Fidelity Tries Luring Investors With 2 No-Fee Funds. So What’s the Catch? (Published 2018) (2024)

Investing just became even cheaper — free, actually.

Fidelity introduced two new index mutual funds last week that have no fees whatsoever, taking the democratization of investing to a whole new level. Consumers now have access to domestic and international stock markets without any hurdles, including no required minimum investment amount.

The move continues an industry trend toward lower-cost investing, with several giant firms — Fidelity, Schwab and Vanguard among them — all but daring one another to push their already rock-bottom fees even lower.

But when companies start to dangle free offers, one can’t help but ask: What’s the catch?

It’s simple, analysts said. If Fidelity can lure investors in with a promise of no fees, it is in a position to sell other products and services — a money-market account, say, or financial advice — that offer fatter profit margins. And given its size, the company can afford to sell no-fee funds below cost.

“They’re bait,” Jeffrey Ptak, an analyst with Morningstar, said of the new funds.

The good news is that the bait — Fidelity Zero Total Market Index Fund and Fidelity Zero International Index Fund — is as advertised: There are no hidden fees, and costs are not simply waived temporarily. (The funds track indexes created by Fidelity.)

“It is not a rebate, it is not temporary, it is not a promotional offer,” Kathy Murphy, president of Fidelity’s personal investing business, said. “It is permanent.”

Beyond the free funds, Fidelity has introduced other changes that make it easier and cheaper to invest. It has eliminated its minimum investment requirements for opening brokerage accounts (previously $2,500), 529 college savings plans and the vast majority of its indexed mutual funds when bought through Fidelity.