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Free Fidelity Funds Stoke Price War in Bid to Catch Index Giants

published Aug 1, 2018, 4:42:02 PM, by Charles Stein, Annie Massa and Felice Maranz
(Bloomberg) —

Fidelity Investments, having lost billions of dollars in assets to rivals, pulled out some new ammunition to use against them — dropping fees to zero.

The move is part of an ongoing reckoning at Fidelity. The company, which built an empire on the prowess of its stock pickers, has been moving aggressively to fit into a world increasingly dominated by low-cost index products and exchange-traded funds. But it’s playing catch-up to Vanguard Group and BlackRock Inc.

So Fidelity unveiled two new index funds Wednesday to individual investors with a zero expense ratio, a move that roiled fellow asset managers. Fidelity may use the funds, as well as the other index products it reduced prices on, to attract investors to more profitable businesses such as financial advice and higher-priced active vehicles.

“For a number of companies, not just Fidelity, these passive assets are a loss leader,” said Kevin McDevitt, an analyst at Morningstar Inc. “It is a way of bringing in assets and selling other services, especially financial advice.”

Closely held Fidelity has in the past few years joined the price wars with Vanguard, BlackRock and Charles Schwab Corp., all of whom have reduced fees dramatically on index mutual funds and ETFs. Fidelity’s fee cuts helped it gather $36 billion in its passive funds in the first half of this year, according to data from Morningstar. But investors still abandoned its active funds to the tune of $27 billion in the period.

Firm Fidelity Vanguard Charles Schwab Fund Name Fidelity Zero Total Market Index Fund Vanguard Total Stock Market Index Fund Schwab Total Stock Market Index Fund Net Expenses 0% 0.14% 0.03% Investment Min $0 $3,000 $0 Total Assets n/a $701.2 billion $8.1 billion
Source: Company data.

Fidelity’s announcement of its free funds rocked the shares of peers. BlackRock fell 4.6 percent on the Fidelity news. T. Rowe Price Group Inc., Legg Mason Inc. and Franklin Resources Inc. also slid.

Fidelity Surprise

“What caught people by surprise is that it was Fidelity” that first offered free funds, said Eric Balchunas, senior ETF analyst at Bloomberg. “That’s the shocker.”

Fidelity’s move may spur BlackRock and Schwab to respond with changes in their fund fees, Morgan Stanley analysts including Michael Cyprys said in a research note Wednesday. BlackRock could “accelerate their push into self index products as a way to cut fees and gather more assets,” the analysts said.

Ed Sweeney, a spokesman for BlackRock, did not comment on Fidelity’s new funds. He noted in a statement that BlackRock has a separate partnership with Fidelity, where it offers 240 commission-free BlackRock iShares ETFs. The deal makes it “even easier for investors to access iShares ETFs,” he said.

Freddy Martino, a Vanguard spokesman, said the company views the change as an example of the “Vanguard effect,” a term Morningstar used to describe rivals competing with the asset manager on costs.

Vanguard’s Pledge

“Vanguard will continue to lower the cost of investing on our index and active funds, as we have for the past 40 years,” Martino said in a statement.

Additional fuel for the price competition has come from a practice in which asset managers loan shares of companies. In exchange, the firms get cash collateral, which they can reinvest for a return to help offset fees associated with index funds and ETFs.

“Since we expect Fidelity is a profit making organization, we expect somehow they will look to make money, likely on the sec lending of assets,” said Robert Lee, an analyst at Keefe, Bruyette & Woods, in a note Wednesday.

Fidelity, which is based in Boston and manages $2.5 trillion, said in the statement it will also cut fees by an average of 35 percent on its existing index mutual funds, and will allow investors to open accounts with no minimum balance required.

Kathleen Murphy, president of Fidelity’s personal investing business, said the firm’s index funds are now priced lower than the cheapest share class available at Vanguard, the longtime leader in low-cost investing. The two zero-fee products will be available Friday. The other pricing changes took effect today.

“We are using our scale to provide more benefits to our clients,” Murphy said in an interview.

To contact the reporter on this story: Mark Gurman in San Francisco at mgurman1@bloomberg.net To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net Alistair Barr, Reed Stevenson
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© 2018 Bloomberg L.P

The Author

Walt Alexander

Walt Alexander

Walt Alexander is the editor-in-chief of Men of Value. Learn more about his vision for the online magazine for American men with the American values—faith, family & freedom—in his Welcome from the Editor.

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