 9:34 am A couple of years back, it seemed like the launch of Fidelity Zeros were very disruptive.

The zero fee international index - which includes EM exposure - seemed particularly good value.

I find it interesting that AUM for these funds seems relatively low, and it doesn't seem like they come up much on this forum either.

Any current thoughts on these funds? If you aren't using them in your index strategy, why not? Is there a fatal flaw with either the index itself or the execution of it that somehow makes it a less good deal than it appears on the surface (the requirement to have a Fidelity brokerage account is not a particularly harsh one).
I didn't think the launch was all that disruptive.

Have you researched the pros and cons of the various index funds in both deferred and taxable accounts? Maybe things will change over time (Vanguard patents expiring, etc.) but even in a horrible return environment, tiny expense ratio differences can get lost in other elements determining return - and overall appeal of the product. I'm not using them because of all the factors discussed in the numerous Boglehead threads about the Zero funds. I wouldn't necessarily not use them if I were starting from scratch, but even when I did add an index fund recently, I went with the Fidelity non-Zero alternative because I preferred the construction of the non-zero fund. And obviously nobody is going to incur massive capital gains taxes to save .05% on expenses.

While today you may feel that having to hold funds at Fidelity isn't a problem, have you read all the Boglehead posts about becoming disgrunteled with this or that brokerage that people had been happy with for years? Maybe you'll be writing one of those posts in a decade or two or three - and be griping about how you're locked into a Zero fund.
3funder
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by 3funder »

The fees associated with the non-Zero index funds are so low that I don't see the appeal of the Zero index funds.
gjlynch17
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by gjlynch17 »

Soon2BXProgrammer wrote: Fri Oct 16, 2020 9:41 am i have no objections using it in a qualified account so that you can change your mind later without a huge tax burden.
Agree. I own Fidelity Zero Total Market and Fidelity Zero International in my Health Savings Account. Fidelity Zero funds are a great choice for any tax advantaged account (IRAs, HSAs). I would not hold them in a taxable account. Generally, ETFs are a better choice for taxable equity (with Vanguard funds being an exception due to their dual-class structure).
Soon2BXProgrammer wrote: Fri Oct 16, 2020 9:41 am
They are a loss leader product from Fidelity, which could change their minds at a later date. I want to be able to change my mind at a later date.
Yes, Fidelity Zero funds are loss leaders. While theoretically, Fidelity could change their minds on fees, they have unequivocally said they will not. Frankly, the Zero funds are really cheap marketing for Fidelity, so it is in their interests to keep them at Zero.
Soon2BXProgrammer wrote: Fri Oct 16, 2020 9:41 am
Fidelity keeps more of the securities lending revenue then Vanguard as an example. (this matters for all accounts, but maybe is a wash with not having a fund fee vs keeping securities lending revenue).
Not true. All of the securities lending revenue from the Zero funds go to the investors, not Fidelity. From the article linked below:

"When the free funds were announced yesterday, commentators were quick to suggest that one way Fidelity could make money from them was through securities lending, whereby the funds would loan out shares of individual securities to short-sellers and charge a fee in exchange.

Bloomberg Intelligence analyst Eric Balchunas estimated the zero-fee funds could recover 1 to 2 bps from securities lending.

However, a Fidelity spokeswoman threw cold water on the theory on Thursday, telling Citywire the company is not receiving any revenue from the zero-fee funds for securities lending.

‘Fidelity is well-positioned to make these significant long-term investments on behalf of our customers. We have a long and successful track record of making many services available at very low or no expense to customers to make managing finances and investments easier – services such as billpay, investing tools, fund screeners and stock research are all available for low or no cost,’ she said.

‘They basically spent 1 bp in an area they weren’t making money in any way to get this brilliant PR and hopefully attract some flow in the future that gets them into the Fidelity universe and then upsell them on some of the active products that can make a lot more,’ Balchunas said. ‘If you really chisel it down, you’re looking at 1 bp for all of this marketing.’

It is also worth noting that even without any fees from securities lending, Fidelity has ensured the loss it makes on these funds will be mitigated by the fact the firm does not have to pay any license fees to an index provider, such as S&P 500 or FTSE Russell, as the two funds will track indices constructed in-house.


https://citywireusa.com/professional-bu ... s/a1143805

Bottom line is that Fidelity Zero funds are a great choice for tax advantaged accounts but I would avoid them in taxable accounts .
Soon2BXProgrammer
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by Soon2BXProgrammer »

gjlynch17 wrote: Fri Oct 16, 2020 10:10 am
Soon2BXProgrammer wrote: Fri Oct 16, 2020 9:41 am
Fidelity keeps more of the securities lending revenue then Vanguard as an example. (this matters for all accounts, but maybe is a wash with not having a fund fee vs keeping securities lending revenue).
Not true. All of the securities lending revenue from the Zero funds go to the investors, not Fidelity. From the article linked below:

https://citywireusa.com/professional-bu ... s/a1143805

Bottom line is that Fidelity Zero funds are a great choice for tax advantaged accounts but I would avoid them in taxable accounts .
Interesting about the securities lending, i must have read something earlier. Always glad to learn something every day.

Agreed on Yes to qualified accounts and No on taxable accounts.
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by Jack FFR1846 »

I have most of my equity allocation in FZROX. I have strongly considered moving my international allocation (VEA held at TDAmeritrade) to cash to buy the zero international. These are both IRAs, so I could care less about the tax problems with these funds in taxable accounts. I have been quite happy with FZROX. But we're talking close to no cost with a bunch of these types of funds and ETFs. I also hold VTI and SCHB in taxable. Along with BRK/b for the dividend free/tax free treatment until I decide to sell.
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ruralavalon
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by ruralavalon »

kirk1299 wrote: Fri Oct 16, 2020 9:34 am A couple of years back, it seemed like the launch of Fidelity Zeros were very disruptive.

The zero fee international index - which includes EM exposure - seemed particularly good value.

I find it interesting that AUM for these funds seems relatively low, and it doesn't seem like they come up much on this forum either.

Any current thoughts on these funds? If you aren't using them in your index strategy, why not? Is there a fatal flaw with either the index itself or the execution of it that somehow makes it a less good deal than it appears on the surface (the requirement to have a Fidelity brokerage account is not a particularly harsh one).
In my opinion Fidelity ZERO International Index Fund (FZILX) is okay in a tax-advantaged account, where if necessary you can switch without tax consequences. The fund does not include small-cap, which I think is a relatively minor omission.

In my opinion the reluctance to use them arises from the unique and untried index, the lack of fund history, and the need to hold them in a retail account at Fidelity.
Last edited by ruralavalon on Fri Oct 16, 2020 10:52 am, edited 1 time in total.
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snailderby
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by snailderby »

When Fidelity first filed for these funds, they were extensively discussed on this forum, including in this 815-post thread: viewtopic.php?t=255356&start=200.

The general consensus seems to be that these funds are perfectly fine in a tax-advantaged account. Their lower ERs may or may not offset any differences in index construction, tracking error, securities lending, etc. For what it's worth, FZILX and FZROX have performed relatively similarly to their Vanguard equivalents since their inception.

That said, the Fidelity ZERO funds cannot be ported to or held at other brokerages. So I would avoid using them in a taxable account, given the risk of having to liquidate them and incur capital gains taxes if you ever wish to move your taxable account to another brokerage. In a taxable account, you're better of using ETFs or Vanguard mutual funds anyways for better tax efficiency.

Finally, note that FZILX does not include small-cap international stocks, so it's more comparable to VFWAX (which also does not include small-cap international stocks) than VTIAX (which does include small-cap international stocks).
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by Outer Marker »

Its a free lunch.

If you're going to be at Fidelity anyway, might as well eat at their buffet.
Topic Author
kirk1299
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by kirk1299 »

Thanks for all the thoughts.

One quick clarification, re the taxable accounts, is that I'm assuming there are unlikely to be capital gains distributions from the zero accounts unless they somehow start going into redemption mode. So the "tax risk" is moving from Fidelity to somewhere else, or if Fidelity changes its fee structure for the funds. My guess is that the latter is very unlikely; worst case, they might close the fund to new investors if they decided it was a bad deal for them. But I think from a corporate standpoint, they've kind of set this forever unless they want to endure some really bad PR and angry customers by shutting it down. And I see no particular reason to ever close an account at Fidelity - so who really cares if it's portable.

My thought is that it's worth holding these as part of an overall low fee strategy. And while saving 5-10 basis points seems small, it can add up in a $10mil+ portfolio over a multi year period to real money.
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by stan1 »

kirk1299 wrote: Fri Oct 16, 2020 11:35 am Thanks for all the thoughts.

One quick clarification, re the taxable accounts, is that I'm assuming there are unlikely to be capital gains distributions from the zero accounts unless they somehow start going into redemption mode. So the "tax risk" is moving from Fidelity to somewhere else, or if Fidelity changes its fee structure for the funds. My guess is that the latter is very unlikely; worst case, they might close the fund to new investors if they decided it was a bad deal for them. But I think from a corporate standpoint, they've kind of set this forever unless they want to endure some really bad PR and angry customers by shutting it down. And I see no particular reason to ever close an account at Fidelity - so who really cares if it's portable.

My thought is that it's worth holding these as part of an overall low fee strategy. And while saving 5-10 basis points seems small, it can add up in a $10mil+ portfolio over a multi year period to real money.
Your assumption about capital gains distributions being unlikely is likely incorrect. Fidelity's S&P 500 Index fund FXAIX and Total Market fund FSKAX have thrown off small capital gains distributions in the past. There's no reason to think the zero funds will be different. The fact is current tax laws favor ETFs over mutual funds in handling of capital gains.

Hopefully I will live for 40 more years and leave a taxable estate to my heirs. I'm not going to assume Fidelity or Vanguard will be a company I want to do business with for the rest of my life. In fact we've seen some people on this forum who have been customers at Vanguard for decades move their accounts to Fidelity. I'd rather give myself flexibility and not predict what the future will hold. I try not to hold loyalties to any corporations and I expect no loyalty to me in return.
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nedsaid
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by nedsaid »

I am a Fidelity customer and have given thought to their Zero funds. I didn't bite on the Zero funds for a few reasons. First, the expense ratios for the standard Fidelity Index funds are pretty darned low to begin with. Second, the standard Index funds hold more stocks than the Zero funds. Third, I thought the Zero concept was faddish and gimmicky. Fourth, I believe in being a good customer and I am not interested in the race to the bottom on fees which can lead to a race to the bottom on service quality.
My Rollover IRA at Fidelity as an average expense ratio of about 14 basis points or 0.14%.

All of that being said, the Fidelity Zero funds are perfectly fine investments. No one should feel bad about owning them. As others have said, I wouldn't hold these in a taxable account as these funds can only be held at Fidelity.
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stan1
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by stan1 »

nedsaid wrote: Fri Oct 16, 2020 2:21 pm Fourth, I believe in being a good customer and I am not interested in the race to the bottom on fees which can lead to a race to the bottom on service quality.
That's nice, I hope Fidelity feels the same way towards you now and for the rest of your life. My cable company, bank, airline and car dealership all say they value me as a customer but their actions make me feel that might not be the case? Loyalty and trust are two way and need to be pretty close to 50/50 relationships.
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by KMoney »

I agree they look like a particularly good deal on the international side, but I feel better having small cap in my international fund.

In the US case, FSKAX has a good track record and the ER difference is so small I don’t mind paying it. Conceptually I prefer the index to be managed by a third party who isn’t trying to optimize cost in a fund.
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nedsaid
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by nedsaid »

stan1 wrote: Fri Oct 16, 2020 2:57 pm
nedsaid wrote: Fri Oct 16, 2020 2:21 pm Fourth, I believe in being a good customer and I am not interested in the race to the bottom on fees which can lead to a race to the bottom on service quality.
That's nice, I hope Fidelity feels the same way towards you now and for the rest of your life. My cable company, bank, airline and car dealership all say they value me as a customer but their actions make me feel that might not be the case? Loyalty and trust are two way and need to be pretty close to 50/50 relationships.
That is why you have competition in our economic system. If quality and service declines at one place, you can go to the competition. Lots of firms out there competing for your investment dollar.

Thing is, how many complaints have I read here about customer service at Vanguard? How many complaints have I seen about the loss of perks at Vanguard? In the race to the bottom for fees, something has to give. I think the death of customer service at Vanguard is greatly exaggerated but it is clear that people have brought up issues and I hope Vanguard is reading those threads. Even a great company can improve.
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by Buy_N_Hold »

I would seriously consider using these funds if I had a Fidelity retail account. Hard to beat free! However, the hassle of switching is not worth it to me at this point relative to the $$ I would be saving on the expense ratio savings.

If I was counseling someone with a few million in assets looking for a home, and think these would be a great option.
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JoMoney
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by JoMoney »

I don't have an international allocation, and I'm not technically in a "Zero" fund, but I am using Fidelity's extremely low cost S&P 500 fund (FXAIX)
It's ER is only one and a half basis points (pretty darn close to zero). Very easy to compare apples to apples against Vanguard's and other S&P 500 index funds since they're tied to the same index.
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Re: Current thoughts on Fidelity Zero funds - especially International Index

Post by invest2bfree »

300K LIMIT WHAT BUMMER.
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