Fidelity Investments of Boston last week launched the Fidelity Advantage Class shares on its five Spartan index funds, which will provide qualified investors with a bonus 30% reduction in fees, a remarkably lower price than what the rest of the industry offers on index funds. Some industry observers view the move as a strike against increasingly popular exchange-traded funds and industry rival Vanguard of Valley Forge, Pa.
John Bonnanzio, group editor of Fidelity Insight, a newsletter that tracks Fidelity, believes Fidelity slashed the fees because of "good old-fashioned competition." Fidelity has been losing its market share in recent years, and so this move is an effort to reverse that, Bonnanzio said. "They are taking advantage of their size and heft, and offering investors a deal they can't refuse," he said.
In August of 2004, Fidelity's Spartan 500 Index, Spartan U.S. Equity Index, Spartan Total Market Index, Spartan Extended Market Index and Spartan International Index funds were priced with Investor Class expense ratios of 10 basis points, and now these funds will be available to shareholders through the Fidelity Advantage Class shares for a mere seven basis points.
On four of the Spartan funds, the Fidelity Advantage Class and Investor class ratios are contractually fixed and therefore, can only be raised if the funds' shareholders vote to do so. However, expenses on the Spartan International Index Fund are being voluntarily capped at seven basis points for the Advantage Class and 10 basis points for the Investor Class. Contractually, they are respectively capped at 17 basis points and 20 basis points.
Other index funds in comparable categories to the Spartan 500 Index and Spartan U.S. Equity Index funds charge an average of 42 basis points, while funds in comparable categories to the Spartan Total Market Index Fund charge 44 basis points, and those in comparable categories to the Spartan Extended Market Index Fund charge 25 basis points, according to Fidelity.
Retail investors will have the opportunity to invest in the Fidelity Advantage Class shares, but under the condition that they have at least $100,000 invested in one of the Spartan equity index funds. Those retail investors, whose invested amount does not meet $100,000 can continue investing through the Investor Class.
As for employer-sponsored retirement plans, $100 million will be the minimum required investment in the funds, and employees will have to be qualified to invest in the Fidelity Advantage Class shares. To be more specific, an investor who has $100,000 invested in one of the funds would only pay $70 a year in fees. When compared to the average S&P 500 fund, which charges $420 a year in fees, this is a pretty impressive discount, according to Morningstar of Chicago.
This move appears to be Fidelity's attempt to win the battle against ETFs and low-cost Vanguard, which in June lowered the minimum investment on its low-cost, nine-basis-point Admiral Shares from $250,000 to $100,000. However, the Admiral Shares cover 64 Vanguard funds, including 24 bond funds. While Fidelity's new fee structure undercuts Vanguard's by two basis points, it only applies to five funds.
On the other hand, Fidelity's new Advantage Class makes its index funds less expensive than a number of ETFs, such as the iShares Dow Jones Total Market Index and the iShares Lehman Aggregate Bond funds, which both charge 20 basis points, and the iShares MSCI Emerging Markets Index Fund, which sports an expense ratio of 75 basis points. Furthermore, investors who trade ETFs usually have to pay brokerage commissions on top of these annual fees.
As to why Fidelity decided to offer the new share class at this time, spokesman John Brockelman said, "This price cut is part of a three-year-plus effort to reduce fees and costs for our investors."
Fidelity.com now offers investors at no charge third-party research and access to industry-leading analyst advice, and the company has done away with the $50 annual brokerage fee for new and existing IRA customers, Fidelity noted in a release. Over the past several years, it has done away with front-end sales charges on dozens of mutual funds, ultimately making Fidelity's whole product line of funds sold directly to investors load free.
Fidelity has also lowered expense ratios on 12 taxable investment-grade bond funds available directly to investors to 45 basis points, representing reductions of up to 31%. The company has also eliminated management fees on the Fidelity and Fidelity Advisor Freedom Funds, as well as rewritten the contracts of the four diversified domestic equity index funds to lock in the initial class of the funds to total expenses of 10 basis points each. Further, it has altered the trading of individual bonds with disclosed and simplified retail fixed-income concessions; lowered the cost of retail online bond concessions and reduced the per-contract charge for options trades to $0.75.
"For years, Fidelity has been aggressively cutting fees, lowering commissions and making it easier for investors to manage their money," said Jeff Carney, president of Fidelity Personal Investments, in a statement. "When you combine our new low-cost pricing on the Fidelity Advantage Class shares with the wide array of services - like our online tools, free guidance, access to more than 100 investor centers, and 24-hour phone representatives - that investors have come to expect from us, it is hard to find a better value for index funds."
Fidelity has notified eligible retail investors that they qualify for the new, lower-priced share class, and their fund investments have been automatically converted to the new shares. Because it is not a sale, no capital gains tax will be applied.
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