The mutual fund giant Vanguard has led the way in cutting costs for retail investors — until last week.
Now, it's Fidelity's turn to take on Vanguard — and Fidelity just went to zero fees first.
As of Friday, Fidelity launched two mutual funds with no fees. Fidelity ZERO Total Market Index Fund (FZROX) and Fidelity ZERO International Index Fund (FZILX) are now available with no fees to individual retail investors who purchase shares through a Fidelity brokerage account. The Boston investment giant also slashed fees on some existing index-based stock and bond funds, according to a news release.
Publicity stunt? Yes, but competitors such as the robo-adviser Betterment said these fee wars will continue raging.
"There has been a consistent march toward lower fees between fund providers, and Vanguard has always been competitive," Betterment senior portfolio researcher Adam Grealish said in response to questions about the Fidelity zero-fee salvo. "I expect that to continue."
One challenge Vanguard may face? Proceeds from Vanguard's stock lending are plowed back into their funds, to the benefit of shareholders, Grealish added. But other fund companies use proceeds from stock lending as a revenue source. Revenue from stock lending allows fund companies to lower expense ratios because they are able to offset lost revenue.
"One advantage of the fee charged by Vanguard is that what you see is what you get. Revenue has to come from somewhere, and Vanguard puts it on its price tag. Broadly, this means that investors have to consider more aspects of a fund to understand its full cost," Grealish explained. He called the concept similar to an airline lowering its fare, then charging for a carry-on bag.
Of course, fees aren't everything. Investors should consider both expense ratio as well as performance vs. the benchmark index the fund seeks to track.
Interestingly, Fidelity's new mutual funds are not using a brand-name index like the S&P 500 or Dow Jones, and that helps reduce costs, since fund companies may have to pay licensing fees.
"I would expect moving away from name-brand indexes to be a trend that continues," he added.
Does Betterment have any plans to introduce no-fee products? No.
Fidelity, a Boston-based firm, is a fierce rival of the Malvern-based fund giant Vanguard, and posted this chart in a news release, highlighting the fee differences between the two (Fidelity oversees roughly $2.5 trillion in assets, and Vanguard roughly $5 trillion):
We investors may actually one day earn money — say, on a mutual fund rebate? — if we choose one firm over another. Yes, it's a joke, but can more zero-fee funds be far behind? What will Vanguard do to respond? We asked for comment but didn't hear back by press time.
"If they had been thinking strategically, Vanguard should have welcomed Fidelity to the low-cost arena and used it to promote the fact that they've been low cost across their entire platform for years," said Dan Wiener, editor of the Independent Adviser for Vanguard Investors newsletter.
"Welcoming Fidelity would have been a huge win for Vanguard and would have stolen all the attention and refocused it on them."
That said, these are brand-new funds with no track record. For more information, here's a link to Fidelity's SEC filing on the new funds. Moreover, the adviser to these two funds can route its trade orders through Fidelity, according to the SEC filing, which is likely how Fidelity will make money off of the "free" mutual funds.
"Geode may place trades with certain brokers, including National Financial Services LLC and Luminex Trading & Analytics LLC," with whom Fidelity is under common control, according to the SEC filing.
Separately, Vanguard changed the name and mandate on one of its precious metals funds. Originally called Gold & Precious Metals at its 1984 inception, the fund was renamed Precious Metals in 2001 and then recast again as Precious Metals & Mining in 2004. M&G Capital Management was the outside portfolio manager on the fund but has been fired and replaced by Wellington Management, which takes over with a new mandate under the name Global Capital Cycles.
CEO Tim Buckley said that the restructuring took into account both "performance and usage." Vanguard will provide more information in the fund's July semiannual report, but that won't be available until at least mid-September. Precious Metals & Mining currently has $2.3 billion in assets, which, while less than half its size at its April 2011 peak of $5.7 billion, "is remarkable given the horrific performance its shareholders have suffered," Wiener added.
After Precious Metals & Mining lost 56 percent in 2008, investors yanked $357 million from the fund. They missed out on the 76.5 percent gain in 2009. Almost $900 million flowed back into the fund that year and in 2010, just in time for a run of five losing years when the fund dropped 72.3 percent.
Its new objective: low correlation to the broad stock market by investing in commodity-oriented businesses as it tries to capture gains from cyclical changes in the capital cycle. Telecommunications and utility companies with "irreplaceable or scarce infrastructure assets" will be a focus, according to Vanguard, though the fund will maintain "meaningful" exposure to metals and mining stocks. And, the manager has the ability to hold lots of cash. Vanguard's Buckley said the recast fund will be "more diversified and predictable" and its expense ratio will rise by one basis point, from 0.36 percent to 0.37 percent.
New Global Capital Cycles manager Keith White is also a co-manager on John Hancock's $650 million Seaport Long/Short Fund, which allocates 20 percent of its assets to a capital cycles long/short strategy. Since its December 2013 inception, the fund has outperformed peers in the long/short category but has dramatically underperformed the MSCI World Index against which John Hancock measures it. White, at last report, owned no shares in the fund, Wiener said.
In the Vanguard iteration, Global Capital Cycles can have 25 percent or more of its assets in precious metals and mining stocks.
Vanguard has not yet said what it will benchmark the fund's performance against, but Wellington will be subject to a performance fee. The new strategy should be in place, along with the new name, by the end of September.