- The Washington Times - Wednesday, September 1, 2004

Fidelity Investments, leaping into a burgeoning price war with low-cost exchange traded funds (ETFs), has slashed fees on five index mutual funds widely used in group and individual retirement accounts.

On Tuesday, Fidelity announced it would cap expenses for the five index funds in its Spartan series at 0.1 percent. The move makes them among the lowest-priced stock funds available, even less expensive than similar portfolios offered by the Vanguard Group, long known for its low-cost products.

Aside from taking aim at traditional competitors, fund experts say Fidelity has positioned itself to capture investor dollars that might otherwise go to low-priced ETFs.

“Whenever fund companies compete on costs, that’s a huge benefit to investors,” said Russ Kinnel, director of fund research at Morningstar Inc. “It’s certain Fidelity will lose a little money on this, but the idea is by being the cheapest they’ll attract more money and gradually be bringing their costs down a bit.”

A number of fund companies have cut fees in the past year, and at least some of the changes, particularly for high-priced actively managed funds, came as a result of the mutual-fund trading scandal, Mr. Kinnel said. But Fidelity’s decision to trim costs for its index funds is more likely a response to price competition from ETFs.

With the change, fees for the Spartan 500 Index Fund and the Spartan U.S. Equity Index were cut from 0.19 percent, the Spartan Total Market Index was chopped from 0.25 percent, the Spartan Extended Market Index was reduced from 0.40 percent, and the Spartan International Index was slashed from 0.47 percent.

In comparison, the Vanguard 500 fund, which like the Spartan 500, tracks the Standard & Poor’s 500 index, charges an annual expense ratio of 0.18 percent. The Vanguard Developed Markets Index, which is closely correlated with Fidelity’s Spartan International Index, charges 0.34 percent in fees.

Fidelity also standardized the required minimum investment for the funds, setting it at $10,000 for an initial purchase and $1,000 for subsequent purchases. Vanguard requires a minimum initial investment of $3,000. In both cases, minimum requirements are waived for anyone investing through a retirement plan, such as a 401(k).

Jeff Carney, president of Fidelity’s retail division, said the changes are part of a wider effort to make the company’s retail business more compelling and more competitive. Fidelity, long known for having an array of no-load fund options, removed front-end charges on all its retail funds late last year, lowered commissions for certain trades on its online platform and, in January, eliminated annual fees for new and existing individual retirement accounts.

“We’re trying to grow our market share, and we think moves like this will allow us to do that,” Mr. Carney said. “The winner on this is definitely investors. … How we win is if customers decide to do more business with us.”

Although ETFs have penetrated the institutional market and are becoming more widely used in managed accounts, they are still in the early stages of cracking the retail market, Mr. Carney said.

Index funds are more familiar to investors, Mr. Carney said, adding this move “now puts the fees of index funds in a better position relative to ETFs, but it still comes down to the individual preference of the investor, as well as your tax situation and anything else that goes into your planning.”

Noting that Fidelity deals with ETFs as part of its brokerage business, Mr. Carney said the company plans to launch a new portion of its Web site this fall to help individual investors understand which ones to choose and why.

ETFs, which track indexes and are traded like stocks, have become an increasingly attractive alternative to equity mutual funds because they offer tax-efficient market exposure at rock-bottom prices.


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