Zero, Nil, Zip (Fees): A Look At Fidelity’s FNILX And FZIPX Index Funds

Fidelity rocked the investment world in July 2018 with its introduction of the first two mutual funds with zero fees: Fidelity ZERO Total Market Index Fund (FZROX), and Fidelity ZERO International Index Fund (FZILX).

While some have argued that the funds are purely a gimmick — after all, FZROX is only 0.015% cheaper than its larger FSKAX fund — investors have warmly embraced the new funds, piling nearly a billion dollars into the two funds in its first month.

Emboldened by the successful launch of FZROX and FZILX, Fidelity introduced two new zero-fee mutual funds on September 13, 2018:

1. Fidelity ZERO Large-Cap Index Fund (FNILX)
2. Fidelity ZERO Extended Market Index Fund (FZIPX)

These Funds Really Have Zero Fees

The first question most investors have when they learn about Fidelity’s ZERO fee index funds is whether they really have zero fees.

The answer is yes. I found the SEC prospectus filing for the FNILX and FZIPX that Fidelity submitted on September 12, 2018:

The prospectus continues with an example of how much in fees you would pay if you invested in these two funds:

How Does Fidelity Make Money On These Funds?

The second question investors ask when they learn about these index funds is how Fidelity plans to make money on these funds if there are zero fees charged to the investor.

Of course, Fidelity does not directly make any money from their investors with these funds, since they are charging no fees. I’ve written a whole post on this question, but put simply, the goal of these funds are to convince investors to bring their money under the Fidelity umbrella. From there, they are able to make money in other ways, such as earning interest on the cash lying around in your account or charging fees to manage donor-advised funds.

I doubt investors who came to Fidelity for zero expense ratio index funds will suddenly be successfully sold high expense ratio actively-managed funds or trade 100 times per month, so I wouldn’t be concerned that Fidelity is doing anything nefarious by offering these funds to investors.

Underlying Indices

Like Fidelity’s other ZERO index funds, FNILX and FZIPX replicate newly-created proprietary indices.

FNILX will track the Fidelity U.S. Large Cap Index, which will be based on the largest 500 U.S. companies based on float-adjusted market capitalization. It is designed to mimic, but not precisely replicate, the S&P 500.

FZIPX will track the Fidelity U.S. Extended Investable Market Index, which consists of the Fidelity U.S. Total Investable Market Index (which you can buy with FZROX) excluding the 500 largest companies (which you can buy with FNILX).

If done in appropriate percentages, buying the Fidelity Large Cap Index Fund (FNILX) and the Fidelity Extended Market Index Fund (FZIPX) would be equivalent to buying the Fidelity Total Stock Market Index Fund (FZROX).

Alternatives to FNILX and FZIPX

There are many alternatives to FNILX and FZIPX that may be appropriate for select groups of investors:

Fidelity Mutual Funds

The equivalent Fidelity index fund to FNILX is the Fidelity 500 Index Fund (FXAIX), which tracks the S&P 500 and has an expense ratio of 0.015%.

The equivalent Fidelity index fund to FZIPX is the Fidelity Extended Market Index Fund (FSMAX), which has an expense ratio of 0.045%.

If you already own these funds in a taxable account and have a profit on these investments, do not sell these funds to buy the zero expense ratio alternative; the capital gains tax would likely outweigh any benefit from the lower expense ratio.

iShares / Vanguard ETFs for Fidelity Investors

Because ETFs are more tax efficient than mutual funds at Fidelity (but not at Vanguard), I still prefer ETFs over mutual funds in Fidelity taxable accounts. Fortunately, Fidelity offers over 200 commission-free ETFs from iShares, one of the leading ETF providers.

IVV is the iShares S&P 500 ETF and has an expense ratio of 0.04%. This would be an excellent alternative to FNILX in Fidelity taxable accounts.

There is no iShares equivalent to FZIPX; however, if you must have an extended market ETF, Vanguard offers VXF, an extended market ETF that has an expense ratio of 0.08%. You would have to pay a commission at Fidelity to buy the Vanguard ETF, but trades at Fidelity are only $4.95.

Vanguard Mutual Funds / ETFs for Vanguard Investors

Vanguard investors have excellent alternatives to Fidelity’s zero expense ratio mutual funds.

Vanguard 500 Index Fund (VFIAX) replicates the S&P 500 and would be an excellent alternative to FNILX; VFIAX has an expense ratio of 0.04%. VOO is the ETF version of VFIAX and also has an expense ratio of 0.04%.

Vanguard also offers an extended market index fund (VEXAX), which would be a good alternative to FZIPX for Vanguard investors. VEXAX has an expense ratio of 0.08%. As mentioned earlier, VXF is Vanguard’s ETF version of their extended market index fund.

Should Fidelity Investors Buy FNILX and FZIPX?

So where do these funds fit in your portfolio? Since FNILX and FZIPX are just Fidelity’s Zero Total Stock Market Index Fund (FZROX) split into its large-cap and mid-cap/small-cap components, they are not necessary for most Fidelity investors. Some investors prefer a fund that closely tracks the S&P 500; while FNILX does not precisely track the S&P 500, I anticipate it will be close enough to satisfy the needs of most investors.

In addition, those who choose to overweight mid-cap and small-cap funds (potentially because they offer higher return with increased risk) could use FNILX and FZIPX to tilt their asset allocations accordingly.

Conclusion

The introduction of FNILX and FZIPX show that Fidelity is all-in on offering zero expense ratio index funds to investors. Expect Fidelity to offer zero-fee index funds in other asset classes, including bonds, in the future.

For Fidelity investors who want to tinker with their U.S. stock asset allocation in retirement accounts, FNILX and FZIPX are good options. Vanguard and Schwab investors should stick with their own very low-cost index funds, and Fidelity investors should continue to use ETFs instead of mutual funds (even zero-fee ones) in their taxable accounts.

What do you think? Are you planning to buy FNILX or FZIPX? Is it only a matter of time before Vanguard and Schwab begin to offer their own zero expense ratio mutual funds?