Fidelity Zero Funds: Smart Investment Or Risky Gamble?

Fidelity ZERO funds are a line of mutual funds from Fidelity that launched in 2018 with zero fees. The funds are only available to individual retail investors who reside in the United States and purchase shares through a Fidelity brokerage account. The funds track proprietary indexes created by Fidelity, and there are currently four ZERO funds, all for stocks: the ZERO Large Cap Index Fund, the ZERO Extended Market Index Fund, the ZERO Total Market Index Fund, and the ZERO International Index Fund. While the funds have no fees, they do pass on transaction costs to investors. So, should you invest in them? Well, that depends on your circumstances. If you're a new investor who wants an inexpensive way to start investing small amounts of money, then Fidelity's free funds are a compelling choice. However, if you have larger sums to invest or use taxable accounts, you may want to stick with more established, low-cost index funds.

What are Fidelity ZERO funds?

Fidelity ZERO funds are a specific line of mutual funds from Fidelity that launched in 2018 with zero fees. The expense ratio for these funds is 0.00%, meaning investors get to hold on to more of their returns.

Fidelity currently has four ZERO funds, all for stocks:

• Fidelity ZERO Large Cap Index Fund (FNILX): Captures U.S. large-cap stocks via the Fidelity U.S. Large Cap Index, which is roughly comparable to the famous S&P 500. FNILX has around 500 holdings.
• Fidelity ZERO Extended Market Index Fund (FZIPX): Seeks to track the Fidelity U.S. Extended Investable Market Index, which is composed of about 2,500 U.S. mid and small-cap stocks.
• Fidelity ZERO Total Market Index Fund (FZROX): Aims to capture the total U.S. stock market via the Fidelity U.S. Total Investable Market Index, which is likely comparable to the Russell 3000 Index. This fund has close to 3,000 holdings across U.S. large, mid, and small-cap stocks.
• Fidelity ZERO International Index Fund (FZILX): Captures international stocks outside the United States by tracking the Fidelity Global ex. U.S. Index, and is composed of about 2,500 mid and large-cap stocks outside the U.S.

The catch with these funds is that they track proprietary indexes created by Fidelity themselves, not household name indexes like the S&P 500. This is how Fidelity is able to offer them free of cost, as they don't have to pay licensing fees. Therefore, the behaviour of these funds will differ slightly from other popular index funds.

Additionally, to buy these funds, you must open a Fidelity brokerage account. If you buy one of these funds, you're stuck at Fidelity, as you can't transfer ownership to another broker.

What are the benefits of investing in them?

There are several benefits to investing in Fidelity's ZERO funds. Firstly, they are index mutual funds with zero fees, meaning investors get to keep all of their returns without paying any expenses. This makes them extremely attractive to investors looking for low-cost access to the stock market. The funds also have no minimum investment requirements, allowing investors to invest any amount without restrictions.

Another advantage is that these funds provide broad, diversified access to the global stock market. The ZERO Large Cap Index Fund (FNILX) captures US large-cap stocks, the ZERO Extended Market Index Fund (FZIPX) focuses on mid-to-small-cap stocks, the ZERO Total Market Index Fund (FZROX) aims to capture the total US stock market, and the ZERO International Index Fund (FZILX) invests in international stocks outside the US.

Additionally, the ZERO funds track proprietary indexes created by Fidelity, which means they don't have to pay licensing fees to use well-known indexes like the S&P 500. This allows them to offer these funds for free, as they don't incur the same costs as funds that track household-name indexes.

Finally, these funds can be a great option for beginning investors, particularly those who plan to invest in tax-advantaged retirement accounts. The lack of fees and minimum investment requirements makes it easier for new investors to get started without a large sum of money.

What are the drawbacks of investing in them?

While the Fidelity ZERO funds have no hidden fees and are truly zero-cost to the investor, there are still some drawbacks to investing in them.

Firstly, these funds are considered a "loss leader", meaning they are sold at a loss to entice customers to use other products and services from Fidelity. This could result in customers being cross-sold products that may not be in their best interests.

Secondly, the funds track proprietary indexes created by Fidelity, rather than well-known indexes like the S&P 500. This means that the behaviour of these funds may differ from comparable funds offered by other companies, and investors are stuck with Fidelity as they cannot transfer ownership of these funds to another broker.

Additionally, these funds do not have ETF equivalents, which tend to be more tax-efficient than mutual funds. This could result in higher tax implications for investors.

Lastly, while the ZERO funds have no expense ratios, the difference in index fund fees has become relatively insignificant. Many other funds offer expense ratios of 0.10% or less, so the cost savings of choosing a zero-fee fund may not have a measurable impact on an investor's financial life.

How do they compare to other funds?

Fidelity Zero funds are a line of mutual funds from Fidelity that launched in 2018 with zero fees. They are index funds with a 0% expense ratio, meaning investors get to hold on to more of their returns. This is possible because they track proprietary indexes created by Fidelity themselves, not household name indexes like the S&P 500, so they don't have to pay licensing fees.

The catch is that you must buy them at Fidelity, and if you do, you're stuck at Fidelity. If you buy one of these funds, you own a product that tracks a proprietary index that is only available at Fidelity. If you later wanted to transfer to a different broker, you wouldn't be able to take it with you and would have to sell your position and realize gains while transferring out.

The four funds are:

• 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)

FNILX captures US large cap stocks via the Fidelity US Large Cap Index, which is roughly comparable to the famous S&P 500. FZIPX seeks to track the Fidelity US Extended Investable Market Index, which is composed of about 2,500 US mid and small cap stocks. FZROX aims to capture the total US stock market via the Fidelity US Total Investable Market Index, which is likely comparable to the Russell 3000 Index. FZILX captures international stocks outside the United States by tracking the Fidelity Global ex. U.S. Index, and is composed of about 2,500 mid and large cap stocks outside the US.

Fidelity Zero funds are comparable to other low-cost index funds on the market. Plain-vanilla index funds can be found with expense ratios of 0.10% or less. Fidelity already has super-cheap funds that carry expense ratios of 0.015% per year, which amounts to $0.15 on every $1,000 invested.

Performance data on the ZERO funds is limited as the funds were launched in 2018. Since then, the ZERO Large Cap fund has outperformed Fidelity's S&P 500 index fund by substantially more than its 1.5 basis point fee. The other ZERO funds have not performed as well. The Extended Market Index fund has underperformed the Extended Market Index fund with a 3.5 basis point fee, and the Total Market Index fund has underperformed the Total Market Index fund with a 1.5 basis point fee. The Total International Index fund with a 6 basis point fee has also edged out the ZERO International Index fund.

In summary, while the ZERO funds have no fees, they track proprietary indexes that differ from the more well-known indexes. The performance of the ZERO funds has been mixed, with the Large Cap fund outperforming its comparable counterpart, and the other funds underperforming. The ZERO funds may be a good option for beginning investors who plan to invest in a tax-advantaged retirement account, but investors with larger sums to invest may want to stick with the tried and true low-cost index funds.

Should I invest in them?

Fidelity ZERO funds are a specific line of mutual funds from Fidelity that launched in 2018 with zero fees. The expense ratio for these funds is 0.00%, meaning investors get to hold on to more of their returns.

There are four ZERO funds, all for stocks:

• 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 are essentially a loss leader, a product sold at a loss to get you through the door so that Fidelity can later cross-sell you on other products and services, such as other funds and advisory services. There are no hidden fees and these are truly zero-cost to the investor. However, the funds track proprietary indexes created by Fidelity themselves, not household name indexes like the S&P 500. That's how Fidelity is able to offer them free of cost, as they don't have to pay licensing fees.

The ZERO funds have no fees, but they do pass on transaction costs to investors. There are also no minimum investment requirements.

So, should you invest in them? Well, that depends. For investors who are just getting started, the benefits of a $0 minimum investment and no expenses are tough to beat. The only cost associated with investing in Fidelity's free funds is using a Fidelity brokerage account. If you're a new investor who just wants an inexpensive way to start investing small amounts of money, Fidelity's free funds are incredibly compelling.

However, investors who have larger sums to invest, as well as those who invest in taxable accounts, may want to stick with the tried and true for now. Fidelity's free funds are still minnows compared to the established, low-cost index funds against which they compete. Until there is more history, it's smart to assume Fidelity's ZERO funds will likely generate returns that deviate from the indexes they "track".

In addition, these are mutual funds that do not have ETF equivalents. If we're talking about the taxable space, ETFs tend to be more tax-efficient than mutual funds, so your potential tax implications may outweigh the aforementioned fee savings.

In summary, Fidelity's free funds may not be perfect, but their value proposition is most clear for beginning investors who plan to invest in a tax-advantaged retirement account.

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