Zero Expense Ratio Index Funds: A No-Fee Investment Option

Zero expense ratio index funds offer a no-fee investment option for investors. These funds have no management fees, which can save investors a significant amount of money over time.

The Vanguard 500 Index Fund is a prime example of a zero expense ratio index fund, with an expense ratio of 0.04%. This means that investors in this fund pay a mere 0.04% of their investment as a management fee.

Investing in zero expense ratio index funds can be a great way to save money, but it's essential to understand that they may not offer the same level of customization as actively managed funds.

Fidelity's ZERO Total Market Index Fund (FZROX) is a great option for those looking for a zero expense ratio index fund. It tracks a proprietary index from Fidelity, which is different from a public index like the Dow Jones US Total Stock Market Index or the CRSP US Total Stock Market Index.

The fund has 2,457 holdings, which is slightly less diversified than a "true" total stock market fund. This may result in slight tracking error over time, which is the difference between the fund's performance and the index it tracks.

For investors who are new to index funds, FZROX is a great option, but it's essential to note that it's only available at Fidelity. Existing investors may not need to switch, as their current funds have already low expense ratios that are negligible.

Here's a comparison of FZROX with two other index funds:

As you can see, FZROX has a lower expense ratio, but its tracking error may be higher due to its proprietary index. Index fund expense ratios are so low that they're basically negligible, making it less of a concern for many investors.

When choosing a zero expense ratio index fund, it's essential to consider the investment decisions that will impact your portfolio's performance.

The investment decisions you make can greatly impact the long-term success of your portfolio. A zero expense ratio index fund can be a great option, but it's crucial to understand the underlying investment strategy.

Investing in a zero expense ratio index fund means you're essentially buying a small piece of the overall market. This can provide broad diversification and potentially lower fees.

Low fees can add up over time, and with a zero expense ratio index fund, you can save thousands of dollars in fees over the course of a decade. According to the article, a 1% expense ratio can cost you $10,000 in fees on a $100,000 investment over 10 years.

The investment decisions you make should be based on your individual financial goals and risk tolerance. A zero expense ratio index fund can be a great option for long-term investors who want to keep costs low.

Investing in a zero expense ratio index fund requires you to be patient and disciplined in your investment strategy. It's also essential to regularly review and rebalance your portfolio to ensure it remains aligned with your goals.

Regular portfolio rebalancing can help you stay on track with your investment strategy and avoid unnecessary risk. By regularly reviewing your portfolio, you can make adjustments as needed to maintain your desired asset allocation.

Fidelity's new index funds have 0% expense ratios and no account minimums, making them a great option for those who want to invest without any extra fees or requirements.

Vanguard, on the other hand, still has expense ratios and minimums, but they vary depending on the share class you choose: Admiral, ETF, or Investor Shares.

Admiral shares typically have the lowest fees but highest account minimums, while Investor shares have the highest fees but lowest account minimums.

ETF shares fall in between the two in terms of fees and minimums.

The new Fidelity funds are only available as index mutual funds, whereas Vanguard funds are available as both index mutual funds and ETFs.

Some people prefer ETFs to mutual funds, but the author is happy to invest in mutual funds.

Expense ratios are a crucial aspect of investing, and it's essential to understand the costs involved. Actively managed mutual funds typically have expense ratios ranging from 1.3% to 1.5%, while index funds have significantly lower expense ratios, often between 0% and 0.20%.

For a $10,000 portfolio, switching from an industry-average mutual fund to a low-cost index fund can save you around $130 per year. This is a significant difference, especially when compounded over time. However, the savings are relatively minimal when switching between two low-cost index funds, with a savings of only $20 per year for the same portfolio.

A 0% expense ratio might seem appealing, but it's not always as straightforward as it seems. In fact, some index funds with a stated expense ratio of 0% can still incur costs, such as securities lending fees, which can offset the benefits.

Expense ratios are a crucial factor to consider when investing in mutual funds. The difference between a 0% expense ratio and a 0.015% expense ratio may seem insignificant, but it can add up over time.

For example, if you have a $10,000 portfolio, you would pay $1.50 in annual expenses for a fund with a 0.015% expense ratio. In contrast, the Fidelity ZERO Total Market Index Fund has a 0% expense ratio, meaning you wouldn't pay any annual expenses at all.

The table below highlights the expense ratios of various index funds mentioned in the article:

As you can see, the Fidelity ZERO funds have significantly lower expense ratios compared to other index funds. However, the article also mentions that the real savings come when you switch from an actively managed mutual fund to a low-cost index fund, rather than switching between two low-cost index funds.

For instance, switching from an industry-average mutual fund with a 1.3% to 1.5% expense ratio to a low-cost index fund with a 0% to 0.20% expense ratio can save you around $130 per year on a $10,000 portfolio.

Tax efficiency is a crucial aspect to consider when investing in index funds. Historically, Vanguard's funds have been relatively tax efficient.

Taxes can be a significant fee if the funds are held in a taxable account. An investor may incur taxes if the fund experiences capital gains during periods of rebalancing.

The smaller portfolio composition of Fidelity's ZERO funds could potentially lead to higher taxable events if index rebalancing results in more capital gains being passed to investors.