Fidelity Investments is taking the price war in investing to its logical conclusion: no fees at all.
The company will offer two new index funds to individual investors with a zero expense ratio, according to a statement issued Wednesday. The funds will track indexes Fidelity created and give investors exposure to the total U.S. stock market and an international benchmark.
The closely held firm is engaged in a price war with Vanguard Group, BlackRock and Charles Schwab, all of whom have reduced fees dramatically on index mutual funds and exchange-traded funds. BlackRock fell 4.6% on the news. T. Rowe Price Group, Legg Mason and Franklin Resources also slid.
Fidelity is likely to benefit from the zero-fee strategy by luring new customers and earning fees on securities lending.
"Fidelity has lots of ways to make money from customers once they are in the door," said Russel Kinnel, director of manager research at Morningstar. "This could work for them."
Additional fuel for the price competition among money managers has come from a practice that involves asset managers loaning out shares of companies. In exchange, the firms get cash collateral, which they can reinvest for a return to help offset fees associated with index funds and exchange-traded funds.
"Since we expect Fidelity is a profit-making organization, we expect somehow they will look to make money, likely on the sec lending of assets," said Robert Lee, an analyst at Keefe, Bruyette & Woods, in a note Wednesday.