Fidelity’s Zero-Fee Index Funds: What’s the Catch?

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Earlier this month there was an uproar in the financial news media that was interesting because:

  1. For once, it had nothing to do with Trump and
  2. It wasn’t bad news

Fidelity, the Boston-based investment group with $2.4tn under management, last week announced that it was cutting the cost of all its passive, index-tracking mutual funds, and introducing two new ones that boasted an expense ratio of zero — in other words, the first free investment funds.

~~Fidelity’s no-fee fund triggers mix of alarm and calls for calm, Financial Times

Fidelity Investments just beat all of the low-fee index fund competition to a move long expected: It will be the first fund company to offer core index funds without any management fee.

~~Fidelity one-ups Vanguard, Schwab and iShares, becoming first company to offer a no-fee index fund, CNBC


Retirement giant Fidelity wants to let you invest for free. But should you?

~~This Mutual Fund Giant Is Now Offering a Zero-Fee Index Fund. So What’s the Catch?, Time

Which of course triggered a flood of emails into our inbox asking about these things, so I thought now would be a good time to address this.

What is it?

First of all, if you don’t know why low-cost Index funds are a Very Good Thing, check out our Investment Workshop. Because not paying high investment fees is the easiest, most reliable way to boost your portfolio’s performance, these things are the building blocks of any self-respecting aspiring (or current) early retiree striving for Financial Independence.

Ever since the 2008 stock market crash proved the relative uselessness of active portfolio managers, the popularity of Index funds has grown until now about half of all US funds invested in equity are invested in passively managed Index funds, mostly led by Vanguard. Now that it’s no longer possible to dismiss passive investing as a temporary fad, that’s forced other fund companies to offer low-cost Index funds as well or risk seeing their assets-under-management get hammered. It’s also caused a bit of a race-to-the-bottom when it comes to investment fees as each company attempts to one-up (or one-down?) each other.

Well, now it looks like Fidelity has won said race-to-the-bottom by offering a pair of Index funds which have fees of 0%. That’s right, 0%. And they are the Fidelity ZERO Total Market Index Fund (FZROX) and the Fidelity ZERO International Index Fund (FZILX).

What’s the Catch?

So what’s their deal? It still costs at least some money to run these things, so why would they be willing to take a loss?

According to Fidelity themselves, they’re doing it to bring customers onto their platform.

Cleverly, when Fidelity made FZROX and FZILX, they chose not to structure them as ETFs. They’re mutual funds. The key difference here is that ETFs are bought or sold on the stock market, so owning an ETF can be done at any brokerage company that can trade on the stock market. Mutual funds, on the other hand, can generally only be owned by opening up an account at that specific company.

So the only way to gain access to this fund is you have to transfer your money into Fidelity. That’s the catch.

It’s a common tactic in the retail world, known as loss leading. Here’s how it works: A grocery store advertises a sale on cereal. You think, “Yay! Cereal!” So you go and pick some up. But when you’re there, you realize you’re also out of milk, and since you can’t eat cereal without milk, you buy some at regular price. And while you’re at it, you pick up some bananas and other stuff too. So the grocery store took a loss when they sold you the cereal to get you into the store, but then made up for it with the other stuff you bought at regular price.

In this case, FZROX and FZILX are loss leaders. They’re taking a loss hoping you transfer all your funds over, and then they’re going to try to sell you on their other funds (which have a steeper MER), or maybe some professional active management advice if they notice you’re a big enough account.

Is This a Good Idea?

Not necessarily.

While equity funds are a major part of your overall portfolio, they aren’t the only part. You still need bonds, and that’s where using Fidelity starts to not make sense. If we were to take our workshop 60/40 portfolio and switch everything over to Fidelity, this is what our fees would look like.

FundTickerAllocationMERWeighted MER
Fidelity ZERO Total Market Index FundFZROX30%0%0%
Fidelity ZERO International Index FundFZILX30%0%0%
Fidelity Total Bond FundFTBFX40%0.45%0.18%

Now compare this to our Workshop portfolio built with Vanguard ETFs

FundTickerAllocationMERWeighted MER
Total Stock Market ETFVTI30%0.04%0.012%
TFSE All-World Ex-USVEU30%0.11%0.033%
Total Bond Market ETFBND40%0.05%0.02%

So even though we’ve eliminated fees for our equity funds, using the Fidelity bond fund actually made our total portfolio MER go UP, to double what it used to be!

Should You Switch?

Now, I’m not claiming Fidelity is doing anything unethical, or even wrong. Just that they’re using a tried-and-true marketing tactic known as loss-leading to try to bring in more business for their other products.

However, it might make sense to open up a Fidelity account and ONLY move the equity portion of your portfolio in while leaving your bond portion with Vanguard. Then, using a free tool like Personal Capital, aggregate the two accounts into one screen so you can still view investments as one giant portfolio. Rebalancing might take a bit more work since you’ll have to move money back and forth between the two companies, but since you typically rebalance only once a year that might not be too bad.

That being said, I’d be extra careful of a few things if you were to go down this route:

Caveat #1: Capital Gains

If you sell your Vanguard ETFs and buy Fidelity ones inside an Individual Trading Account, you’re going to create a taxable event. If your investment has gone up in value, capital gains taxes will be due. To get around this, you can consider harvesting your capital gains gradually to take advantage of the 0% tax rate on the first $77k of LT capital gains. Our good friend and fellow FI blogger MadFientist wrote an excellent article on how to do this here.

Caveat #2: Don’t Split up Your 401(k)’s

If you, for whatever reason, have both equities and bonds in a tax-deferred or tax-sheltered account like a 401(k) or a Roth IRA, don’t do anything silly like open up another Roth IRA in Fidelity and try to run one IRA for your equity and another for your fixed income. Just trust me on this, it will be an absolutely monstrous pain in the ass.

When you rebalance, transferring between Individual Trading Accounts is relatively easy. Just do an ACH transfer into your checking account, then another ACH back out. But for a 401(k) or an IRA, this will involve tons of forms, and more importantly cost you money each time you transfer. And oh yeah, if you screw up a transfer it maybe get counted as an early withdrawal and you’d be subject to income tax on the transfer amount as well as a 10% Federal tax penalty if you’re below the age of 59 1/2.

Just trust me on this. Don’t split up your retirement accounts.


So there you have it. Fidelity Zero-Fee Funds. A good product, a GREAT product even. But only if you can avoid the siren song of moving all your money over and buying into other higher-fee products, and if you can do it without complicating your finances in a way that will cost you more than what you’d be saving.

What do you think? Yay or Nay on the Fidelity Zero-Fee Index Funds? Let’s hear it in the comments below!

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49 thoughts on “Fidelity’s Zero-Fee Index Funds: What’s the Catch?”

  1. I own the Fidelity US Bond Index (FSITX) and it says the expense ration is 0.025%, not 0.045%. Am I missing something obvious?

    1. No, you’re not missing anything. Wanderer missed something and incorrectly assumed that the 0.45% ER fund is the only bond fund at Fidelity. But Fidelity and Schwab now have funds in every category that have lower fees than Vanguard. So far, it hasn’t hurt Vanguard to have the worst expense ratios among the top-3 providers. Money is still flowing into Vanguard.

  2. To be fair to Fidelity, they also offer a couple hundred commission free ETFs (with a 30 day min holding period IIRC, which should be zero problem for us long term buy and holders 🙂 ). Notably, they offer AGG total bond index fund from ishares for zero commission. Same 0.05% expense ratio as the Vanguard BND/VBTLX total bond fund.

  3. Right. Don’t Fidelity have a cheaper bond ETF? I have an account at Fidelity for my kid’s Roth and it was invested in no fees iShares ETF previously. I’ll switch to FZROX soon.

  4. I don’t think they are taking a loss, they still make money lending out their shares to the shorts

    I have both Fidelity and Vanguard, I don’t think I will change any current holdings but I will strongly consider this fund for any conversions/rollovers going forward. Maybe Vanguard will match this

    1. Exactly. Bogleheads widely presume that Fidelity is making up any lost revenue by attracting buy and hold investors so they can lend shares for a longer term at higher commissions because we don’t move in and out. Sounds like a great exchange to me!

  5. Well, you’re right that these new mutual funds are intended to bring in new business, but I don’t believe the vast majority of Fidelity funds (bonds or otherwise) have expenses as high as that bond fund.

    Maybe you were just trying to prove a point. Fidelity is actually a pretty good company to deal with in my experience.

  6. I’ve got no beef with these no-fee Fidelity funds, myself. I know others have looked into and the savings are pretty minimal between the fees. It is good to get this type of competition though, and obviously, if you already have a tax-advantaged account that can invest in these funds, then why not do it.

    For whatever reason, my Solo 401k with Fidelity won’t let me buy FZROX. Hoping they open that up to Solo 401k investors later.

    1. Solo 401K rules are constraining for the brokers, and either Fidelity isn’t ready to get the IRS approvals, or not willing to spend money to lose money as investors move from other funds to ZERO in their Solo 401K account.
      This is why we have to carry a check in to make Solo 401K deposits rather than deposit electronically, it’s not Fidelity, it’s the IRS.

  7. Hi Wanderer, Thanks for the in-depth analysis. I moved back to Canada years ago, but still have 401K mutual funds in the U.S. with Fidelity and am in the process of moving to Brokerage Link option within Fidelity to purchase ETF-based funds instead. I will purchase FZROX and FZILX at zero MERs and a low cost Bond ETFs and not Fidelity to reduce my total MER.

  8. I never left Fidelity to go with this Vanguard hype out there. Now that Fidelity has killed the competitors by letting us invest for free…will never switch!
    I’ve been a Fidelity client for decades and I couldn’t be happier! Their basket of commission-free ETFs and investment options is best in class
    #gofidelity #ditchvanguard

      1. Here it might be. Out there there’s plenty of complaints against VG. Prices, terrible customer service, discrimination against immigrants are among them ! Check out Reddit forums.

    1. Here it might be. Out there there is plenty of complaints against them ranging from terrible customer service to discrimination against immigrants. Check Reddit forums !

  9. I always wanted to ask a financial professional this question. So I allegedly assume that a person can open as many IRA accounts as they want and dump $10,000 into every one of them and let them sit for 20 years. Is this true that a person can do this and is this one of many ways millionaires become billionaires?

    1. I’m assuming you are referring to individual IRAs which have an annual maximum contribution limit of $5500 (and $6500 for people 50 and older)

      However SEP-IRAs contributions cannot exceed $55000/year

      1. I heard the maximum contribution to an IRA is $10,000. And if you let that $10k sit for 20 years untouched, you’re an automatic millionaire. Are there limits to how many IRA accounts a person can have open at once?

  10. Thanks again for another awesome article explaining financial hot topic in the FI world. I was wondering about the 0 fees myself but haven’t had time to call them up.
    Great article.

  11. I’ve wanted to invest with Vanguard forever but they won’t let me because I’m an American expatriate with no US address (they initially lied to me and said it was some sort of federal policy/law/rule, but later admitted that it’s their own policy!). Wanderer, have you run into a similar situation?
    And will Fidelity let me invest?
    Thanks and greetings from Taipei, Taiwan!

  12. I’ve been getting asked about these new funds over on my blog as well.

    There is, in my view, zero chance that FZROX will maintain a 0% ER for 60 years (as one of my readers suggested). Or even six. These are, as your post says, loss leaders and loss leaders are short term hooks to lure in the suckers, er, investors.

    Vanguard is structured to seek ever lower costs for its shareholders.
    Fidelity is structured to seek maximum profits for its owners, which means raising ERs whenever possible.

    Plus, FZROX still has operating expenses. Fidelity is just shifting those expenses to the holders of their other funds. I have an ethical issue with that. Not to mention a practical one if I owned one those other funds.

    One last thing that likely no one but cranky old geezers like me even know or care about:

    Back in the 1970s and early 1980s, when indexing was new and struggling for acceptance, Fidelity led the effort to strangle the concept in its crib. They recognized the threat indexing represented to their very profitable (to them) traditional high fee mutual funds. Those are where their hearts still lie. They’d kick indexing to the curb the moment they thought they could get away with it.

    Something to think about when making a long-term investment.

        1. The fact is that I always thought Collins link to Vanguard were a little suspicious and I really doubt he doesn’t get financial compensation for that. Now others are beginning to question that as well. I’m actually glad I wasn’t the only one.

          1. Hi Mary…

            I have never received a penny in compensation from Vanguard. Other than the fact I hold all our investments there, I have no other relationship with them. The opinions I express about them are purely what I believe.

            Jack Bogle did send me a very nice email about my book, which I posted about here:

            I do have affiliate links on my blog that pay me, and those are clearly identified. Even then, I only accept affiliates whose business practices and products meet my standards. When I write about them, my readers get my unvarnished opinion.

            If Vanguard were to offer such a program I’d definitely sign on. Then I would be getting paid and my critics would have a field day. But, as now, I would still write exactly what I think:

            Truth is, while there’d be money in it for me, I rather like that Vanguard doesn’t do affiliate programs. It is more in keeping with their ethic of keeping expenses down.

            Not sure if that puts your mind at rest on this or not, but it is the truth. And it doesn’t matter.

            You should always doubt what you read on the internet. 🙂

      1. So you think JL Collins will make money from Vanguard but Fidelity will not make any money from you? Makes total sense….

  13. I just wanted to chime in and say it doesn’t always make sense to consolidate 401k’s.

    Real world example, I have a former employer account that has the best fund for everything, 0.06 MER for total stock, 0.03 for total bond, just amazing funds across the board. But I work for a smaller company now, with a lackluster (incidentally, Fidelity) plan and the funds available aren’t even close.

    In this case I have no good bond fund in my new 401k. To balance I do independent buys and sells in each account weighing the total exposure of stocks and bonds. A small optimization to get the lowest MER. This balances my old 401k heavier in bonds to make up for a (smaller) stock only portfolio without good fund options.

    One day I may have to worry about finding a good bond fund, when my new 401k catches up in size to my old one, but it’s a good trick for now. I have an epic spreadsheet to help with setting allocations and doing rebalances (doing this, do not pass ‘go’ without one).

  14. I know it’s heresy to say it to index fund purists, but Fidelity Total Bond may be worth buying. Despite the annoying expense ratio, it’s beaten the Bloomberg Barclays Aggregate Bond Index over the trailing 1, 3, 5, 10, and 15 year periods. It turns out even the super cheap Institutional shares of the Vanguard Total Bond Market Index haven’t performed all that well over the last 15 years. It ranked in the 52nd percentile of all intermediate term bond funds over that period. Personally, I think an actively managed bond fund with below average costs such as Fidelity Total Bond, Dodge & Cox Income, Baird Core Plus Bond, or Harbor Bond are worth considering.

  15. wow

    garth turner really had it out with you two on his blog! why does he mock you guys?!?!

    ‘Is there something to learn here? Maybe. But really smart people spend their lives doing what they want, erasing that line between work and the rest. Retirement for them is irrelevant.’


    1. The generational conflict is showing! 🙂 And, as much as I hate to be confrontational, a philosophy that emphasizes chasing your own goals and ambitions looks to me just outright better than one that focuses on some predetermined path that may or may not mean anything to you.

      He does have a very valid point in that we don’t have to/shouldn’t wait 10+ years to try to improve our lives. In the same vein, I wouldn’t advocate for saving by deprivation — happiness during the working phase of your life matters; you’ll be doing it for several years even in the most optimistic scenarios (Finding the line between frugality and deprivation is admittedly hard though).

  16. OMG

    Garth this is mean!!

    ‘By the way, my two clients have been living off a modest 4-5% income stream from their million bucks, yet now work far more hours than they did when the bank owned them. They’re obsessed with creating a FIRE franchise, online, in speeches, books and the media. The party ended. The big gig started. Selling vapours is really hard work. Who knew?’

  17. @Wanderer:

    It’s easy to look this stuff up on
    I was going to post the links from, but Wordfence wouldn’t let me do it.


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