Fidelity Tries to Out-Vanguard Vanguard With Latest Fee Cuts

(Bloomberg) -- Fidelity Investments is trying to beat Vanguard Group at its own game.

Fidelity will cut fees on 14 passive products, saying its stock and bond index mutual funds and sector exchange-traded funds now have net expenses lower than comparable Vanguard funds. The reductions, which take effect Aug. 1 and apply to most share classes, will save investors about $18 million a year, the Boston-based firm said in a statement Monday.

Vanguard, the pioneer of low-cost investing, has been challenged by a growing number of rivals that have matched and sometimes undercut the price it charges on index funds and ETFs. BlackRock Inc. and Charles Schwab Corp. have also staked claims to territory Vanguard once had to itself.

Fidelity, best known for stock pickers like the legendary manager Peter Lynch, has been building up its passive business as investors dump active products in favor of those that track indexes. The firm had almost $300 billion in passive assets as of June 30, according to Morningstar Inc., roughly 13 percent of its $2.3 trillion total.

“Investors should not be basis-point wise and pound foolish,” John Woerth, a Vanguard spokesman wrote in an email in response to the Fidelity announcement. While expenses are important, people considering an index fund need to look at other factors, including how closely the fund tracks its index and after-tax returns, he said.

The reductions affect funds such as the Fidelity Large-Cap Growth Index Fund, where expenses for the small investor share class will drop to 17 cents for every $100 invested from 21 cents previously.

Revenue Squeeze

In the first six months of the year, Fidelity's active funds lost about $21.5 billion to net redemptions while its passive funds attracted inflows of $20 billion, Morningstar data show.

The shift cuts into Fidelity's revenue because active funds carry significantly higher fees. The firm's biggest active stock fund, the $113.8 billion Contrafund, charges 68 cents per $100. Its largest passive equity fund, the $119.9 billion Fidelity 500 Index Fund, charges 9 cents for small investors and 3 cents for institutional customers.

Fidelity in June said more than 1,500 employees took a buyout offer announced in February, around the time Chief Executive Officer Abigail Johnson wrote in the firm's annual letter that the indexing wave has created a more difficult world for money managers. In July, the firm dismissed hundreds of employees, according to a report by website Axios.

Read more: Battle for ETF crumbs escalates as passive war gets aggressive

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net.

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Josh Friedman, Alan Mirabella