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I have noticed that Fidelity has some no cost ETFs. That is, they do not charge a management fee. I have bought some Vanguard ETFs because they have a very low management fee. I consider both Fidelity and Vanguard to be reputable companies. However, neither one is a charity.

I am thinking about buying one of Fidelity no cost ETF but I believe they need to make money. I am concerned that Fidelity has another way of making money at my expense. Do they? Is there something I am missing?

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    Posting as a comment, as I haven't been digging deep. They will probably lend out shares to short sellers. With TER being rock bottom for many standard ETFs, it is not totally implausible to go from like 0.05% to 0%. Also there seems to be a caveat "No Transaction Fee Fidelity funds are available without paying a trading fee to Fidelity or a sales load to the fund. However, the fund may charge a short-term trading or redemption fee to protect the interests of long-term shareholders of the fund."
    – Manziel
    Nov 13 at 9:03
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    +1 for being skeptical of things that seem "too good to be true".
    – Heinzi
    Nov 13 at 9:12

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Fidelity's 0% fee index funds (FZROX, FNILX, etc) are not ETFs. They are mutual funds.

What this means is that you cannot generically trade them through exchanges with any broker (the "exchange-traded" part of ETF). They can only be bought and sold through Fidelity.

In this manner, they basically work as advertisement for Fidelity, drawing customers/capital to them.

Sources: See how the funds are categorized under mutual funds e.g. FZROX, Fidelity's own marketing page calling them mutual funds, motley fool article about the funds explaining you need a Fidelity brokerage account to hold them.

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  • Good catch on the Fidelity funds. However, I claim that BNY Mellon US Large Cap Core Equity ETF, symbol BKLC, is an ETF and it does not charge any fees.
    – Bob
    Nov 13 at 23:01
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    @Bob BKLC's reasoning seems less obvious. Articles seem to guess its a similar idea of "marketing!" but point out that there's no need to actually deal with the company to buy the ETF. This article (at the end) suggests a lot of the money was their own clients money moved into the fund ("BYOA"), in which case their goal is maybe looking good to their own existing client base?
    – mbrig
    Nov 13 at 23:22
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Vanguard had patented some financial process that reduces their tax liability on ETFs and the patent expires in 2023. For that reason Fidelity may have reduced their fees to zero to compete. See the link below.

If this is the case, then a zero cost ETF might still be more expensive than a reduced-tax ETF from Vanguard which boasts very low expense ratios (0.04% for VTSAX).

https://www.investopedia.com/how-vanguard-patented-a-system-to-avoid-taxes-in-mutual-funds-4686985

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