Fidelity No-Fee Funds: A Smart Investment Strategy?

Fidelity is a well-rounded brokerage that offers a range of investment options, including no-fee funds. These funds are part of the company's commitment to providing value to its customers by reducing investment costs. The four Fidelity Zero-fee funds introduced in August 2023 have no management fees, expense ratios, or minimum investment requirements. This means that investors can access these funds without incurring any charges, making them a very attractive option for those looking to minimise costs.

However, it's important to remember that there are no guarantees in the world of investing, and even fee-free funds may carry hidden costs or risks. Therefore, it's essential to carefully consider your investment goals, conduct thorough research, and understand the potential risks and fees associated with any investment before making a decision.

Fidelity's no-fee funds: pros and cons

Fidelity offers a range of no-fee funds, including the Fidelity Zero Large Cap Index Fund, the Fidelity Zero Extended Market Index Fund, the Fidelity Zero Total Market Index Fund, and the Fidelity Zero International Index Fund. These funds have a 0% expense ratio and no minimum investment requirement, meaning they are free to invest in. This makes them a good choice for those looking to keep costs low, as fees can eat into profits over time.

However, it's important to consider that these funds are likely being used as a loss leader, with the investment company subsidizing the costs to attract customers to other products that do charge fees. Additionally, while the funds are free to invest in, there may still be other expenses charged by investments, such as funds, managed accounts, and certain HSAs.

Another thing to keep in mind is that actively managed funds can sometimes produce better returns than indexed ones, so paying fees in certain market sectors may be worth it. Furthermore, if you already have investments in a taxable account that have risen in value, you may owe taxes on your gains if you sell, so it could be better to stick with your current funds rather than moving to a zero-fee fund.

Fidelity's no-fee funds also don't yet have a track record, so there's no guarantee they will do a good job of matching the indexes they're supposed to mirror. However, Fidelity has a strong reputation for its mutual funds, and even the funds that do charge an expense ratio are still competitive in terms of price.

Overall, Fidelity's no-fee funds can be a good option for those looking to keep costs low, but it's important to consider the potential trade-offs and do your research before investing.

How do no-fee funds compare to other funds?

No-fee funds, also known as no-load funds, are mutual funds that do not charge a sales commission or fees for purchasing or selling shares. They are often associated with lower management and transaction costs, no sales charges, broad diversification of investments, and lower portfolio turnover than actively managed funds.

No-fee funds, such as those offered by Fidelity, provide investors with a cost-effective way to diversify their portfolio and benefit from lower fees compared to other funds. These funds have a zero expense ratio, no minimum investment requirements, and no account fees for retail brokerage accounts.

Compared to other funds, no-fee funds offer several advantages. Firstly, they eliminate the sales commission, also known as a load fee, typically charged when purchasing or redeeming shares. This fee can range from 5% to 8.5% of the amount invested, which can significantly impact investment returns.

Secondly, no-fee funds often have lower management and transaction costs. Actively managed funds incur higher expenses as they employ fund managers to actively select investments and strive to outperform the market. In contrast, no-fee funds, such as index funds, passively track a market index and aim to mirror its performance, resulting in lower management fees.

Additionally, no-fee funds offer broad diversification within their given indexes, helping to mitigate risk. They also tend to have lower portfolio turnover, reducing transaction costs and minimizing tax implications.

Overall, no-fee funds provide a cost-effective option for investors by eliminating sales commissions and reducing management and transaction fees. By choosing no-fee funds, investors can maximize their returns and keep more of their investment dollars working for them.

What are the risks of investing in no-fee funds?

Investing in no-fee funds, such as those offered by Fidelity, can be a great way to keep costs low and boost your net returns. However, there are still some risks to consider before investing:

• Market Risk: No-fee funds, like any investment, are susceptible to market risk. The value of your investment will fluctuate, and you may lose money. While index funds aim to mirror the performance of a particular market index, they do not eliminate market risk.
• Concentration Risk: Some no-fee funds may focus on a specific sector or group of companies. For example, Fidelity's ZERO Large Cap Index Fund (FNILX) focuses on large-capitalization US companies. Investing in a narrow segment of the market can carry more risk than a diversified portfolio.
• Opportunity Cost: While no-fee funds can save you money on expenses and transaction costs, there may be other investment opportunities with higher potential returns. Consider the trade-off between the guaranteed cost savings of a no-fee fund and the potential for higher returns with a different investment.
• Liquidity Risk: Some no-fee funds may have limitations on buying or selling shares, or they may not be as widely traded as other investments. This could impact your ability to buy or sell the fund easily and may result in a delay in getting your money out.
• Manager Risk: No-fee funds are often passively managed, aiming to mirror a particular index. However, this means you are relying on the fund manager to effectively replicate the index's performance. If the fund manager deviates from the index or makes poor investment decisions, it could impact the fund's performance.
• Cryptocurrency Risk: Some no-fee funds, like Fidelity's Wise Origin Bitcoin Fund, invest in cryptocurrencies like bitcoin. Cryptocurrencies are highly volatile and can become illiquid, posing a significant risk to investors.

While no-fee funds can offer benefits in terms of cost savings, it's important to carefully consider the risks and weigh them against your investment goals and risk tolerance. Diversification, asset allocation, and conducting thorough research can help mitigate some of these risks.

What are the alternatives to Fidelity's no-fee funds?

There are several alternatives to Fidelity's no-fee funds, depending on your investment goals and preferences. Here are some options to consider:

Vanguard Index Funds: Vanguard offers a range of index funds with competitive expense ratios. While they may not be completely free, their fees are generally low, and they provide a similar offering to Fidelity's no-fee funds. Vanguard's Admiral Share Class has a $3,000 minimum investment, which is higher than Fidelity's no-fee funds with no minimum investment requirements.

Robinhood, Public, SoFi, and Firstrade: These brokerage platforms offer free options trading, which can be a good alternative if you're looking for no-fee investment options in the options market.

Webull, Interactive Brokers, and Charles Schwab: These platforms offer futures trading, which Fidelity does not currently provide. If you're interested in trading futures, these platforms might be worth considering.

Other Brokerage Accounts: Depending on your specific needs and investment strategy, you may want to explore other well-known brokerage firms such as TD Ameritrade, Betterment, Ally Invest, or Merrill Edge. Each of these firms has its own set of features, fees, and investment options that may align with your goals.

Actively Managed Mutual Funds: While Fidelity's no-fee funds are index funds, you may also consider actively managed mutual funds. These funds have higher fees due to the cost of fund management and research teams, but they offer the potential for higher returns if the fund performs well. Fidelity itself offers actively managed funds, or you can explore similar options from other fund providers.

Remember, when considering alternatives, it's important to evaluate your investment goals, risk tolerance, and the fees and features offered by each platform or fund. Conduct thorough research and consider seeking advice from a financial professional before making any investment decisions.

How do I invest in Fidelity's no-fee funds?

Investing in Fidelity's no-fee funds is straightforward.

First, you'll need to open a brokerage account with Fidelity. This is a simple process: you select the type of account you want, such as a standard brokerage account or an IRA, and then provide details to confirm your identity, employment information, and other personal information. If you already have a workplace retirement plan administered by Fidelity, you can log in with your existing details, and Fidelity will pre-fill some of the application information.

Once you have your account, you can invest in Fidelity's no-fee funds. Fidelity offers four such funds:

• Fidelity Zero Large Cap Index Fund (FNILX)
• Fidelity Zero Extended Market Index Fund (FZIPX)
• Fidelity Zero Total Market Index Fund (FZROX)
• Fidelity Zero International Index Fund (FZILX)

These funds have a 0% expense ratio and no minimum investment requirement. They are available to individual retail investors who purchase their shares through a Fidelity brokerage account.

Fidelity also offers a wide range of other funds with no transaction fees, including over 3,300 mutual funds and nearly 950 funds with expense ratios of 0.50% or less.

Frequently asked questions