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Fidelity Introduces Zero Expense Ratio Index Funds

362 points by prostoalex 8y ago

jacobcohen11 8y ago
How can they make money?
allochthon 8y ago
To restate the question that was raised below and then downvoted, I'm curious what the business model and business strategy are with these funds. The press release gives us a sense of the benefit to consumers; what is the flipside?
- bradleybuda 8y ago
  Matt Levine discussed this in "Money Stuff" yesterday (sorry, can't find a link). My understanding is that there are two reasons: 1) The bank still makes some money charging a fee to lend the shares in the ETF to short sellers. 2) Fidelity sees this as a loss leader for higher-priced funds and traditional investment advice / wealth management.
themodelplumber 8y ago
I'm not an investing pro, so I checked it out a little deeper. It looks like they'll be making money in the background by selling short calls to other investors and collecting interest on those. So they want this front end to be super low friction; your money will be making them money. It seems that e.g. Vanguard will also waive their fees under some circumstances. (Hope I got that right)
- howeyc 8y ago
  I think you're close. I believe they loan shares to short sellers. Selling short calls would leave them open to the risk of shares being called away and would be an entirely different fund. You can buy ETFs that do this, some distribute the premium and others roll it into the fund's cash.
- whitepoplar 8y ago
  Almost all index funds participate in share lending. Vanguard does, and almost 100% of income is returned to shareholders. Blackrock's iShares does this too, and Blackrock keeps ~20-30%. As far as I know, Vanguard's expense ratio for their total market fund (VSTAX) is effectively 0% after income from share lending.
  - evrydayhustling 8y ago
    This, exactly. It's worth noting that this is one of a few income streams that take advantage of retail investor appetites -- another is when when retail brokers who do "smart routing" of orders lease a feed with advance look at those orders to HFT firms. That kind of income is generally NOT returned to investors, and at some retail brokerages can make up 80% of profits. It's true that if something is free you are the product... but even when you're paying you may be getting sold on the side.
  - tanderson92 8y ago
    > and Blackrock keeps ~half. This is untrue. Per iShares(https://www.ishares.com/us/literature/brochure/securities-lending-unlocking-portfolios-en-us.pdf https://www.ishares.com/us/literature/brochure/securities-le...): > Q: How much of the securities lending proceeds are paid to iShares ETFs? > A:. iShares ETFs receive 71.5-80% of the income generated from securities lending depending on the asset class held. For example, iShares ETFs that predominantly hold US equities receive 71.5% of the income from securities lending. All other funds (i.e., fund-of-funds and funds that invest predominantly in fixed income or international equities) receive 80% of the income from securities lending. Once the aggregate securities lending income exceeds a certain income threshold amount, each iShares ETF will receive an increased percentage of the income above original levels, i.e. from 71.5% to 75% for US equity iShares and from 80% to 85% for all other iShares, for the remainder of that calendar year. By the way, Fidelity isn't making money off of securities lending on these funds, or at least has pledged not to. I still wouldn't use the funds, though.
    - whitepoplar 8y ago
      Thanks for the correction. Fixed.
- tanderson92 8y ago
  Fidelity has pledged that all securities revenue will return to the fund and not Fidelity itself, so no, that isn't the way they (claim, anyway) will make money. > "Fidelity is not receiving any revenue from the Fidelity ZERO Index funds for securities lending. Nor is Fidelity currently receiving any portion of the income that is generated from securities lent out." --Fidelity August 1, 2018 However, their securities lending practice is significantly less efficient than Vanguard: their total stock market index fund returned only 40% of securities lending revenue to the fund while Vanguard returned 94%. The difference there is in broker rebates -- how much of the interest on loan collateral posted by the borrower goes back to the borrower. For some reason Vanguard seems to be doing a much better job on this (possibly Fidelity is much more aggressive in loaning out shares so receives less benefit).
  - whitepoplar 8y ago
    > Fidelity has pledged that all securities revenue will return to the fund and not Fidelity itself. Cool, I didn't know this. Do you have a link?
    - tanderson92 8y ago
      Here: http://www.investmentnews.com/article/20180801/FREE/180809994/fidelity-resets-the-fee-war-bar-with-zero-expense-index-funds http://www.investmentnews.com/article/20180801/FREE/18080999...
berberous 8y ago
For those interested in more detail and discussion, this is probably the most informed place on the internet to discuss it: https://www.bogleheads.org/forum/viewtopic.php?t=255356 https://www.bogleheads.org/forum/viewtopic.php?t=255356
mbesto 8y ago
As always, good analysis by Matt Levine: (go down to "How much should an index fund cost?") https://www.bloomberg.com/view/articles/2018-08-02/-metoo-is-a-due-diligence-issue-now https://www.bloomberg.com/view/articles/2018-08-02/-metoo-is... https://www.bloomberg.com/news/articles/2018-08-01/fidelity-to-offer-index-mutual-funds-with-zero-expense-ratio https://www.bloomberg.com/news/articles/2018-08-01/fidelity-...
- modeless 8y ago
  > You can lend out the fund’s stock to short sellers, and share some of the fees paid by the short sellers with the fund, while keeping some for yourself. Wait a second. Lending is not a risk-free activity. These index funds are supposed to be low risk. What happens in a short squeeze situation?
  - tanderson92 8y ago
    Why do you say that index funds are supposed to be low risk? That's not really true; they in fact desire to have precisely the risk profile of whatever benchmark they target and seek minimal tracking error relative to that. Anyway, loans are marked to market daily with collateral required. Details are here: https://personal.vanguard.com/pdf/ISGSL.pdf https://personal.vanguard.com/pdf/ISGSL.pdf It is absolutely a risk, but I think you err by saying index funds are supposed to be low risk.
    - modeless 8y ago
      Obviously I am talking about the risk inherent to the fund separate from the risk of what it's tracking, which is arbitrary. The inherent risk of the fund is absolutely supposed to be low. Thanks for the link, but I think even with 102% collateral marked to market daily, short sellers could still default and cause the fund to lose gains. It would be a black swan event, but the losses would be much larger than the 3 basis points they claim to gain from lending. Missing a small number of up days in the market has a huge negative effect on returns.
      - 8y ago
reverend_gonzo 8y ago
For people wondering how this can be of any benefit to Fidelity, here's a couple options: 1) They lend the stock to shorters and make money off the interest. 2) They get people into their ecosystem. As most people don't keep a dozen different accounts, they can get people to start using their checking and savings accounts (where Fidelity makes money from lending a fraction of the balance). People might also be more likely to use their loan products, credit cards, or other services, which are obviously benefical to Fidelity. There's likely other benefits to them as well, especially given that index funds don't require any real human oversight. Edit: Given other info posted, it's really just #2. This is a loss leader to get customers.
- smileysteve 8y ago
  I read #2 in their press release; But; it seems like a poor marketing decision; You're attracting people who want no fees and subscribe the the Random Walk Model - then you prove the Random Walk Model. I don't see how this encourages people to go into more different funds. Maybe for asset allocation for near term cash volatility.
  - Fomite 8y ago
    As a counter-example, I chose Schwab for their low fees, because the bulk of my investments are in index funds. But that doesn't mean they all are. Schwab is also both my bank and my active investment broker of choice. The reason for that is because it's nice to have all my stuff in one place, viewable from a single screen.
refurb 8y ago
Is this an example of the capitalism "race to the bottom" that everyone warns me about? If so, more please!
- asdfman123 8y ago
  Interestingly, the reason expense ratios are now so low is that Vanguard entered the market, basically innovated the index fund, slashed all the expense ratios, and now everyone has to compete with them. But Vanguard is not-for-profit company because it's owned by its shareholders. I think capitalism works in a lot of situations and I'm not against it, but there are certain scenarios where the "free market" logic doesn't really work or apply because of various reasons. In medicine it seems to be a race to higher prices.
  - lotsofpulp 8y ago
    Medicine is nowhere near a free market, hence why there aren't suppliers entering the market to push the price down.
  - briandear 8y ago
    It’s all supply and demand. In the UK you don’t have a free market — you have essentially price caps (capped at “free”) — this causes shortages. In the US, you don’t have the same price caps, but then generally you don’t have shortages. A person willing to pay market rates can almost always get care in the US, while no amount of money can speed up a UK NHS surgery waiting list. Really the answer is a balance somewhere in the middle, but my point is that the free market does work, when it’s allowed to. The problem in the US is that the market is highly distorted by Medicaid and Medicare reimbursement rates as well as opaque price competition.
  - theandrewbailey 8y ago
    > But Vanguard is not-for-profit company because it's owned by its shareholders. Isn't every company owned by its shareholders, for-profit or not?
    - 8y ago
nabla9 8y ago
https://nordnetab.com/ https://nordnetab.com/ has zero expense index funds for Finland, Sweden, Norway and Denmark. They are only available for their customers, but it's a great way to get new customers. They don't have any extra fixed fees either, so it's not a scam. It's just good marketing.
fiveFeet 8y ago
The cost to run an etf does not (or at least should not) increase with Assets Under Management (AUM). So if anything the providers should be charging a fixed fee for the whole index fund instead of charging based on the AUM.
- slivym 8y ago
  There's a cost associated with buying and selling the underlying equities which is proportional to AUM.
  - jonknee 8y ago
    Is there? For large index ETFs that is surely done by broker dealers arbitraging miniscule pricing differences between the underlying and ETF price.
  - fiveFeet 8y ago
    Hmmm... why? What is so different between trading 100 shares vs 1,000 shares vs 100,000 shares? Trading is automated enough that a linear cost is not justified.
maxxxxx 8y ago
I would prefer they offered funds at cost plus some profit . It seems all "free" products come with some major downside because the company that offers them must make money through some sleazy backdoor. See Google, Facebook and others.
- gxs 8y ago
  Agree - I applaud the effort but I will stick with Vanguard for the foreseeable future.
djsumdog 8y ago
Coffee Break has a great video about Index Funds: https://www.youtube.com/watch?v=_vdB7gphtyo https://www.youtube.com/watch?v=_vdB7gphtyo The TL;DW is that in many different studies, index funds preform better in the very long term than almost any managed fund. Why pay some monkeys to manage your money when an even distribution over a bunch of common stocks does just as well?
- bluGill 8y ago
  Two points in favor of paying someone. First, most funds have goals other than beating the index, so if the index is your goal we should ignore them. However why is the index your goal? If you are far away from retirement (or whatever your reason for investing is), then the index is a good goal, but as you get closer to retirement you need to have an asset allocation that won't drop in value right when you need the money. The index will not do that for you. Second, of those that attempt to match/beat the index, some of them do beat the index year after year. IF you can get in one of them you are better off. Note that IF is in all caps - this is a big if, very few managed funds beat the index on a regular basis. However if some fund manager beats the index year after year, that manager ought to be worth a lot of money to you (so long as after expenses he beats the market) After considering the above, most of my money is in a target date retirement fund with a low expense ratio. I know I'm not going to beat the index, but as I get older they balance things. I know someone invested all in an index who retired right before a crash, the crash combined with his withdrawals to live cut his principal enough that he is now broke. (I suspect he didn't have enough savings to retire in other than best case scenarios, but even so his required capital to retire is higher in a stock index). I do have some play money in an index fund, if things go well I'll retire early on that cash, if things go bad, at least my normal retirement is not in trouble.
  - AnimalMuppet 8y ago
    Re beating the index: Here's a bunch of managed funds that try to beat the index. Some do better, some do worse - say, 50/50. The next year, half do better, half do worse, and it's (for the most part) unrelated to the year before. So now you have 25% of the funds having beaten the index two years in a row. As you said, very few managed funds beat the index year after year. But even for those funds, the question is, will they beat the index next year with greater than 50% probability? I'm not sure that any of them will.
asdfman123 8y ago
I still trust Vanguard now because they're not-for-profit. I own a certain percentage of it by buying their index funds and I know their interests are beholden to mine. The ER for Vanguard still only 0.15%, which is about $12/mo per $100k invested.
- mkozlows 8y ago
  0.04% for Admiral shares, aka the ones for people who have $100k.
  - froindt 8y ago
    Admiral shares come in at 10k for most of their funds. E.g. VTSAX has the 0.04% ER and a 10k minimum, while the Investor class is at 0.14% (VTSMX). https://investor.vanguard.com/mutual-funds/fees https://investor.vanguard.com/mutual-funds/fees > Admiral Shares > * $10,000 for most index funds and tax-managed funds. > * $50,000 for most actively managed funds. > * $100,000 for certain sector-specific index funds.
    - TheCoelacanth 8y ago
      Does that include target retirement funds and the like that include a mix of different asset classes? Last time I looked I didn't think it did, so you would need more than $10k if you want to do the sensible thing and not have 100% of your assets in stocks.
      - froindt 8y ago
        The target date funds seem to have a 1k minimum with an ER of 0.13-0.15%. [1] There are no admiral shares for target date funds. Across their other mutual fund offerings, investor shares generally have a similar expense ratio to the target date funds with a 3k minimum. When I was getting started, it took awhile before I was diversified beyond a single fund (currently not using the target date funds), then eventually getting up to admiral shares. > Last time I looked I didn't think it did, so you would need more than $10k if you want to do the sensible thing and not have 100% of your assets in stocks. Looking through all their target date funds, none have more than 90% stocks. The 2015-2040 funds have 60% to 15% bonds, with all later dates at 10%. [1] https://investor.vanguard.com/mutual-funds/list#/mutual-funds/asset-class/month-end-returns https://investor.vanguard.com/mutual-funds/list#/mutual-fund...
mamurphy 8y ago
Reddit had a few good discussions of this if you are interested: https://www.reddit.com/r/personalfinance/comments/940jdc/fidelity_launches_zero_fee_index_funds/ https://www.reddit.com/r/personalfinance/comments/940jdc/fid... ; https://www.reddit.com/r/personalfinance/comments/93s4mj/fidelity_to_offer_0_expense_ratio_index_funds/ https://www.reddit.com/r/personalfinance/comments/93s4mj/fid...
SpaethCo 8y ago
While the new funds are attracting all the attention, I find these other changes more interesting: Expense Ratios have been slashed across existing funds: https://www.fidelity.com/mutual-funds/investing-ideas/index-funds https://www.fidelity.com/mutual-funds/investing-ideas/index-... Premium, Investor, and Institutional classes are all being merged into 1 class with lower fees and no minimums: https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/press-release/Fidelity-Redefines-Investing.pdf https://www.fidelity.com/bin-public/060_www_fidelity_com/doc... For people holding existing Fidelity index funds, you just start paying less now without having to do anything.
- deleted 8y ago
  [deleted]
- astura 8y ago
  I got this email this morning, short and sweet: --- As of August 1, 2018, we introduced the following changes, which will be automatically applied to your affected Fidelity accounts: • Removed account fees and minimums • Eliminated domestic money movement fees • Lowered expense ratios on all Fidelity stock and bond index mutual funds • Introduced two index mutual funds (FZROX and FZILX) with a zero expense ratio No action is required on your part. --- I've never paid a fee for domestic money movement (EFTs) so I wonder what that refers to. Fidelity also has an extremely attractive product in their cash management account (free checking account with ATM reimbursements)
  - nerdponx 8y ago
    Fidelity also has an extremely attractive product in their cash management account (free checking account with ATM reimbursements) Schwab has this as well, and a better privacy policy than Chase to boot.
  - bbarn 8y ago
    If you have good credit, their credit card is good for a daily driver if you're the type who pays off a card monthly. Unlimited 2% cash back, no annual fee. You can set up the cash back to go straight into investment accounts too.
jorblumesea 8y ago
Vanguard returns 94% of the securities lending business of the fund, back to the fund. Fidelity is around 40%, iShares is 50%. Meaning even with fees, Vanguard is a better deal as you get more money back on the money that you own. It's more complex than just simply measuring fees. These are some additional factors to consider: Tracking Error Capital Gains Securities lending Mutual Ownership Structure https://personal.vanguard.com/pdf/ISGSL.pdf https://personal.vanguard.com/pdf/ISGSL.pdf https://www.ishares.com/us/literature/brochure/securities-lending-unlocking-portfolios-en-us.pdf https://www.ishares.com/us/literature/brochure/securities-le...
- xur17 8y ago
  If I'm understanding correctly, if I compare the performance of my VTSAX fund vs all of the stocks that make it up, VTSAX would show better performance because it includes money made from lending out securities? This seems like a major spot for consumer confusion - how do these funds decide what percentage to return back to the fund vs keep? Why wouldn't Fidelity keep 100% of these fees, and then charge a negative fee?
  - jorblumesea 8y ago
    > VTSAX would show better performance because it includes money made from lending out securities Correct, VTSAX would probably perform better by a small margin, but it's also hard to compare given that everyone rolls their own "Total Market Index" with slightly different stock composition. At the very least, you're getting more of your money back to you. > how do these funds decide what percentage to return back to the fund vs keep? Depending on how much money they want to make :) vanguard is actually a mutually owned firmed, the only one. So they have little incentive to tax themselves. When you buy vanguard funds, you are also buying ownership of vanguard. > Why wouldn't Fidelity keep 100% of these fees, and then charge a negative fee? Because people have no idea how any of this works and "0% expense" rings out. They can make more money this way.
- tanderson92 8y ago
  It's also more complex than simply measuring how much of the securities lending revenue ends up back in the fund. Most of that 60% for Fidelity's funds don't end up back in Fidelity's pockets either, but instead in the pockets of the people who borrowed stock from Fidelity investors in the form of rebates. You can understand this like: the borrower puts up 100-105% of the collateral and so should get some portion of the short-term rate on that cash. It's not clear why the disparity exists between Vanguard and Fidelity though. iShares is truly different where they actually take 15-30% of profits for themselves.
OnlyRepliesToBS 8y ago
And you thought Bitcoin was risky? Fuck it, we're going 5 blades!
ppeetteerr 8y ago
If you don't pay for the service, you end up the product.
- craftyguy 8y ago
  While usually true, it's not 100% true in all cases. In this case, it's almost certainly a loss leader for other higher priced funds and other financial advising/services they offer.
  - ppeetteerr 8y ago
    I don't buy it. This is a financial company. They don't compete with their own funds for the opportunity to up-sell their customers.
    - craftyguy 8y ago
      And why not? Being a 'financial company' is not really a convincing argument against them possibly up-selling here.
      - ppeetteerr 8y ago
        I'm not referring to the up-sell. They can upsell a cheaper service. Having a free service means that every customer is extra cost. When you sell something, however little you charge, you still charge just above recurring cost (unless you're a startup). If you don't charge, then every customer is an expense. Trusting that your sales team can up-sell hard enough to compensate for the recurring cost of a customer is wishful thinking.
        craftyguy 8y ago
        You're assuming that all fidelity customers are competent investors, when in fact many (most?) of them are customers of fidelity only because fidelity is the custodian for their company retirement plans. Many (most?) of these folks had no idea why a ER > 1.0% was not good for them, but now that the word is out, this could easily be a gimmick to convince more folks to choose fidelity for servicing retirement plans and investments. So, 1) pick trendy topic among casual (retirement) investors, 2) blow competition out of water by offering it for free to get their attention, 3) gain trust and additional business from casual investors My employer uses fidelity for retirement plans (so I'm a customer, whether I like it or not), and I'm bombarded by emails/communications very regularly to sign up for various services from fidelity for 'planning for my future'. These services ultimately cost a lot of money. Many of my coworkers have signed up.
Veraticus 8y ago
I wonder if there's a natural cost to operating a fund, that would make this kind of product unsustainable, long-term? In contrast, Robinhood can provide free trades, and M1 Finance can provide free portfolio-oriented management, but they also both have good explanations for their underlying business models. To be transparent, I work at M1 Finance, and I invest in a few Fidelity ETF's; still not sure how I feel about this one.
- deleted 8y ago
  [deleted]
- TuringNYC 8y ago
  >> have good explanations for their underlying business models Where could I find this? I havent seen it anywhere and have been half-worried they will either jack up prices or sell-out customers hanging like CapitalOne/ShareBuilder did. What is their short term and long term revenue model that would make their [awesome] product sustainable? Aside: I love M1, especially after CapitalOne/ShareBuilder left their customers hanging.
  - theautist 8y ago
    I think both Robinhood and M1 Finance collect interest on their customers' cash and securities. Robinhood also makes money by offering margin to its customers and I believe M1 Finance has a similar but more general offering called M1 Borrow where the money borrowed can be used anywhere instead of just trading.
- philipodonnell 8y ago
  I recently spec'd out an ETF based on the number of employees working in a given MSA with the management proceeds going to support entrepreneurship in that area. Fixed costs for operating a single ETF is about $250K, which means a minimum AUM of $50M with a 0.5% fee. Most platforms won't even list an ETF with < $40M because they know its not sustainable below that level. That said, for a manager of many ETFs, the fixed costs are much lower because they can be spread across multiple funds.
- 8y ago
tibbon 8y ago
Sooo... if it's possible (I have a Fidelity 401k), is it a good or terrible idea to put a small % of my 401k into this?
- theandrewbailey 8y ago
  There would be that nasty early withdraw penalty on that (probably). Not sure if it would be worth it in the long run. (IANA investor)
  - astura 8y ago
    What‽‽‽‽ Changing your fund allocations within your 401(k), in general, doesn't trigger any penalties and is not a withdraw.
    - theandrewbailey 8y ago
      I was under the impression that it was about taking funds out of the 401k entirely (because the article doesn't mention 401k anywhere), not about changing the fund allocations within the 401k.
      - froindt 8y ago
        Whether the funds would be removed wasn't explicitly clear, but in a roundabout way, you brought up a good point. 401k's typically have a select 20-40 funds you can choose from, and this won't necessarily be available to GP. That being said, I haven't had a 401k with Fidelity in 3 years and don't recall if I had access to "everything" or if the fund choices are limited.
        WorldMaker 8y ago
        I know Fidelity has limited Vanguard options in the past in its 401k and IRA funds options, presumably for control/competition reasons. I'm definitely curious how well Fidelity will promote its own index funds over actively managed ones, given they are still competing on active fees versus passive, but now just with themselves. I am planning to take a look at my own Fidelity accounts this weekend and see if they've surfaced these index funds well. It seemed encouraging from the email this morning.
bitxbit 8y ago
What people fail to see with this is that Fidelity (and other large money managers) effectively control supply. You think "oh great zero ratio!" but in reality the cost of having these market concentrations far exceeds a few basis points to individual investors. I would argue that the next financial crisis will be very much linked to ETFs and related beta products.
- ttul 8y ago
  Yes. For instance one way they make money is by lending shares for short selling.
  - sdinsn 8y ago
    Fidelity has stated they make no income from lending shares for these funds
- refurb 8y ago
  Control supply of what? The index fund? If you can find investors, you can create one. Also, Fidelity is one of many index fund owners and my understanding is that their market share is lower than competitors.
- cwkoss 8y ago
  Yeah, ETFs are basically a herd-following strategy. When a higher proportion of traders aren't herd-following, this is an efficient strategy. However, as the proportion of herd-followers increases, the information held in a company's stock price increase is less indicative of faith in that company and more of faith in the overall sector. This has led to our current bubble, where everyone is buying stock, so the price goes up, so everyone wants to buy stock. No clue where the top is going to be, but it feels like this one is going to be uglier than 2008.
  - 1stranger 8y ago
    > No clue where the top is going to be, but it feels like this one is going to be uglier than 2008. Pretty sure an asset bubble (which we've experienced many times in the past) will not be worse than the entire financial system melting down.
patja 8y ago
Vanguard is great as long as you don't ask much of them. I used to have my accounts split between Fidelity and Vanguard. But after several botched transactions where Vanguard reps gave me inaccurate information about their own processes, and lost or claimed to have never received multiple mailed signed documents (with difficult-to-obtain Medallion signatures), I switched everything to Fidelity and am much happier. I have never failed to get a knowledgeable/expert person on the phone whenever I've called Fidelity, which is a stark contrast to my experience with Vanguard.
- opmac 8y ago
  This is true to my experience as well, although I'm still a loyal Vanguard customer. I actually got dubious tax advice from a Vanguard rep that could have screwed me if I didn't do a bit more research. That being said, I do tend to prefer them over Fidelity (I am currently a customer of both), but maybe it's worth taking a closer look now.
  - JibJabLab 8y ago
    Does Vanguard offer tax advice? Why not reach out to a tax accountant?
    - opmac 8y ago
      I asked what the tax implications were for performing a backdoor IRA conversion for an account I hold with them, and what they told me regarding tax implications was straight up incorrect. I did eventually speak to an accountant, which is how I wasn't burned by them.
alainchabat 8y ago
It's been a while I'm thinking about this. As an european (french if that helps), living in asia , does that worth it to invest in an american fund ? Anyone has a recommendation? Thanks!
misiti3780 8y ago
how is fidelity making money on this product ?
paulpauper 8y ago
I don't understand why the difference between .05%.15%, .001%, etc is such a big deal. IT's all within a tenth of a percent. Unless you live to 300 or something and never move the money, it won't matter that much. I think SPY is the best because it has low fees and can be traded like a stock, which means you are getting the best possible execution down to the penny.
- orthros 8y ago
  It's a big deal because the numbers will (hopefully) get large quickly. A $3M account that pays an extra 0.1% per year is dinged for $3,000 a year, every year. The cumulative compounded effect over 20 years is north of $75K.
whitepoplar 8y ago
Free overnight checks. Free cashier's checks. Free wire transfers (incoming and outgoing)...on top of what was already free. This is great! For those of you comparing Fidelity and Schwab for cash management, two things: 1) Fidelity's debit card also reimburses ATM fees worldwide, but lists a 1% foreign transaction fee for purchases. This doesn't apply to ATM withdrawals, which don't count as purchases and are, in fact, 0%. 2) Schwab's interest rate on cash in their checking account is 0.25% last time I checked. Fidelity's is similar, but they count purchased money market funds as liquid, withdrawable cash, and automatically liquidate shares when needed without intervention by you. So the effective interest rate on cash is somewhere between 1.55% and 1.9%, depending on which money market fund you choose. Schwab also has money market funds, but they're not treated as liquid cash. You must manually sell shares, wait until settlement clears, and then transfer funds into your checking account, which is a pain in the ass. 3) Not directly related to cash management, but useful nonetheless: Fidelity advertises $4.95 brokerage trades. Every time I've called and asked, "Can you give me free trades?," they give me free trades (usually 10-20) as a "goodwill" perk. It's a 60 second phone call. Don't pay for trades! EDIT: Perhaps notable for those who live in high tax states like NY or CA, interest income from Fidelity's "Treasury Only" money market funds is exempt from state taxes. Interest earned from a typical checking account or CD is state taxable. You can also purchase municipal money market funds which are exempt from state and federal taxes, but they have a lower yields.
- rconti 8y ago
  wow!
- pbreit 8y ago
  In your estimation are Schwab or Fidelity viable primary bank accounts?
  - astura 8y ago
    Yes, they absolutely 100% are. Source: Fidelity is my primary bank account. A bonus is I get paid a day early, Fidelity makes my paycheck available a day before payday for some reason.
pascalxus 8y ago
I've noticed a lot of consolidation in 401Ks moving towards Fidelity. This has caused me some doubt as to their long term trustworthiness since greater power usually results in lower value for end customers. so, i'm pleasantly surprised to see them offering such a great product.
Animats 8y ago
- Account transfer out: $25 (Vanguard: $0) - Reorganization fee (?): $39 (Vanguard: $0) - Late Settlement Fee: $25 (Vanguard: 0) So that's how they make money off of this. It's index funds, the payday loan edition.
- jimmyswimmy 8y ago
  Those are not exactly common fees! I think you're pretty off base here. The first two fees probably ~once every five years on the upper end (how often do you change the registration on an account?) and the last is entirely up to you. Besides which, these fees are 0.25-0.39% each on a 10k account. I bet most of their accounts are much larger, and so the fees are proportionally smaller. Suppose you're charged $39 every three years - hard to imagine on that fee schedule - on your 10k account, that's around 0.13% per year. And that's a crazy high estimate for a relatively small brokerage account. It's not a way for Fidelity to stay in business.
OnlyRepliesToBS 8y ago
lol

362 points by prostoalex 8y ago

How can they make money?

To restate the question that was raised below and then downvoted, I'm curious what the business model and business strategy are with these funds. The press release gives us a sense of the benefit to consumers; what is the flipside?

bradleybuda 8y ago
Matt Levine discussed this in "Money Stuff" yesterday (sorry, can't find a link). My understanding is that there are two reasons: 1) The bank still makes some money charging a fee to lend the shares in the ETF to short sellers. 2) Fidelity sees this as a loss leader for higher-priced funds and traditional investment advice / wealth management.

themodelplumber 8y ago

I'm not an investing pro, so I checked it out a little deeper. It looks like they'll be making money in the background by selling short calls to other investors and collecting interest on those. So they want this front end to be super low friction; your money will be making them money. It seems that e.g. Vanguard will also waive their fees under some circumstances. (Hope I got that right)

howeyc 8y ago
I think you're close. I believe they loan shares to short sellers. Selling short calls would leave them open to the risk of shares being called away and would be an entirely different fund. You can buy ETFs that do this, some distribute the premium and others roll it into the fund's cash.
whitepoplar 8y ago
Almost all index funds participate in share lending. Vanguard does, and almost 100% of income is returned to shareholders. Blackrock's iShares does this too, and Blackrock keeps ~20-30%. As far as I know, Vanguard's expense ratio for their total market fund (VSTAX) is effectively 0% after income from share lending.
- evrydayhustling 8y ago
  This, exactly. It's worth noting that this is one of a few income streams that take advantage of retail investor appetites -- another is when when retail brokers who do "smart routing" of orders lease a feed with advance look at those orders to HFT firms. That kind of income is generally NOT returned to investors, and at some retail brokerages can make up 80% of profits. It's true that if something is free you are the product... but even when you're paying you may be getting sold on the side.
- tanderson92 8y ago
  > and Blackrock keeps ~half. This is untrue. Per iShares(https://www.ishares.com/us/literature/brochure/securities-lending-unlocking-portfolios-en-us.pdf https://www.ishares.com/us/literature/brochure/securities-le...): > Q: How much of the securities lending proceeds are paid to iShares ETFs? > A:. iShares ETFs receive 71.5-80% of the income generated from securities lending depending on the asset class held. For example, iShares ETFs that predominantly hold US equities receive 71.5% of the income from securities lending. All other funds (i.e., fund-of-funds and funds that invest predominantly in fixed income or international equities) receive 80% of the income from securities lending. Once the aggregate securities lending income exceeds a certain income threshold amount, each iShares ETF will receive an increased percentage of the income above original levels, i.e. from 71.5% to 75% for US equity iShares and from 80% to 85% for all other iShares, for the remainder of that calendar year. By the way, Fidelity isn't making money off of securities lending on these funds, or at least has pledged not to. I still wouldn't use the funds, though.
  - whitepoplar 8y ago
    Thanks for the correction. Fixed.
tanderson92 8y ago
Fidelity has pledged that all securities revenue will return to the fund and not Fidelity itself, so no, that isn't the way they (claim, anyway) will make money. > "Fidelity is not receiving any revenue from the Fidelity ZERO Index funds for securities lending. Nor is Fidelity currently receiving any portion of the income that is generated from securities lent out." --Fidelity August 1, 2018 However, their securities lending practice is significantly less efficient than Vanguard: their total stock market index fund returned only 40% of securities lending revenue to the fund while Vanguard returned 94%. The difference there is in broker rebates -- how much of the interest on loan collateral posted by the borrower goes back to the borrower. For some reason Vanguard seems to be doing a much better job on this (possibly Fidelity is much more aggressive in loaning out shares so receives less benefit).
- whitepoplar 8y ago
  > Fidelity has pledged that all securities revenue will return to the fund and not Fidelity itself. Cool, I didn't know this. Do you have a link?
  - tanderson92 8y ago
    Here: http://www.investmentnews.com/article/20180801/FREE/180809994/fidelity-resets-the-fee-war-bar-with-zero-expense-index-funds http://www.investmentnews.com/article/20180801/FREE/18080999...

berberous 8y ago

For those interested in more detail and discussion, this is probably the most informed place on the internet to discuss it: https://www.bogleheads.org/forum/viewtopic.php?t=255356 https://www.bogleheads.org/forum/viewtopic.php?t=255356

mbesto 8y ago

As always, good analysis by Matt Levine: (go down to "How much should an index fund cost?") https://www.bloomberg.com/view/articles/2018-08-02/-metoo-is-a-due-diligence-issue-now https://www.bloomberg.com/view/articles/2018-08-02/-metoo-is... https://www.bloomberg.com/news/articles/2018-08-01/fidelity-to-offer-index-mutual-funds-with-zero-expense-ratio https://www.bloomberg.com/news/articles/2018-08-01/fidelity-...

modeless 8y ago
> You can lend out the fund’s stock to short sellers, and share some of the fees paid by the short sellers with the fund, while keeping some for yourself. Wait a second. Lending is not a risk-free activity. These index funds are supposed to be low risk. What happens in a short squeeze situation?
- tanderson92 8y ago
  Why do you say that index funds are supposed to be low risk? That's not really true; they in fact desire to have precisely the risk profile of whatever benchmark they target and seek minimal tracking error relative to that. Anyway, loans are marked to market daily with collateral required. Details are here: https://personal.vanguard.com/pdf/ISGSL.pdf https://personal.vanguard.com/pdf/ISGSL.pdf It is absolutely a risk, but I think you err by saying index funds are supposed to be low risk.
  - modeless 8y ago
    Obviously I am talking about the risk inherent to the fund separate from the risk of what it's tracking, which is arbitrary. The inherent risk of the fund is absolutely supposed to be low. Thanks for the link, but I think even with 102% collateral marked to market daily, short sellers could still default and cause the fund to lose gains. It would be a black swan event, but the losses would be much larger than the 3 basis points they claim to gain from lending. Missing a small number of up days in the market has a huge negative effect on returns.
    - 8y ago

reverend_gonzo 8y ago

For people wondering how this can be of any benefit to Fidelity, here's a couple options: 1) They lend the stock to shorters and make money off the interest. 2) They get people into their ecosystem. As most people don't keep a dozen different accounts, they can get people to start using their checking and savings accounts (where Fidelity makes money from lending a fraction of the balance). People might also be more likely to use their loan products, credit cards, or other services, which are obviously benefical to Fidelity. There's likely other benefits to them as well, especially given that index funds don't require any real human oversight. Edit: Given other info posted, it's really just #2. This is a loss leader to get customers.

smileysteve 8y ago
I read #2 in their press release; But; it seems like a poor marketing decision; You're attracting people who want no fees and subscribe the the Random Walk Model - then you prove the Random Walk Model. I don't see how this encourages people to go into more different funds. Maybe for asset allocation for near term cash volatility.
- Fomite 8y ago
  As a counter-example, I chose Schwab for their low fees, because the bulk of my investments are in index funds. But that doesn't mean they all are. Schwab is also both my bank and my active investment broker of choice. The reason for that is because it's nice to have all my stuff in one place, viewable from a single screen.

refurb 8y ago

Is this an example of the capitalism "race to the bottom" that everyone warns me about? If so, more please!

asdfman123 8y ago
Interestingly, the reason expense ratios are now so low is that Vanguard entered the market, basically innovated the index fund, slashed all the expense ratios, and now everyone has to compete with them. But Vanguard is not-for-profit company because it's owned by its shareholders. I think capitalism works in a lot of situations and I'm not against it, but there are certain scenarios where the "free market" logic doesn't really work or apply because of various reasons. In medicine it seems to be a race to higher prices.
- lotsofpulp 8y ago
  Medicine is nowhere near a free market, hence why there aren't suppliers entering the market to push the price down.
- briandear 8y ago
  It’s all supply and demand. In the UK you don’t have a free market — you have essentially price caps (capped at “free”) — this causes shortages. In the US, you don’t have the same price caps, but then generally you don’t have shortages. A person willing to pay market rates can almost always get care in the US, while no amount of money can speed up a UK NHS surgery waiting list. Really the answer is a balance somewhere in the middle, but my point is that the free market does work, when it’s allowed to. The problem in the US is that the market is highly distorted by Medicaid and Medicare reimbursement rates as well as opaque price competition.
- theandrewbailey 8y ago
  > But Vanguard is not-for-profit company because it's owned by its shareholders. Isn't every company owned by its shareholders, for-profit or not?
  - 8y ago

nabla9 8y ago

https://nordnetab.com/ https://nordnetab.com/ has zero expense index funds for Finland, Sweden, Norway and Denmark. They are only available for their customers, but it's a great way to get new customers. They don't have any extra fixed fees either, so it's not a scam. It's just good marketing.

fiveFeet 8y ago

The cost to run an etf does not (or at least should not) increase with Assets Under Management (AUM). So if anything the providers should be charging a fixed fee for the whole index fund instead of charging based on the AUM.

slivym 8y ago
There's a cost associated with buying and selling the underlying equities which is proportional to AUM.
- jonknee 8y ago
  Is there? For large index ETFs that is surely done by broker dealers arbitraging miniscule pricing differences between the underlying and ETF price.
- fiveFeet 8y ago
  Hmmm... why? What is so different between trading 100 shares vs 1,000 shares vs 100,000 shares? Trading is automated enough that a linear cost is not justified.

maxxxxx 8y ago

I would prefer they offered funds at cost plus some profit . It seems all "free" products come with some major downside because the company that offers them must make money through some sleazy backdoor. See Google, Facebook and others.

gxs 8y ago
Agree - I applaud the effort but I will stick with Vanguard for the foreseeable future.

djsumdog 8y ago

Coffee Break has a great video about Index Funds: https://www.youtube.com/watch?v=_vdB7gphtyo https://www.youtube.com/watch?v=_vdB7gphtyo The TL;DW is that in many different studies, index funds preform better in the very long term than almost any managed fund. Why pay some monkeys to manage your money when an even distribution over a bunch of common stocks does just as well?

bluGill 8y ago
Two points in favor of paying someone. First, most funds have goals other than beating the index, so if the index is your goal we should ignore them. However why is the index your goal? If you are far away from retirement (or whatever your reason for investing is), then the index is a good goal, but as you get closer to retirement you need to have an asset allocation that won't drop in value right when you need the money. The index will not do that for you. Second, of those that attempt to match/beat the index, some of them do beat the index year after year. IF you can get in one of them you are better off. Note that IF is in all caps - this is a big if, very few managed funds beat the index on a regular basis. However if some fund manager beats the index year after year, that manager ought to be worth a lot of money to you (so long as after expenses he beats the market) After considering the above, most of my money is in a target date retirement fund with a low expense ratio. I know I'm not going to beat the index, but as I get older they balance things. I know someone invested all in an index who retired right before a crash, the crash combined with his withdrawals to live cut his principal enough that he is now broke. (I suspect he didn't have enough savings to retire in other than best case scenarios, but even so his required capital to retire is higher in a stock index). I do have some play money in an index fund, if things go well I'll retire early on that cash, if things go bad, at least my normal retirement is not in trouble.
- AnimalMuppet 8y ago
  Re beating the index: Here's a bunch of managed funds that try to beat the index. Some do better, some do worse - say, 50/50. The next year, half do better, half do worse, and it's (for the most part) unrelated to the year before. So now you have 25% of the funds having beaten the index two years in a row. As you said, very few managed funds beat the index year after year. But even for those funds, the question is, will they beat the index next year with greater than 50% probability? I'm not sure that any of them will.

asdfman123 8y ago

I still trust Vanguard now because they're not-for-profit. I own a certain percentage of it by buying their index funds and I know their interests are beholden to mine. The ER for Vanguard still only 0.15%, which is about $12/mo per $100k invested.

mkozlows 8y ago
0.04% for Admiral shares, aka the ones for people who have $100k.
- froindt 8y ago
  Admiral shares come in at 10k for most of their funds. E.g. VTSAX has the 0.04% ER and a 10k minimum, while the Investor class is at 0.14% (VTSMX). https://investor.vanguard.com/mutual-funds/fees https://investor.vanguard.com/mutual-funds/fees > Admiral Shares > * $10,000 for most index funds and tax-managed funds. > * $50,000 for most actively managed funds. > * $100,000 for certain sector-specific index funds.
  - TheCoelacanth 8y ago
    Does that include target retirement funds and the like that include a mix of different asset classes? Last time I looked I didn't think it did, so you would need more than $10k if you want to do the sensible thing and not have 100% of your assets in stocks.
    - froindt 8y ago
      The target date funds seem to have a 1k minimum with an ER of 0.13-0.15%. [1] There are no admiral shares for target date funds. Across their other mutual fund offerings, investor shares generally have a similar expense ratio to the target date funds with a 3k minimum. When I was getting started, it took awhile before I was diversified beyond a single fund (currently not using the target date funds), then eventually getting up to admiral shares. > Last time I looked I didn't think it did, so you would need more than $10k if you want to do the sensible thing and not have 100% of your assets in stocks. Looking through all their target date funds, none have more than 90% stocks. The 2015-2040 funds have 60% to 15% bonds, with all later dates at 10%. [1] https://investor.vanguard.com/mutual-funds/list#/mutual-funds/asset-class/month-end-returns https://investor.vanguard.com/mutual-funds/list#/mutual-fund...

mamurphy 8y ago

Reddit had a few good discussions of this if you are interested: https://www.reddit.com/r/personalfinance/comments/940jdc/fidelity_launches_zero_fee_index_funds/ https://www.reddit.com/r/personalfinance/comments/940jdc/fid... ; https://www.reddit.com/r/personalfinance/comments/93s4mj/fidelity_to_offer_0_expense_ratio_index_funds/ https://www.reddit.com/r/personalfinance/comments/93s4mj/fid...

SpaethCo 8y ago

While the new funds are attracting all the attention, I find these other changes more interesting: Expense Ratios have been slashed across existing funds: https://www.fidelity.com/mutual-funds/investing-ideas/index-funds https://www.fidelity.com/mutual-funds/investing-ideas/index-... Premium, Investor, and Institutional classes are all being merged into 1 class with lower fees and no minimums: https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/press-release/Fidelity-Redefines-Investing.pdf https://www.fidelity.com/bin-public/060_www_fidelity_com/doc... For people holding existing Fidelity index funds, you just start paying less now without having to do anything.

deleted 8y ago
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astura 8y ago
I got this email this morning, short and sweet: --- As of August 1, 2018, we introduced the following changes, which will be automatically applied to your affected Fidelity accounts: • Removed account fees and minimums • Eliminated domestic money movement fees • Lowered expense ratios on all Fidelity stock and bond index mutual funds • Introduced two index mutual funds (FZROX and FZILX) with a zero expense ratio No action is required on your part. --- I've never paid a fee for domestic money movement (EFTs) so I wonder what that refers to. Fidelity also has an extremely attractive product in their cash management account (free checking account with ATM reimbursements)
- nerdponx 8y ago
  Fidelity also has an extremely attractive product in their cash management account (free checking account with ATM reimbursements) Schwab has this as well, and a better privacy policy than Chase to boot.
- bbarn 8y ago
  If you have good credit, their credit card is good for a daily driver if you're the type who pays off a card monthly. Unlimited 2% cash back, no annual fee. You can set up the cash back to go straight into investment accounts too.

jorblumesea 8y ago

Vanguard returns 94% of the securities lending business of the fund, back to the fund. Fidelity is around 40%, iShares is 50%. Meaning even with fees, Vanguard is a better deal as you get more money back on the money that you own. It's more complex than just simply measuring fees. These are some additional factors to consider: Tracking Error Capital Gains Securities lending Mutual Ownership Structure https://personal.vanguard.com/pdf/ISGSL.pdf https://personal.vanguard.com/pdf/ISGSL.pdf https://www.ishares.com/us/literature/brochure/securities-lending-unlocking-portfolios-en-us.pdf https://www.ishares.com/us/literature/brochure/securities-le...

xur17 8y ago
If I'm understanding correctly, if I compare the performance of my VTSAX fund vs all of the stocks that make it up, VTSAX would show better performance because it includes money made from lending out securities? This seems like a major spot for consumer confusion - how do these funds decide what percentage to return back to the fund vs keep? Why wouldn't Fidelity keep 100% of these fees, and then charge a negative fee?
- jorblumesea 8y ago
  > VTSAX would show better performance because it includes money made from lending out securities Correct, VTSAX would probably perform better by a small margin, but it's also hard to compare given that everyone rolls their own "Total Market Index" with slightly different stock composition. At the very least, you're getting more of your money back to you. > how do these funds decide what percentage to return back to the fund vs keep? Depending on how much money they want to make :) vanguard is actually a mutually owned firmed, the only one. So they have little incentive to tax themselves. When you buy vanguard funds, you are also buying ownership of vanguard. > Why wouldn't Fidelity keep 100% of these fees, and then charge a negative fee? Because people have no idea how any of this works and "0% expense" rings out. They can make more money this way.
tanderson92 8y ago
It's also more complex than simply measuring how much of the securities lending revenue ends up back in the fund. Most of that 60% for Fidelity's funds don't end up back in Fidelity's pockets either, but instead in the pockets of the people who borrowed stock from Fidelity investors in the form of rebates. You can understand this like: the borrower puts up 100-105% of the collateral and so should get some portion of the short-term rate on that cash. It's not clear why the disparity exists between Vanguard and Fidelity though. iShares is truly different where they actually take 15-30% of profits for themselves.

OnlyRepliesToBS 8y ago

And you thought Bitcoin was risky? Fuck it, we're going 5 blades!

ppeetteerr 8y ago

If you don't pay for the service, you end up the product.

craftyguy 8y ago
While usually true, it's not 100% true in all cases. In this case, it's almost certainly a loss leader for other higher priced funds and other financial advising/services they offer.
- ppeetteerr 8y ago
  I don't buy it. This is a financial company. They don't compete with their own funds for the opportunity to up-sell their customers.
  - craftyguy 8y ago
    And why not? Being a 'financial company' is not really a convincing argument against them possibly up-selling here.
    - ppeetteerr 8y ago
      I'm not referring to the up-sell. They can upsell a cheaper service. Having a free service means that every customer is extra cost. When you sell something, however little you charge, you still charge just above recurring cost (unless you're a startup). If you don't charge, then every customer is an expense. Trusting that your sales team can up-sell hard enough to compensate for the recurring cost of a customer is wishful thinking.
      - craftyguy 8y ago
        You're assuming that all fidelity customers are competent investors, when in fact many (most?) of them are customers of fidelity only because fidelity is the custodian for their company retirement plans. Many (most?) of these folks had no idea why a ER > 1.0% was not good for them, but now that the word is out, this could easily be a gimmick to convince more folks to choose fidelity for servicing retirement plans and investments. So, 1) pick trendy topic among casual (retirement) investors, 2) blow competition out of water by offering it for free to get their attention, 3) gain trust and additional business from casual investors My employer uses fidelity for retirement plans (so I'm a customer, whether I like it or not), and I'm bombarded by emails/communications very regularly to sign up for various services from fidelity for 'planning for my future'. These services ultimately cost a lot of money. Many of my coworkers have signed up.

Veraticus 8y ago

I wonder if there's a natural cost to operating a fund, that would make this kind of product unsustainable, long-term? In contrast, Robinhood can provide free trades, and M1 Finance can provide free portfolio-oriented management, but they also both have good explanations for their underlying business models. To be transparent, I work at M1 Finance, and I invest in a few Fidelity ETF's; still not sure how I feel about this one.

deleted 8y ago
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TuringNYC 8y ago
>> have good explanations for their underlying business models Where could I find this? I havent seen it anywhere and have been half-worried they will either jack up prices or sell-out customers hanging like CapitalOne/ShareBuilder did. What is their short term and long term revenue model that would make their [awesome] product sustainable? Aside: I love M1, especially after CapitalOne/ShareBuilder left their customers hanging.
- theautist 8y ago
  I think both Robinhood and M1 Finance collect interest on their customers' cash and securities. Robinhood also makes money by offering margin to its customers and I believe M1 Finance has a similar but more general offering called M1 Borrow where the money borrowed can be used anywhere instead of just trading.
philipodonnell 8y ago
I recently spec'd out an ETF based on the number of employees working in a given MSA with the management proceeds going to support entrepreneurship in that area. Fixed costs for operating a single ETF is about $250K, which means a minimum AUM of $50M with a 0.5% fee. Most platforms won't even list an ETF with < $40M because they know its not sustainable below that level. That said, for a manager of many ETFs, the fixed costs are much lower because they can be spread across multiple funds.
8y ago

tibbon 8y ago

Sooo... if it's possible (I have a Fidelity 401k), is it a good or terrible idea to put a small % of my 401k into this?

theandrewbailey 8y ago
There would be that nasty early withdraw penalty on that (probably). Not sure if it would be worth it in the long run. (IANA investor)
- astura 8y ago
  What‽‽‽‽ Changing your fund allocations within your 401(k), in general, doesn't trigger any penalties and is not a withdraw.
  - theandrewbailey 8y ago
    I was under the impression that it was about taking funds out of the 401k entirely (because the article doesn't mention 401k anywhere), not about changing the fund allocations within the 401k.
    - froindt 8y ago
      Whether the funds would be removed wasn't explicitly clear, but in a roundabout way, you brought up a good point. 401k's typically have a select 20-40 funds you can choose from, and this won't necessarily be available to GP. That being said, I haven't had a 401k with Fidelity in 3 years and don't recall if I had access to "everything" or if the fund choices are limited.
      - WorldMaker 8y ago
        I know Fidelity has limited Vanguard options in the past in its 401k and IRA funds options, presumably for control/competition reasons. I'm definitely curious how well Fidelity will promote its own index funds over actively managed ones, given they are still competing on active fees versus passive, but now just with themselves. I am planning to take a look at my own Fidelity accounts this weekend and see if they've surfaced these index funds well. It seemed encouraging from the email this morning.

bitxbit 8y ago

What people fail to see with this is that Fidelity (and other large money managers) effectively control supply. You think "oh great zero ratio!" but in reality the cost of having these market concentrations far exceeds a few basis points to individual investors. I would argue that the next financial crisis will be very much linked to ETFs and related beta products.

ttul 8y ago
Yes. For instance one way they make money is by lending shares for short selling.
- sdinsn 8y ago
  Fidelity has stated they make no income from lending shares for these funds
refurb 8y ago
Control supply of what? The index fund? If you can find investors, you can create one. Also, Fidelity is one of many index fund owners and my understanding is that their market share is lower than competitors.
cwkoss 8y ago
Yeah, ETFs are basically a herd-following strategy. When a higher proportion of traders aren't herd-following, this is an efficient strategy. However, as the proportion of herd-followers increases, the information held in a company's stock price increase is less indicative of faith in that company and more of faith in the overall sector. This has led to our current bubble, where everyone is buying stock, so the price goes up, so everyone wants to buy stock. No clue where the top is going to be, but it feels like this one is going to be uglier than 2008.
- 1stranger 8y ago
  > No clue where the top is going to be, but it feels like this one is going to be uglier than 2008. Pretty sure an asset bubble (which we've experienced many times in the past) will not be worse than the entire financial system melting down.

patja 8y ago

Vanguard is great as long as you don't ask much of them. I used to have my accounts split between Fidelity and Vanguard. But after several botched transactions where Vanguard reps gave me inaccurate information about their own processes, and lost or claimed to have never received multiple mailed signed documents (with difficult-to-obtain Medallion signatures), I switched everything to Fidelity and am much happier. I have never failed to get a knowledgeable/expert person on the phone whenever I've called Fidelity, which is a stark contrast to my experience with Vanguard.

opmac 8y ago
This is true to my experience as well, although I'm still a loyal Vanguard customer. I actually got dubious tax advice from a Vanguard rep that could have screwed me if I didn't do a bit more research. That being said, I do tend to prefer them over Fidelity (I am currently a customer of both), but maybe it's worth taking a closer look now.
- JibJabLab 8y ago
  Does Vanguard offer tax advice? Why not reach out to a tax accountant?
  - opmac 8y ago
    I asked what the tax implications were for performing a backdoor IRA conversion for an account I hold with them, and what they told me regarding tax implications was straight up incorrect. I did eventually speak to an accountant, which is how I wasn't burned by them.

alainchabat 8y ago

It's been a while I'm thinking about this. As an european (french if that helps), living in asia , does that worth it to invest in an american fund ? Anyone has a recommendation? Thanks!

misiti3780 8y ago

how is fidelity making money on this product ?

paulpauper 8y ago

I don't understand why the difference between .05%.15%, .001%, etc is such a big deal. IT's all within a tenth of a percent. Unless you live to 300 or something and never move the money, it won't matter that much. I think SPY is the best because it has low fees and can be traded like a stock, which means you are getting the best possible execution down to the penny.

orthros 8y ago
It's a big deal because the numbers will (hopefully) get large quickly. A $3M account that pays an extra 0.1% per year is dinged for $3,000 a year, every year. The cumulative compounded effect over 20 years is north of $75K.

whitepoplar 8y ago

Free overnight checks. Free cashier's checks. Free wire transfers (incoming and outgoing)...on top of what was already free. This is great! For those of you comparing Fidelity and Schwab for cash management, two things: 1) Fidelity's debit card also reimburses ATM fees worldwide, but lists a 1% foreign transaction fee for purchases. This doesn't apply to ATM withdrawals, which don't count as purchases and are, in fact, 0%. 2) Schwab's interest rate on cash in their checking account is 0.25% last time I checked. Fidelity's is similar, but they count purchased money market funds as liquid, withdrawable cash, and automatically liquidate shares when needed without intervention by you. So the effective interest rate on cash is somewhere between 1.55% and 1.9%, depending on which money market fund you choose. Schwab also has money market funds, but they're not treated as liquid cash. You must manually sell shares, wait until settlement clears, and then transfer funds into your checking account, which is a pain in the ass. 3) Not directly related to cash management, but useful nonetheless: Fidelity advertises $4.95 brokerage trades. Every time I've called and asked, "Can you give me free trades?," they give me free trades (usually 10-20) as a "goodwill" perk. It's a 60 second phone call. Don't pay for trades! EDIT: Perhaps notable for those who live in high tax states like NY or CA, interest income from Fidelity's "Treasury Only" money market funds is exempt from state taxes. Interest earned from a typical checking account or CD is state taxable. You can also purchase municipal money market funds which are exempt from state and federal taxes, but they have a lower yields.

rconti 8y ago
wow!
pbreit 8y ago
In your estimation are Schwab or Fidelity viable primary bank accounts?
- astura 8y ago
  Yes, they absolutely 100% are. Source: Fidelity is my primary bank account. A bonus is I get paid a day early, Fidelity makes my paycheck available a day before payday for some reason.

pascalxus 8y ago

I've noticed a lot of consolidation in 401Ks moving towards Fidelity. This has caused me some doubt as to their long term trustworthiness since greater power usually results in lower value for end customers. so, i'm pleasantly surprised to see them offering such a great product.

Animats 8y ago

- Account transfer out: $25 (Vanguard: $0) - Reorganization fee (?): $39 (Vanguard: $0) - Late Settlement Fee: $25 (Vanguard: 0) So that's how they make money off of this. It's index funds, the payday loan edition.

jimmyswimmy 8y ago
Those are not exactly common fees! I think you're pretty off base here. The first two fees probably ~once every five years on the upper end (how often do you change the registration on an account?) and the last is entirely up to you. Besides which, these fees are 0.25-0.39% each on a 10k account. I bet most of their accounts are much larger, and so the fees are proportionally smaller. Suppose you're charged $39 every three years - hard to imagine on that fee schedule - on your 10k account, that's around 0.13% per year. And that's a crazy high estimate for a relatively small brokerage account. It's not a way for Fidelity to stay in business.

OnlyRepliesToBS 8y ago

lol