In the “race to zero,” someone just crossed the finish line.
Fidelity Investments on Wednesday announced the upcoming debut of two mutual funds that break new ground in affordability, with annual expense ratios of 0%, making them essentially free to own.
The funds, which will debut on Aug. 3, cover broad swaths of the global equity market. One fund, the Fidelity ZERO Total Market Index Fund, covers the entirety of the U.S. stock market, while the other focuses on international stocks. (The funds will earn income by lending securities out to broker-dealers and other institutions, and there’s also the possibility clients will buy other services.)
While the pair appear to be the first funds to appear on the market with a zero-percent expense ratio, the step merely reflects a decade-long shift on Wall Street, where fees have been steadily dropping for years.
According to Morningstar, the average expense ratio for funds in 2017, when weighted for the amount the funds have in assets, was 0.52%. That represents a decline of 8% from the 2016 average, the largest year-over-year drop in the research firm’s data, which goes back to 2000. Morningstar estimated that investors saved roughly $4 billion in fund expenses as a result of the drop. The shift has occurred across all major fund categories, including both active and passive strategies, and ones holding stocks, fixed-income, and commodities like gold.
The most popular fund categories, especially for passive strategies, charge significantly less than 0.52%. In fact, Fidelity’s new funds are just a couple of steps below offerings that are already on the market. The iShares Core S&P Total U.S. Stock Market ETF
, which also provides passive exposure to the entire U.S. market, carries an expense ratio of 0.03%, or $3 for every $10,000 invested. Vanguard’s Total Stock Market ETF
Compared with these funds, an investor would need to have a significant amount invested in Fidelity’s product to see any appreciable savings over time.
Fund fees have gotten so low that Vanguard has played down the importance of this issue when evaluating options. Instead, it has urged investors to consider other factors, like spreads, liquidity, and tax efficiency.