Fidelity Investments loosed the latest weapon in the long-running price war among passive managers — two free mutual funds — but sources said the better news for institutional investors is a dramatic reduction in fees for 21 of the firm's indexed mutual funds.
The Boston-based manager launched Fidelity ZERO Total Market Index Fund and a companion international version of the self-indexed fund on Aug. 3.
Fidelity's two new equity funds, managed with internally developed indexes, are only available to Fidelity retail brokerage account clients and do not require an investment minimum, the company said in an Aug. 1 announcement.
The move is strictly a retail play: Fidelity said it has no plans to offer zero-cost indexed mutual funds to institutional investors.
But institutional investors got a significant pricing break, sources stressed. Fidelity eliminated investment minimums and multiple-share classes for its stock- and bond-indexed mutual funds, effective Aug. 1, the company said.
The result is that all investors in the funds, regardless of the size of their investment, now are in the same lowest-cost share class.
Investment minimums also were abolished for all Fidelity mutual funds and 529 college savings plans.
Fidelity managed a total of $2.6 trillion as of June 30, of which 17% was managed in passive strategies with $402 billion run in indexed mutual funds, $26.5 billion in indexed target-date mutual funds, $8.5 billion in indexed target-date institutional commingled pools and $11 billion in passively managed exchange-traded funds. The balance of Fidelity's assets is actively managed.
Collapsing the former four-share class structure to one low-cost share class reduces the average asset-weighted annual expense across Fidelity's passively managed mutual funds by 35%, with an expense ratio as low as 0.015% for some funds, Fidelity said in its announcement.
"This is a seminal point in the industry. I never thought I would see such low-fee levels for mutual funds in my lifetime," said James T. O'Shaughnessy, managing partner of investment consultant Sheridan Road Financial LLC, Northbrook, Ill.
"An index fund food fight has been going on for the past few years and pricing has been completely leveled," Mr. O'Shaughnessy said, noting that pricing for investment in indexed mutual funds by small defined contribution plans and even startup plans over that past two to three years is much closer to that for much larger defined contribution plans.