Securities Lending. A Fidelity® fund may lend securities to parties such as broker-dealers or other institutions, including an affiliate. Fidelity® funds for which Geode Capital Management, LLC (Geode) serves as sub-adviser will not lend securities to Geode or its affiliates. Securities lending allows a fund to retain ownership of the securities loaned and, at the same time, earn additional income… Cash received as collateral through loan transactions may be invested in other eligible securities, including shares of a money market fund. Investing this cash subjects that investment, as well as the securities loaned, to market appreciation or depreciation.
Affiliates, “Lunch is on my expense account”
It appears the prospectus implies security lending revenue is not the motivator or profit center for these two “free” index mutual funds, but the passage does bring up another issue; revenue to affiliates. See prospectus excerpt below:
Geode may place trades with certain brokers, including National Financial Services LLC (NFS) and Luminex Trading & Analytics LLC (Luminex), with whom FMRC is under common control, provided it determines that these affiliates’ trade execution abilities and costs are comparable to those of non-affiliated, qualified brokerage firms.
There does seem to be some fees being applied from one entity within Fidelity to another. This shuffling of the deck is common, but at the end of the day, it still appears that no fee is being derived from the shareholder.
The Lunch is Free at Only One Restaurant
Our ETF Thinktank conclusion is that these Zero Fee funds are actually zero fee, as long as you purchase them at Fidelity. See below:
Purchase and Sale of Shares: Shares of the fund are available only to individual retail investors who purchase their shares through a Fidelity brokerage account, including retail non-retirement accounts, retail retirement accounts (traditional, Roth and SEP Individual Retirement Accounts (IRAs)), health savings accounts (HSAs), and stock plan services accounts.
These two mutual funds can only be purchased at Fidelity, their motive is to capture new clients. This restriction on purchase cannot be done with ETFs. ETFs trade on exchanges, the benefits of liquidity, transparency and tax efficiency are worth way more than 0.03%. So therefore, Fidelity is offering these mutual funds to acquire new clients, as opposed to free ETFs that would actually be a superior value to investors. That is why this, non-altruistic move by Fidelity, is not a meaningful threat to growth of the ETF industry or TETFindex.
This article was written by the team at Toroso Asset Management, a participant in the ETF Strategist Channel.
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