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Fidelity Cuts Fees On Index Funds

Olly Ludwig


Fidelity Investments next year will cut fees on some of its biggest index mutual funds, and broaden access to some of its cheapest funds, in a gesture that appears linked to a broader fee war in the world of index ETFs involving companies such as Vanguard, Charles Schwab and BlackRock’s iShares.

Fidelity’s move, which doesn’t affect any of its actively managed mutual funds, lowers investment minimums on 22 funds, including 14 in its Spartan family of stock and bond index funds, Fidelity said in a press release . It lowered expense ratios on eight of those Spartan funds, making them among the cheapest ETFs canvassing the same pockets of the investment universe. The company has $100 billion in index assets and total assets of $1.6 trillion.

“Index funds are pretty much a commodity,” Sophie Launay, spokeswoman at Boston-based Fidelity said today in an interview. “We already offer some of the lowest-priced index funds, and this is the latest example of that.”

The minimum investment on “Investor Class” shares of the 14 Spartan mutual funds will drop to $2,500 from $10,000. Fidelity said it will automatically convert qualifying Investor Class shares into lower-cost Fidelity Advantage Class shares of the same fund in January 2013—hence the fact a lot more investors of relatively modest means will soon have access to some of the cheapest funds available, period.

As an example, Advantage Class shares of the Fidelity Spartan 500 Index Fund will cost 0.05 percent—or $5 for every $10,000 invested—compared with 0.06 percent currently. In comparison, the Schwab U.S. Broad Market ETF (SCHB) costs 0.04 percent, and the Vanguard S'P 500 ETF (VOO) and the iShares Core S'P 500 ETF (IVV) cost 0.05 percent and 0.07 percent, respectively.

Fidelity, with one exception, does not yet have a presence in the exchange-traded fund industry, so this week’s move doesn’t immediately apply to the world of ETFs. But to the extent ETFs are index funds competing for the same investor assets, it’s hard not to see the connection between what Fidelity is doing and the broader price competition in the ETF industry.

The lower expense ratios on the eight funds, which are effective Jan. 1, are as follows:

  • Spartan 500 Index Fund—Advantage shares to drop, as noted, to 5 basis points from 6
  • Spartan Total Market Index Fund—Advantage shares to drop to 6 basis points from 7 basis points
  • Spartan Emerging Markets Index Fund—Advantage shares to drop to 20 basis points from 22 basis points
  • Spartan Global ex U.S. Index Fund—Advantage Class shares will remain at 18 basis points, but Investor Class shares will drop to 22 basis points from 24
  • Spartan Mid Cap Index Fund—Advantage shares to drop to 10 basis points from 14
  • Spartan Real Estate Index Fund—Advantage shares to drop to 10 basis points from 13
  • Spartan Small Cap Index Fund—Advantage shares to drop to 16 basis points from 24
  • Spartan U.S. Bond Index Fund—Advantage shares to drop to 10 basis points from 11



A Bold Move Into ETFs—Finally

It does have one fund, the Fidelity Nasdaq Composite Tracking Stock ETF (ONEQ), which it rolled out in September 2003 and which has about $175 million in assets, but is now laying the regulatory groundwork for what looks likely to be a massive push into ETFs.

That launch was arguably quite timely, as rival fund companies—including the now-No. 3 ETF company, Vanguard—were barely yet in the business of marketing ETFs themselves.

But because Fidelity never followed ONEQ’s launch with rollouts of any other strategies, the company is now widely perceived as having missed out on the early phase of ETF development.

However, in the past year Fidelity has filed for broad regulatory permission to offer a variety of index as well as active ETFs and has also hired Tony Rochte, a reputable ETF industry insider, to run its ETF operation.

Moreover, it appears possible from the language in these regulatory filings that it could be seeking to market its new ETFs as a separate share class of its mutual funds—something Vanguard already does with patent protection.

It’s not at all clear how it will all pan out, but the ETF industry is watching Fidelity closely.


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