Last year Fidelity Investments, one of the world’s largest asset managers, controversially launched two exchange-traded funds (ETFs) in the US that had zero fees.
That’s right. Not 1% fees. Not 0.1%. Not 0.01%. 0%. Nudda. Zilch.
Vanguard and Blackrock are already known for offering very low-cost index funds globally and in Australia.
The two cheapest that I’m aware of in Australia are the iShares S&P 500 ETF (ASX: IVV) and Vanguard US Total Market Shares ETF (ASX: VTS), both of which have annual fees of around 0.05%.
Fidelity’s move was a very interesting one. How do you make money on 0% fees?
The answer is you don’t. But I guess Fidelity hopes to make money from its customers in other ways, perhaps with its other funds, shorting or services. As a comparison, some credit cards come with benefits, but it’s the people that don’t pay on time and incur interest that pay for those benefits. In other words, the ETFs could be ‘loss leaders’ for Fidelity.
It seems unlikely that Vanguard and Blackrock will follow suit and drop prices to 0%. Vanguard offers its products to investors virtually at cost, and Blackrock needs to make a profit for its shareholders. BetaShares recently launched the Australia A200 ETF (ASX: A200) with a fee of just 0.07%, making it the cheapest Australian shares ETF on our list.
However, we may see further fee reductions in time, similar to how Coles Group Limited (ASX: COL) and Woolworths Group Ltd (ASX: WOW) reduced prices to combat Aldi and Costco in Australia.
With almost US$3 billion invested so far, the first zero-fee Fidelity ETFs are going quite well since launching around six months ago, although there’s a long way to go before they are the size of some of the major ETFs.
Zero Fees. Who Cares?
Does the difference between 0.04% and 0% make it worthwhile switching from one ETF to another?
Well, there could a lot of taxation implications (and potentially other issues) involved in moving money across. That aside, a $1 million portfolio would pay management fees of around $400 a year on 0.04%. That’s not much when you’re looking at $1 million, but the savings would compound over time.
With ETFs now being so cheap (or free), it’s very easy to achieve the average market return. I think considering these ultra-low-cost ETFs would be a wise idea.
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