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Fidelity Changes Index War Tactics

Fidelity has decided to fight the index war on the institutional front, leaving retail shareholders with less-than-rock-bottom fees.

Morningstar Fund Analysts, 09/22/2011

Fidelity has decided to fight the index war on the institutional front, leaving retail shareholders with less-than-rock-bottom fees.

For seven years, Fidelity has been the lowest-cost provider of international index funds for individual investors--until now. The firm said this week that it will end the voluntary fee waiver for Fidelity Spartan International Index FSIIX and allow expenses to rise to 0.20% in February 2012 from 0.10% for the retail shares. The fee is likely to stay at this level, as to go higher than 0.20% would require approval from shareholders as well as the fund's board.

After doubling the cost, the new fee will be more expensive than the retail Admiral share class of Vanguard Developed Markets Index VDMIX, which tracks the same benchmark, the MSCI EAFE Index. The Admiral share class is expected to be introduced this month and will carry the share class' typical $10,000 minimum investment for the individual investor. Meanwhile, the price tag for Schwab International Index SWISX, which tracks a slightly different large-cap benchmark, sits right below Fidelity's.

The retail price war coincides with the release of two institutional share classes of the Fidelity international index fund at the same price as Vanguard's own institutional version of the index. It seems Fidelity is willing to surrender to Vanguard on the battle over retail customers in order to capture greater share of the retirement plan market. According to Morningstar's data, as of Aug. 31 Fidelity had only about $13 billion invested in its institutional mutual fund index products. In contrast, Vanguard had nearly $250 billion in its institutional mutual fund index products (index mutual funds with a minimum investment of $5 million or more).

Institutional Offerings

To create a more robust lineup for retirement plans, Fidelity for the first time is offering index funds that will track pure small- and mid-cap benchmarks as well as index funds with emerging-markets, global (ex US), and real estate benchmarks. These five new funds will launch this month with a retail class that will cost between 11 and 18 basis points more than the institutional shares. Meanwhile, Fidelity is introducing an institutional share class and even cheaper Advantage institutional share class for Fidelity Spartan Total Stock Market Index FSKTX, and an Advantage institutional share class for its Spartan Extended Market Index FSMAX, which tracks both small and mid-caps.

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Morningstar fund analysts cover more than 1,700 mutual funds and write regular commentary covering fund industry news, fund investing trends, picks, portfolio planning, international investing, and more.
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