This week Fidelity launched free index funds, the first company to do so. As Bloomberg reports they’re playing catch-up to Vanguard when it comes to the low-cost index fund space, and this is an unprecedented move.

Sure, as many on the web have pointed out, they’re definitely going to be using these no-fee funds as a “loss leader” to get customers to buy other profitable assets.

Sometimes there is such a thing as a free lunch. To me this is the same as credit card companies giving points and free stuff for using their card. The points and/or miles they’re giving you are indeed free if and only if you pay your credit card bill every month and the card has no annual fee. That’s what I do and I get free stuff.

Same with these Fidelity funds. If you put your money in them and do not also open other Fidelity accounts that have fees (as I’m sure Fidelity wants you to), then you are playing the game correctly. As far as I can see you can get a free lunch here.

Sure, Fidelity can just announce that they’re instituting fees on these funds a year or two down the road, but that might not go over well. In my mind they would have to keep these at no fee for at least a good while or it would seem like bait-and-switch and would alienate customers.

Additionally, while Vanguard requires a minimum investment of $3000 to open an account, Fidelity does not require a minimum at all. You can open an account with $10 if you choose.

What Does This Save You?

I saw this making the news rounds yesterday heavily and I saw many in the FI/FIRE community roll their eyes after the one-hundreth mention.

But I haven’t seen any of these masters of snark actually break down what it really means in numbers. I try to go the extra mile at Accidental FIRE, so I’m going to show an example of what these no-fee funds will save you as compare to Vanguard.

Let’s assume you’re just starting out. You have $3,000 to invest (since I want to compare to Vanguard and that’s their minimum for VTSMX – remember, VTSAX is the admiral shares and requires a $10,000 minimum, but has a much lower fee)

If you invest $3k with the Fidelity Total Stock Market Index Fund (FZROX) and keep it for 20 years, assuming a 7% return you’d have $11,609 after 20 years.

The same $3k invested in VTSMX which has a .14% operating expense would see you with $11,288 after 20 years.

So $11,609 – $11,288 = $321

Over 20 years this no-fee index fund could save you $321. Not huge or life altering, but as I always joke if I saw $321 laying on the ground I’d pick it up 🙂

Now let’s do it for the Fidelity Fund versus VTSAX. To get in VTSAX you must invest $10k, so assuming the same 7% return, $10k in the FZROX fund over 20 years would grow to $38,697

In VTSAX, which has a .04% operating expense, you’d have $38,388.

$38,697 – $38,388 = $309

Basically you’re likely to save about $300 over 20 years in each scenario.

Is that enough to switch to Fidelity? For me, no. And probably not for anyone invested with Vanguard. But if you’re just getting started, it might be worth a look.

To me the bigger factor than the zero fee here is the no minimum investment amount. Many in the FIRE community have high paying jobs and don’t have any issues finding $10,000 smackaroos to open an account.

But they forget that in the real America the median family income is $58,000, and many or I’d guess most people simply can’t do that. Nor can they find $3,000 to open a VTSMX account. So being able to open a no-fee index fund with only $500 bucks is a valuable thing from my standpoint.

Now to be clear I’m a Vanguard guy, always have been. I’ve been investing with them since 1995. But if I were just starting out I would consider this offer for sure.

What say you AF readers – will any of you be switching to Fidelity because of this or perhaps opening a new account with them?

*Fidelity does advertise on this site through a third-party advertising company but Accidental FIRE has no direct business relationship with Fidelity and is not in any Fidelity affiliate programs.