Fidelity takes on Vanguard by cutting prices on index funds, ETFs

The Boston-based fund giant's sector ETFs now cheapest on the market

Jun 28, 2016 @ 1:38 pm

By John Waggoner

Fidelity Investments announced Tuesday that it will lower expense ratios on 27 index funds and ETFs on July 1, as the competition for investor assets drives costs down further.

“We are taking already one of the lowest cost index fund offerings in the industry and making it even more compelling,” said Colby Penzone, senior vice president for Fidelity's Investment Product Group.

Fidelity is No. 2 in index assets and now offers several index products with lower costs than archrival Vanguard.

The Boston-based fund company's Fidelity 500 Index fund (FUSEX), which tracks the Standard & Poor's 500 stock index, charges 0.09% annual for individual investors, versus 0.16% for the Vanguard 500 Index Fund Investor Shares (VFINX). Fidelity's minimum investment in the fund is $2,500, vs. $3,000 for Vanguard's S&P 500 fund.

Similarly, the investor share class of Fidelity's Total International Index Fund (FTIGX) will sink to 0.18%, a whisker below the 0.19% for Vanguard Total International Stock Index Fund Investor Shares (VGTSX).

The fee cuts extend across all four share classes of Fidelity's index funds. For example, the Fidelity 500 Index fund's premium share class, which has a $10,000 minimum, will fall to 0.045%, vs. 0.05% for the similar Vanguard 500 Index Admiral shares.

Fidelity also cut the expense ratios of 11 sector ETFs from 0.12% to 0.08%, again pricing it below Vanguard's offerings. For example, the Vanguard Information Technology ETF (VGT) charges 0.10% annually, while the iShares U.S. Technology ETF weighs in at 0.43%. “They (Fidelity) have the lowest cost sector funds,” said Jim Lowell, editor of Fidelity Investor, a newsletter.

The move to cut expenses follows the relentless rules of competing with commodity products: Cut prices continually to keep competitors at a disadvantage. “In the past few years, Fidelity has gotten into the cost competition business,” Mr. Lowell said. “They want people to pay attention to the fact that they have the lowest-cost products.”

The move also moves Fidelity's brand in a different direction. “They have never figured out a way to break into the brand consciousness of the consumer,” Mr. Lowell said. “If investors think index, they think Vanguard, if they think growth, they think Fidelity. In the past few years, though, they have gotten into the cost competition business.

And that's a business that has room for very few competitors. A fund with a 0.05% expense ratio and $100 million in asset grosses just $50,000 in fees. Vanguard's unique corporate structure allows it to slash expenses to the bone. But Fidelity, which is privately held, can also cut expenses. “Fidelity doesn't have to make a dime on these for a decade,” Mr. Lowell said.

Fidelity's Mr. Penzone said it's not just about cost. “It's the value we bring and the services and distribution channels we offer,” he said. “We think active and passive can play a role in customers' portfolios. We're very focused on making sure we can support advisers in the space.”

Fidelity's move brought praise from Vanguard expert Dan Wiener, editor of "The Independent Adviser for Vanguard Investors."

“Fidelity is late to the party, but there's a lot of food and drink left,” Mr. Wiener said. “Most of the fund industry doesn't know where the party is.”

0
Comments

What do you think?

View comments

Recommended for you

All of the noise in the District of Columbia is distracting your clients. Ben Phillips of Event Shares explains what deserves your attention (and what doesn't) as we head into 2018.

Recommended Video

Channels

Latest news & opinion

Capital Group, sponsor of American Funds, wins 401(k) lawsuit

Decision comes as financial services companies, especially those focused on active management, have been sued for self-dealing.

SEC considers barring aggrieved investors from suing companies

Swept up by pro-business zeitgeist, regulator seeks to reverse two-decade slump in U.S. stock listings.

Wells Fargo, Morgan Stanley use contrary tactics to keep advisers

Wells is helping brokers transition to independence within the firm, while Morgan is taking them to court.

Fidelity pushes Vanguard to compete on brand in 401(k) plans

With Fidelity imposing an additional fee, Vanguard likely will look less attractive compared with comparably priced index-fund providers, advisers said.

Goldman's measure of risk appetite hits record

Global stocks and U.S. Treasuries are seeing their most "extreme" start to a year ever, bank says.

X

Hi! Glad you're here and we hope you like all the great work we do here at arjuna-design. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting arjuna-design.com? It'll help us continue to serve you.

Yes, show me how to whitelist arjuna-design.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Last News

reit distributions tax treatment cheap undervalued stocks cost of h&r block tax preparation taxact pricing spousal death benefits social security form 1099r codes annuity calculator fidelity merille edge turbotaxdeluxe ssi benefit statement fidelity select natural resources 16pf questionnaire free online what is a grantor in a trust internal revenue code section 72 t wells fargo advantage small cap value can a trust inherit an ira how to invest pension lump sum blackrock us debt index fund ticker fidelity canadian short term bond fund eaton vance high income opportunities fund how much is a first edition charizard worth td bank savings account interest rates vanguard total bond market index fund charles schwab mutual fund how are ordinary dividends taxed finance jokes one liners vanguard total stock market index fund investor shares vtsmx converting roth ira to traditional ira what is the meaning of decant ira tax deduction deadline maximum earnings when collecting social security merrill edge trading platform survivors benefits for widows janus mutual funds daily prices fidelity freedom fund review 2020 target date fund