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Fidelity Is Now Offering Zero-Fee Index Funds. Here’s How It’ll Make Money
Everyone should have at least one retirement account.
And you have a lot of options when deciding where to invest for retirement: 401(k)s, 403(b)s, traditional IRAs, Roth IRAs — all tax-advantaged accounts you can put mutual funds and exchange-traded funds in.
Unfortunately, that freedom can be paralyzing.
Many people can’t contribute more than a few hundred dollars per month, and with thousands of mutual funds and ETFs to choose from, sometimes it’s easier to just invest in a new car.
Well, Fidelity is trying to lower that barrier to entry for investors with something no major mutual fund company has ever done before.
On Friday, Aug. 3, Fidelity will begin offering two no-fee index funds with no minimum investment.
You’ll be able to invest in the Fidelity Zero Total Market Index Fund (FZROX) and Fidelity Zero International Index Fund (FZILX) with a zero expense ratio — the percentage of the fund that goes to fees associated with managing the fund — no account fees and no investment minimums.
These funds can go into a traditional or Roth IRA, 529 plan or any investment account when you purchase them through a Fidelity brokerage account.
Index mutual funds and ETFs are known for having the lowest fees in the investment world. Fidelity is just the first to cross the zero-fee finish line. Schwab’s lowest index funds have a 0.03% expense ratio, and Vanguard’s have a 0.04% ratio.
So you’d have to have a lot invested to see a significant difference.
How’s Fidelity Going to Make Money?
This looks like a classic “loss leader” strategy. A loss leader is a good or service that’s strategically sold at a loss to attract customers in hopes they’ll purchase other, more profitable products while they’re there.
Kind of like what MoviePass was (unsuccessfully) trying to do.
This is evidenced by the fact that Fidelity didn’t even let people take a breath before it also announced it’s dropping expense ratios on a number of other funds to as low as 0.015%.
Whether you stick with who you have or try out these new Fidelity funds, the most important takeaway is to consistently contribute to your retirement accounts. Lower fees typically translate to higher profits, but not if you don’t contribute.
This article contains general information and explains options you may have, but it is not intended to be investment advice or a personal recommendation. We can't personalize articles for our readers, so your situation may vary from the one discussed here. Please seek a licensed professional for tax advice, legal advice, financial planning advice or investment advice.
Jen Smith is a staff writer at The Penny Hoarder. She consistently invests in index funds and gives money-saving and debt-payoff tips on Instagram at @savingwithspunk.