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Fidelity launches first-ever free index funds, and $1 billion follows in first month

Eric Rosenbaum
  • Fidelity Investments became the first financial company to offer no-fee index funds last month.
  • The two funds have already attracted close to $1 billion.
  • The zero-fee U.S. stock fund, which competes with low-cost index funds from Vanguard Group and Schwab, attracted over $750 million.

Vanguard Group founder Jack Bogle once said that the only thing growing as fast if not faster than ETFs is traditional index funds. Fidelity Investments may have been listening. Just a month after announcing it would become the first financial company to offer no-fee index mutual funds, Fidelity has attracted roughly $1 billion into the two portfolios.

Fidelity's zero-fee funds covering the U.S. and international stock market and have no management fee. The Fidelity ZERO Total Market Index Fund (FZROX FZROX ) has taken in $753 million, according to Fidelity's website. The Fidelity ZERO International Index Fund (FZILX FZILX ) has attracted $234 million.

"The $1 billion in the two mutual funds is a success," said Todd Rosenbluth Director of ETF & mutual fund research at CFRA. He said it is not a surprise, as Fidelity Investments has the size and marketing strength to support a strong launch, and he expects the assets will continue to rise. "Fidelity has the size to gather assets into a new fund quickly, but even though this is index-based, many investors will be patient to understand what they are getting."

The ETF market has seen recent launches really take off, as big financial firms try to grab market share from ETF and index fund and discount brokerage leaders like Vanguard and Schwab SCHW . JP Morgan JPM had two recent equity ETFs each raise $1 billion . But Rosenbluth said the strong flows into JPMorgan ETFs likely resulted a captive audience, in-house resources or institutional investors that were already prepared to invest.

Some of the fund companies hit hardest by the Fidelity move were publicly traded managers of active mutual funds, such as Federated Investors FII and Franklin Resources BEN , both of which were down more than 1 percent on Tuesday. Franklin has moved into ETFs more recently. BlackRock was also down 1 percent on Tuesday in afternoon trading.

Vanguard's total stock market ETF just hit $100 billion

To put the Fidelity early success into perspective, it still has a long way to go to catch Vanguard. Vanguard's Total Stock Market ETF (VTI VTI ) recently became one of only three ETFs to reach the $100 billion asset mark, joining Vanguard's S&P 500 ETF and State Street Global Advisors' S&P 500 SPDR (SPY SPY ).

CFRA does not measure monthly assets under management, so Rosenbluth said it is too soon for him to say whether money moved from a Schwab S&P 500 fund or another index fund, though as more data becomes available it may support the asset-gathering benefits of launching a zero-fee fund.

In the past month, the Vanguard S&P 500 ETF (VOO VOO ) and iShares Core S&P 500 ETF (IVV IVV ), took in a combined $9 billion, with the majority going to iShares, $6.6 billion.

Some fund experts have argued that the word "zero" doesn't have a positive marketing connotation when it comes to investments and that might limit appeal, but so far, it seems the intense fee war in the fund world has reached the point where "zero" is a selling point.

In late August, Vanguard launched its new brokerage site with all ETF trading offered free of charge, the first time an established financial services company to offer ETF trading for free on almost all funds except for inverse and leveraged funds.

Vanguard, Schwab and BlackRock BLK 's iShares have been waging a battle for low-fee supremacy in the ETF and index fund space, though Fidelity is the only to offer an index fund with no management fee.

Investing experts have cautioned that investors should not choose funds based on fee alone, as other factors influence the overall cost of holding funds, including trading costs and taxes. There also are concerns that the era of free investing may encourage investors to trade more frequently than is good for their long-term portfolio performance.



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