Why brokerages are outdoing each other to offer no-cost mutual funds, ETFs


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Investment management firms are falling over themselves to offer clients low- and no-cost stock and bond funds, opening the door to ultra-cheap accounts for individual investors.

The Vanguard Group, Fidelity Investments and other firms are playing the long game, sacrificing commissions and fees on mutual funds and exchange-traded funds (ETFs), betting that clients will add other more-lucrative products and services later to maximize their financial portfolios, experts say.

ETFs are big business for the brokerages. As of August, there were 5,665 ETFs globally with assets totaling more than $5 trillion, according to the research firm ETFGI. The mutual fund market is even larger with nearly $19 trillion in total net assets in the U.S. alone in 2017, according to the Investment Company Institute.

Both ETFs and mutual funds come with a host of fees and expenses, when you buy them in the form of trade commissions, and ongoing through the expense ratio, which is the percentage of your investment that goes each year to pay the operating expenses of the fund.

“The index fund pie continues to expand so firms are willing to aggressively compete on price for market share and to bring assets into their ecosystem,” says Todd Rosenbluth, director of mutual fund and ETF research at CFRA Research. “As more firms are willing to act this way the bar gets set lower. Investors are increasingly focused on paying as little as possible for asset allocation tools.”

Brokerages in how-low-can-you-go contest

In August, Fidelity issued a major punch in the no-fee fight by launching two ZERO funds — Fidelity ZERO Total Market Index Fund (FZROX) and Fidelity ZERO International Index Fund (FZILX). The new mutual funds are unique in that Fidelity isn’t charging investors anything for their management. Or in investor speak: they have zero expense ratios.

The ZERO funds already have grown to more than $1 billion in assets, according to Fidelity. The firm rolled out two new ZERO funds in September — Fidelity ZERO Large Cap Index Fund (FNILX) and Fidelity ZERO Extended Market Index Fund (FZIPX). Fidelity also has 265 commission-free ETFs available for purchase, but these do charge annual expenses.

Not to be outdone, this summer Vanguard dropped the commission it charges for trading nearly 1,800 ETFs, and JPMorgan Chase launched You Invest with 100 commission-free online stock and ETF trades.

Smaller firms like Robinhood are also competing on no- and low-fee trading options.

Fidelity vs. Vanguard
Fidelity Vanguard
Commission-free ETFs 265 About 1,800
Fee-free mutual funds 75 More than 124

Source: The Vanguard Group and Fidelity Investments

With low costs, investors can focus on what really matters

Eliminating commissions means there’s one less factor to consider when deciding between a product from Vanguard versus Fidelity or another firm, says Rich Powers, head of ETF product management for Vanguard.

“There’s a myriad of factors they should be looking at,” Powers says. “Commissions would have been one of them on the Vanguard platform, but that’s no longer the case now. Now they can focus on things like expense ratio, the bid/ask spreads, the exposure of the funds, the tracking of the portfolio and how tax efficient the portfolio is.”

Before picking ETFs or mutual funds, he recommends investors first consider their savings goals and how much risk they’re willing to take.

“From there, looking at the universe of low-cost investments is a really good next step,” Powers says. “We’ve done a lot of research that shows the lower the expense ratio, the higher probability of that product delivering on what the investor hopes it would.”

In general, keeping it simple and broad works for a lot of investors. A person could get exposure to all the stocks and bonds in the global market with as little as two funds, he says.

Some worry the reduction in fees will tempt investors to trade more often, which research has shown to be a drag on returns. While ETFs offer the flexibility to be bought and sold throughout the day, Vanguard strongly cautions investors from trading excessively and chasing hot performers.

Multiple investment accounts might work for you

Investment management firms want new customers, but they aren’t about to give away the farm.

“They can make money selling other fund products as compliments to low-cost products as well as for advice on portfolio construction,” Rosenbluth says.

It could make sense for investors to look at the full suite of offerings from prospective investment companies. In some cases, it could be beneficial to have multiple accounts, getting the best deals offered by each firm.

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