Fidelity slashes fees as U.S. funds battle for investors

The price war among mutual fund companies is hitting a new frontier in the U.S., to the further benefit of investors.

Fidelity says it will soon offer a pair of mutual funds that charge zero in expenses.

The new index funds are part of a suite of changes Fidelity is making to lower expenses and make investing easier, even for investors with smaller amounts to put into the market.

Mutual fund companies have been battling to attract customers, who have become increasingly aware of how much high fees can limit returns. Vanguard, the largest mutual fund provider, said last month it will stop charging commissions for online trades of most ETFs, for example.

Vanguard Investments Canada recently launched its first suite of mutual funds north of the border, with management fees based on performance ranging from 0.34% to 0.40% for the first year.

Read: Fund news from Vanguard, RBC

In the U.S., two zero-fee Fidelity index funds will be available Friday. One will cover the U.S. stock market, and the other will follow the international stock market. These kinds of funds often form the centerpiece of a retirement portfolio, along with bond funds.

Fees for mutual funds have been dropping steadily for years, and investors last year paid $59 of every $10,000 invested in stock mutual funds in expenses. That’s down from $100 in 2003, according to the Investment Company Institute. (All amounts are in U.S. dollars.)

Investors have been flocking to the lowest-cost funds with the knowledge that high-fee funds have to perform that much better just to equal their after-fee returns. More than three-quarters of all the money invested in stock mutual funds is in a fund that ranks in the bottom quarter of expenses, according to the Investment Company Institute.

Among other changes Fidelity is making: it set zero minimums to open accounts and zero account fees. It also is cutting expenses for its existing stock and bond index mutual funds by letting investors have the lowest-priced share class available, regardless of how much they have invested. Fidelity said the change will save shareholders about $47 million annually.

All the investor-friendly actions by Fidelity and others across the industry mean it’s never been this cheap or easy to put money into the market. Perhaps the only downside is the timing: the stock market is more than nine years into one of its longest-ever upward runs, and some experts on Wall Street are questioning how much longer it can go.

One other potential drawback to making investing easier is that it could make investors more likely to try to time the market and jump quickly in and out of stock—something that many investors get wrong, highlighting the importance of advisory services.

Also read:

As markets drop, here’s how advisors are communicating

Now isn’t the time to expand cost reporting: IIAC to MFDA

Staff, with files from The Associated Press

The Associated Press is an American not-for-profit news agency headquartered in New York City.