As an investor, I always look for ways to maximize returns while minimizing costs. Fidelity’s no-fee mutual funds caught my attention, but are they worth it? In this analysis, I dissect their structure, performance, and hidden considerations to help you decide if they fit your portfolio.
Table of Contents
What Are Fidelity’s No-Fee Mutual Funds?
Fidelity made waves in 2018 by introducing zero-expense-ratio index funds, eliminating management fees entirely. The four flagship funds are:
- Fidelity ZERO Total Market Index Fund (FZROX)
- Fidelity ZERO International Index Fund (FZILX)
- Fidelity ZERO Large Cap Index Fund (FNILX)
- Fidelity ZERO Extended Market Index Fund (FZIPX)
These funds track custom benchmarks rather than well-known indices like the S&P 500. For example, FNILX follows a proprietary “Fidelity U.S. Large Cap Index” instead of the S&P 500.
How Do They Compare to Competitors?
Let’s compare FZROX with Vanguard’s Total Stock Market ETF (VTI):
| Fund | Expense Ratio | 10-Year Annualized Return | Tracking Error |
|---|---|---|---|
| FZROX | 0.00% | ~12.1% (since inception) | 0.03% |
| VTI (Vanguard) | 0.03% | ~12.3% | 0.02% |
The difference in expense ratios seems trivial, but over 30 years, even a 0.03% fee gap compounds. Using the future value formula:
FV = PV \times (1 + r)^nWhere:
- PV = Initial investment ($10,000)
- r = Annual return (12.1% for FZROX vs. 12.27% for VTI after fees)
- n = Time horizon (30 years)
The difference amounts to ~$3,200 less in FZROX due to slightly lower returns despite the fee advantage.
The Hidden Costs of “Free” Funds
1. Tracking Error and Custom Indexes
Fidelity’s funds don’t follow mainstream indices. For instance, FZILX excludes small-cap and Canadian stocks, unlike Vanguard’s VXUS. This leads to performance drift.
2. Tax Inefficiency
Unlike ETFs, mutual funds distribute capital gains, triggering taxable events. If you hold these in a taxable account, the tax drag could outweigh the fee savings.
3. Limited Transferability
Fidelity’s proprietary structure means you can’t transfer these funds to other brokerages without selling them, incurring capital gains taxes.
Performance Analysis: Do They Deliver?
Since inception (2018), FZROX has trailed VTI by ~0.2% annually. While minor, this gap suggests Fidelity’s custom index may underperform slightly.
Hypothetical Growth of $10,000 (2018–2023)
| Fund | Final Value | CAGR |
|---|---|---|
| FZROX | ~$18,200 | ~10.8% |
| VTI | ~$18,500 | ~11.0% |
The difference seems small, but compounded over decades, it adds up.
Who Should Consider Fidelity’s No-Fee Funds?
Ideal For:
- Cost-conscious investors – If you prioritize minimal fees, these funds excel.
- Fidelity account holders – They integrate seamlessly with Fidelity’s platform.
- Tax-advantaged accounts (IRA, 401k) – Avoids capital gains distributions.
Not Ideal For:
- Taxable accounts – Capital gains distributions create unnecessary tax bills.
- Those seeking portability – You’re locked into Fidelity’s ecosystem.
Final Verdict: Are They Worth It?
Fidelity’s no-fee funds are a solid choice for long-term, tax-advantaged investors who prioritize low costs. However, the minor tracking error and lack of portability may deter some. If you already use Fidelity, these funds are a no-brainer for core holdings. Otherwise, weigh the trade-offs carefully.
Would I personally use them? In my IRA, yes. In my taxable account, I’d stick with Vanguard ETFs for better tax efficiency.
