Are Fidelity’s Free Funds Really Free?

Ted

FYI: (This is a follow-up article.)

Recently, Fidelity made a splash by launching two index mutual funds that charge no fees. In some ways, this is huge news, as the zero percent price tag confirms that the price war in asset management fees is truly a race to zero. [ETF Prime Podcast: Fidelity Goes To Zero]

Vanguard, Schwab, and BlackRock now have to decide whether to give up their remaining minuscule fees in the face of direct no-fee competition.
Regards,
Ted
https://www.etf.com/sections/features-and-news/are-fidelitys-free-funds-really-free?nopaging=1

msf

This column ignores the cash drag in ETFs structured as UITs. Specifically, SPY, which is nearly double the size of the next largest ETF, IVV.

Normally, a mutual fund (or ETF structured as a mutual fund) reinvests interest and dividends it receives from its portfolio as it receives them. But a UIT like SPY must sit on that cash and distribute it periodically. The only way that cash gets reinvested is when it gets distributed to investors who (through their brokerage programs) purchase more shares of the ETF.

Which leads to another distinction between ETFs and mutual funds. When mutual fund holders reinvest dividends, the fund doesn't need to raise the cash - it just keeps the investments in place and adjusts the shareholders' numbers of shares. But the ETF must (as noted in the column) literally distribute the cash. The column implies that this creates a small cash drag (between the time the cash is distributed and it is reinvested by the brokerage). But it omits pointing out the cash flow impact on ETFs from paying "real" dividends that mutual funds largely avoid.

From iShares:

Just like traditional stocks, most iShares ETFs distribute dividends as cash payments to the brokerage accounts holding iShares. The way in which the dividends you receive from iShares funds are treated will depend upon your existing agreement with your broker dealer. If your broker dealer offers a dividend reinvestment plan (DRIP), you may be able to reinvest dividends from iShares funds as part of that programme.

None of this is meant to say that mutual funds have fewer cash flow concerns (overall, they're greater because they're receiving share purchases in cash, not in kind), or that they don't have other issues that are smaller or nonexistent with ETFs. Simply that things are not as onesided as ETF columns often make them appear.