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Fidelity Introduces Zero Expense Ratio Index Funds (businesswire.com)
362 points by prostoalex 6 months ago | hide | past | web | favorite | 215 comments

While the new funds are attracting all the attention, I find these other changes more interesting:

Expense Ratios have been slashed across existing funds: https://www.fidelity.com/mutual-funds/investing-ideas/index-...

Premium, Investor, and Institutional classes are all being merged into 1 class with lower fees and no minimums: https://www.fidelity.com/bin-public/060_www_fidelity_com/doc...

For people holding existing Fidelity index funds, you just start paying less now without having to do anything.

I got this email this morning, short and sweet:


As of August 1, 2018, we introduced the following changes, which will be automatically applied to your affected Fidelity accounts:

• Removed account fees and minimums

• Eliminated domestic money movement fees

• Lowered expense ratios on all Fidelity stock and bond index mutual funds

• Introduced two index mutual funds (FZROX and FZILX) with a zero expense ratio

No action is required on your part.


I've never paid a fee for domestic money movement (EFTs) so I wonder what that refers to.

Fidelity also has an extremely attractive product in their cash management account (free checking account with ATM reimbursements)

«Fidelity also has an extremely attractive product in their cash management account (free checking account with ATM reimbursements)»

Yes, just like Charles Schwab. I wonder why most Americans don't know about this and either pay ATM fees, or endure the hassle of never using an ATM outside of their bank network.

To get a free Schwab checking account, you have to get a checking account paired with a brokerage account. They hard pull your credit before they approve you. If you have a low credit score, you won't be approved. Most Americans' credit scores are too low.

Because banks have much greater presence and marketing reach, being involved in a lot more of the ordinary financial transactions than just withdrawing cash. As only one example of this, brokerage checking doesn't have an obvious path towards insured savings vehicles, you'll have to do some research and have an investor mindset which most banking customers don't want to bother with. If you have a loan, it also becomes another account and institution to deal with, which if you're not an investor you don't want.

Schwab is kind of a PITA for opening a savings account though. I had to fax them a form to open it.

my guess is this is not a common use case among their customers. why do you want a savings account anyway?

I keep my emergency fund in a high interest savings account. I don't know what Schwab's rates are, but if you don't care about that yield and have other accounts with Schwab, maybe the simplicity is worth it.

why not just grab some shares of a bond fund? even with the best savings accounts you are slowly burning your money.

Maybe try I-bonds? Better Rates than high interest savings.

The downside is that you can only invest 10k at a time and you’re illiquid for six months.

Why is this getting downvoted? Current return on I-bonds is 2.52%, higher than any high-yield savings that I know of. It compounds semi-annually, tracks inflation, and there are no penalties for withdrawal. Seems perfect for an emergency fund and less hassle than a CD ladder. I'm not shilling an investment product, it's available direct from the US treasury:


It's not a bad idea. I've thought about migrating to I-Bonds. I've kept it in a savings account for the liquidity, but if you are okay with having a less liquid emergency fund, go for it.

Because "emergency fund" and "illiquid for six months" aren't a great combination?

Illiquid in the sense that it takes a few days to liquidate. One can always get back their original investment with no penalties.

Is that correct? According to the TreasuryDirect website, you can't redeem a bond within the first year. If a bond is less than 5 years old, you pay a 3 month interest penalty.


That is correct. It's twelve months instead of six. I was mistaken. Generally speaking an emergency fund should be 3-6 months of income. I justified the illiquid period by moving a third of my fund into it at a time.

The interest "penalty" is simply not getting back the interest accrued in the prior three months.

Or Ally, a stand-alone product. I’ve had an account with them since 2010.

I think ally limits you to $10 a month. I don’t use an ATM that’s not in-network. I’ve only done it once (well three times because you can only withdraw up to $400 at a time and I needed a thousand). Iirc you get the money back at the end of the month.

How do you do ATM deposits?

Use the Fidelity app to take a photo of the check. I use Fidelity checking for withdrawaling foreign currency too. Easily the best banking product I’ve ever used and I can’t imagine using anyone else.

I deposit checks through Schwab's Android app. But this only works for checks under $10k. Above that you have to deposit them at a Schwab location.

You can also mail checks in (though I don't know about $10k and above).

You can mail checks much larger than $10k in. That is what I usually do, as it’s less of a hassle than getting to a branch during business hours. Schwab even provides post paid enevelopes for you to use.

If you have good credit, their credit card is good for a daily driver if you're the type who pays off a card monthly. Unlimited 2% cash back, no annual fee. You can set up the cash back to go straight into investment accounts too.

It is a good one, but my experience is that the customer service on the card is not so hot. Namely they are overly aggressive with fraud detection, which combined with slow card replacement can be problematic. They canceled my card once because I swiped it instead of inserting the chip for reading, said they could not reverse the action, and then took over a week to get me a replacement card (granted there was a holiday weekend, but this was very different from Amex who always have overnighted replacement cards)

I've had the opposite experience with my Fidelity card. I've accidentally swiped it a few times with no consequences, just had to insert the chip afterward. Their fraud detection has been spot on. I must've gotten skimmed and incurred a fraudulent charge. The card was immediately cancelled, I was notified, and three days later I had a new card in the mail.

> they are overly aggressive with fraud detection

That's the worst, BoA is like that too. Chase and Amex seem to work well for me.

I've never hard my card permanently deactivated. They will definitely freeze my card if I make three or four large purchases in a day or over a weekend, but there's always an immediate robo-call asking me to confirm and then it's instantly active again.

Fidelity also has an extremely attractive product in their cash management account (free checking account with ATM reimbursements)

Schwab has this as well, and a better privacy policy than Chase to boot.

"I've never paid a fee for domestic money movement (EFTs) so I wonder what that refers to."

It might be for wire transfers, which are same-day money transfers.

One of the truly few notices from companies these days that aren't lies about "improving our services to you" or have a catch.

This sounds like an excellent way to keep customers.

I wonder what forced this decision. I'm guessing they were losing too many customers to Vanguard?

The entire fund industry is experiencing cost compression. It's a race to zero

As always, good analysis by Matt Levine: (go down to "How much should an index fund cost?")



>Again this dynamic is sort of terrible! In a perfect world you’d want clients and banks to develop relationships, to know and trust each other, to build mutually beneficial sequences of repeated interactions rather than just trying to gouge each other in atomistic arm’s-length trades.

Why this should be the case? Ideally, you want maximally impersonal bulk markets for buying and selling assets. Finance industry should have smaller and smaller profit margins. Only those relatively rare cases where someone can provide value over others the trend is reversed.

That wasn't related to zero expense ratio index funds, but instead on the foreign exchange derivatives market. Matt's point is that the worst clients get the best pricing and the people you'd normally want to have as clients get the short end of the stick.

Yes. But the worst client is only worst because he is price aware.

The natural development in financial industry with increased automation is to make everyone the worst possible customer for the financial service provider and that's a good thing.

Sure, all he's saying that in a perfect world you could give the best price to people you like.

It seems a bit on the opposite - that it's natural to like/prefer customers who are suckers and will gladly overpay you significantly for no good reason.

A recipe for cronyism.

Sustainable financial service/investment banking businesses are based on relationships, not razor thin margins and excessive leverage between parties.

>the worst clients get the best pricing

That's how it always is, in every market. Fact of business. Your worst customers are the most price-sensitive and the least loyal - but you can't turn them into better customers by making them pay more in a tiered loyalty structure, that's not how it works. They'll go to a competitor.

Your best (meaning worth investing in) customers on the other hand, WILL pay more. That's not a bad thing. They're happy to do so.

There's got to be a way for trust to be financially advantageous.

It can be, but it needs to be for a service that offers some other value. The problem is that doesn’t scale — most customers don’t care.

>>Again this dynamic is sort of terrible! In a perfect world you’d want clients and banks to develop relationships, to know and trust each other, to build mutually beneficial sequences of repeated interactions rather than just trying to gouge each other in atomistic arm’s-length trades.

This loss of trust has been happening across the capitalist landscape. Consider job security in the 60s compared to now for another example. As a consumer/employee I personally feel the frustration that's at the root of this - many companies treat their employees and their customers like interchangeable cogs that should be optimized, not like people at all.

But it's clear that the same thing happens in the other direction as well. For all the complaints about the decreasing quality of air-travel, almost everyone I know chooses flights based on cost and time, not service. Walmart was able to drive mom & pop shops out of business because they could sell things cheaper, not because they offered a superior shopping experience.

Perhaps the post-WWII era was a unique aberration. Happening after automation was advanced enough to make things pretty cheap, but before management science had discovered that hyper-optimizing every input and process was a great way to compete on price. Or perhaps this is the result of stagnant wages forcing people to buy from companies they hate because money is tight.

Either way, it seems like relationships are becoming increasingly currency-driven and transactional - the human factor matters less and less in spending, investing, and career decisions.

> For all the complaints about the decreasing quality of air-travel, almost everyone I know chooses flights based on cost and time, not service.

Almost everyone I know does the opposite, but only to a limited degree. I think it's also more nuanced than equating "quality of air travel" with "service".

I think it's true that the vast majority of people don't actually care how well they're served. Many do, however, care about physical comfort (as evidenced by willingness to pay for coach-plus type seats) and convenience.

Convenience is, arguably, closely linked with time, which you mentioned being something people are paying for. However, time is at odds with cost in at least the sense that airlines are flying jets slower to reduce fuel consumption.

> Ideally, you want maximally impersonal bulk markets for buying and selling assets. Finance industry should have smaller and smaller profit margins.

Some people would consider a personal, friendly market more valuable than a maximally efficient one. Finance is a tool to help humans fulfill their values, not the other way around.

Hire a fee only advisor. This is a separate role from the funds.

Are you thinking of funds that don't have money in corps causing social harm (carbon, tobacco, etc)? It's not clear to me what you have in mind here.

What is a 'friendly' market in contrast to an efficient one?

Do you a prefer a market where you get a worse price, but your broker smiles at you?

Yea, I do.

Just like I prefer selling my car on craigslist "priced to sell" to avoid haggling.

Or helping people move for free with no implication that I'm owed a favor later for it. Although I'm not sure we're still in "market world" at that point.

Finance feels like something akin to my electric bill, not an emotional good like entertainment or food.

Matt Levine's articles should be read in a light, slightly irreverent tone.

There may be costs to making things impersonal. Repeated interactions provide more opportunities to reward cooperation and punish defection, so the equilibrium point of a repeated game is often better than the equilibrium of a one-off game.

Basically, it's sometimes more efficient to work with people you can trust. It's expensive to build protections that ensure people cannot betray you.

I think you'd want access to such a market, but still want your accounts and user interface to be with a brokerage that would tell you whether you're getting a good deal on trades. Of course this could be entirely automated.

Having a UI that clearly tells you what's going on and doesn't lie to you or use dark patterns seems pretty basic?

You can't get good and honest advice from someone whose advice is tied for them making trade with you with a extra markup.

matt levine is a national treasure. he makes the most boring minutiae of finance fun to read and is consistently insightful. even if you're not into finance you should read him for general business culture

> You can lend out the fund’s stock to short sellers, and share some of the fees paid by the short sellers with the fund, while keeping some for yourself.

Wait a second. Lending is not a risk-free activity. These index funds are supposed to be low risk. What happens in a short squeeze situation?

Why do you say that index funds are supposed to be low risk? That's not really true; they in fact desire to have precisely the risk profile of whatever benchmark they target and seek minimal tracking error relative to that.

Anyway, loans are marked to market daily with collateral required. Details are here: https://personal.vanguard.com/pdf/ISGSL.pdf

It is absolutely a risk, but I think you err by saying index funds are supposed to be low risk.

Obviously I am talking about the risk inherent to the fund separate from the risk of what it's tracking, which is arbitrary. The inherent risk of the fund is absolutely supposed to be low.

Thanks for the link, but I think even with 102% collateral marked to market daily, short sellers could still default and cause the fund to lose gains. It would be a black swan event, but the losses would be much larger than the 3 basis points they claim to gain from lending. Missing a small number of up days in the market has a huge negative effect on returns.

I see what you mean. The only thing I would add is that they do credit analysis on who they are lending to, and it's basically just institutional investors not fly-by-night short-sellers.

Lenders make money on a short squeeze.

The only time you lose money is if you want to sell and can't because you've loaned out your shares. But with a large index fund, that's extremely unlikely: you can easily lend out a small portion of your shares all the time (say 5%) with virtually no chance that too many customers will want to cash out all at the same time.

Lenders only make money on a short squeeze if the shorts can cover. If they default, the lender loses shares. And if the lender is an index fund that is required to maintain a certain balance of shares then they will have to replace those lost shares, becoming a victim of the short squeeze themselves.

Nothing. That's the rate I've had for the last three years.

Granted, not in the US.

He sort of glossed over how valuable it is for Fidelity (or others) to get to control so many shares for voting purposes.

How much power have companies like vanguard exercised in this situation? I thought the problem with vanguard was that they didn't care about the outcome of individual companies and so would vote for maintaining the status quo.

Free overnight checks. Free cashier's checks. Free wire transfers (incoming and outgoing)...on top of what was already free. This is great!

For those of you comparing Fidelity and Schwab for cash management, two things:

1) Fidelity's debit card also reimburses ATM fees worldwide, but lists a 1% foreign transaction fee for purchases. This doesn't apply to ATM withdrawals, which don't count as purchases and are, in fact, 0%.

2) Schwab's interest rate on cash in their checking account is 0.25% last time I checked. Fidelity's is similar, but they count purchased money market funds as liquid, withdrawable cash, and automatically liquidate shares when needed without intervention by you. So the effective interest rate on cash is somewhere between 1.55% and 1.9%, depending on which money market fund you choose. Schwab also has money market funds, but they're not treated as liquid cash. You must manually sell shares, wait until settlement clears, and then transfer funds into your checking account, which is a pain in the ass.

3) Not directly related to cash management, but useful nonetheless: Fidelity advertises $4.95 brokerage trades. Every time I've called and asked, "Can you give me free trades?," they give me free trades (usually 10-20) as a "goodwill" perk. It's a 60 second phone call. Don't pay for trades!

EDIT: Perhaps notable for those who live in high tax states like NY or CA, interest income from Fidelity's "Treasury Only" money market funds is exempt from state taxes. Interest earned from a typical checking account or CD is state taxable. You can also purchase municipal money market funds which are exempt from state and federal taxes, but they have a lower yields.

Is there any particular department you speak with to get free trades? Based on your comment, I just gave it a shot and was told they don't do free trades and the person I spoke with was confused as to why I would even ask.

I generally talk to the people in charge of account transfers. "Hey, so I've had accounts at Fidelity for a while and am wondering if you have any promotions for a couple free trades." "We only have promotions for clients bringing in over $50k, but as a goodwill measure, I can add 10 free trades to your account, would that be okay?" "Cool, thanks, that works. Hope you have a great day!"

It's probably dependant on your trading history and general account balance.

I haven't heard about the money market fund thing. Can you buy money market funds in your cash management account? Or do you have to hold them in your brokerage account and they automatically liquidate them and move them to the cash management account when you (say) withdraw cash? Or do you have to get checkwriting privileges on your brokerage account?

Also, free wire transfers? That sounds almost unbelievable.

Yes, you can hold money market funds directly in a cash management account. That's what I do. They're treated exactly as cash, so under the tab "Available to withdraw," all money market funds are included in that number.

Thank you very much!

Does the Regulation D six withdraw a month limit apply? Might depend on the money market fund you choose?

Nope, does not apply to money market funds as far as I know. You can always double check with Fidelity live chat/phone support.

I just confirmed that Reg D doesn't apply to money market funds in Fidelity cash management accounts, since technically, they're not bank accounts, but brokerage accounts with banking features.

This is probably why Schwab doesn't offer the same feature, because Schwab is a bona fide bank and offers true bank accounts to complement their brokerage accounts.

>So the effective interest rate on cash is somewhere between 1.55% and 1.9%, depending on which money market fund you choose.

Wait, so are you saying you can get up to 1.65% interest on a withdrawable cash fund? Perhaps I'm confused - are you including a penalty for liquidating the shares in that, or just assuming you never liquidate?

I'm getting slightly better than that, but that's in a 5 year CD with a large minimum deposit. The penalty for liquidating is the previous 6 months of interest.

There are lots of credit unions that have 3% or better checking accounts:



No penalties for liquidating, some minor requirements (use it for at least one bill and a couple purchases each month) to get the interest rate each month.

Yes, my figures are for money market funds. They are withdrawable cash. No penalties. Plop money in, take it out whenever you want (or not).

Ally Bank savings accounts just went to 1.8%, and 2 year CDs are 2.5%, with no minimums.

2 year treasuries are 2.64% and they're exempt from state taxes.

Another thing to note is that Fidelity and Schwab both have commission-free secondary-market treasury trading. This is much preferred to savings account rates. Oh and they allow you to participate in Treasury auctions too; you receive the so-called "high-rate" as a non-competitive bidder.

Yes! Fidelity even offers the option to "auto roll" treasuries and I believe CDs, so you can stay 100% invested without thinking about it. Great alternative to a government bond fund.

In your estimation are Schwab or Fidelity viable primary bank accounts?

Yep, I've been a customer of both Fidelity and Schwab and both have been fantastic replacements for brick and mortar banks. The only catch is dealing with cash deposits, but that can be easily mitigated by keeping a no-fee bank account with branches and/or ATMs locally. I use Capital One 360 for that. Also, both Fidelity and Schwab offer 24/7 customer service, and both have live chat if you don't want to wait on the phone.

Do you know if schwab high investor yield checking bank account has 1% foreign transaction fee? I have both Fido cash mag and schwab HIY account.

Schwab's debit card is 0% for both international ATM withdrawals and other purchases. Fidelity's debit card is 0% for international ATM withdrawals, but 1% for other purchases.

Yes, they absolutely 100% are.

Source: Fidelity is my primary bank account.

A bonus is I get paid a day early, Fidelity makes my paycheck available a day before payday for some reason.

Fidelity licenses software that powers the backend of a lot of the banks. That may have something to do with it.

Anticipatory banking! Marvelous!

Schwab's been my primary bank account for 10 years. It's fantastic.

They have all this but no 2FA. Also, their password limit was like 8 or 10 characters till recently.

This is incorrect. They have 2FA available via the Symantec VIP Access app. It's not U2F or Google Authenticator, but it works.


I finally get an opportunity to vent about Schwab.

Schwab is the worst.

That's insufficient venting! Why is Schwab the worst?

(I am a Fidelity customer who just kind of fell into holding funds with them, and I'd like to know why other options are good or bad.)

I want to vent about Schwab, too. I've been using Schwab for years now, and they're pretty OK.

I'm not an investing pro, so I checked it out a little deeper. It looks like they'll be making money in the background by selling short calls to other investors and collecting interest on those. So they want this front end to be super low friction; your money will be making them money. It seems that e.g. Vanguard will also waive their fees under some circumstances. (Hope I got that right)

Fidelity has pledged that all securities revenue will return to the fund and not Fidelity itself, so no, that isn't the way they (claim, anyway) will make money.

> "Fidelity is not receiving any revenue from the Fidelity ZERO Index funds for securities lending. Nor is Fidelity currently receiving any portion of the income that is generated from securities lent out." --Fidelity August 1, 2018

However, their securities lending practice is significantly less efficient than Vanguard: their total stock market index fund returned only 40% of securities lending revenue to the fund while Vanguard returned 94%. The difference there is in broker rebates -- how much of the interest on loan collateral posted by the borrower goes back to the borrower. For some reason Vanguard seems to be doing a much better job on this (possibly Fidelity is much more aggressive in loaning out shares so receives less benefit).

> Fidelity has pledged that all securities revenue will return to the fund and not Fidelity itself.

Cool, I didn't know this. Do you have a link?

Almost all index funds participate in share lending. Vanguard does, and almost 100% of income is returned to shareholders. Blackrock's iShares does this too, and Blackrock keeps ~20-30%. As far as I know, Vanguard's expense ratio for their total market fund (VSTAX) is effectively 0% after income from share lending.

> and Blackrock keeps ~half.

This is untrue. Per iShares(https://www.ishares.com/us/literature/brochure/securities-le...):

> Q: How much of the securities lending proceeds are paid to iShares ETFs?

> A:. iShares ETFs receive 71.5-80% of the income generated from securities lending depending on the asset class held. For example, iShares ETFs that predominantly hold US equities receive 71.5% of the income from securities lending. All other funds (i.e., fund-of-funds and funds that invest predominantly in fixed income or international equities) receive 80% of the income from securities lending. Once the aggregate securities lending income exceeds a certain income threshold amount, each iShares ETF will receive an increased percentage of the income above original levels, i.e. from 71.5% to 75% for US equity iShares and from 80% to 85% for all other iShares, for the remainder of that calendar year.

By the way, Fidelity isn't making money off of securities lending on these funds, or at least has pledged not to. I still wouldn't use the funds, though.

Thanks for the correction. Fixed.

Curious, why wouldn’t you use these funds? Do you still prefer ishares or vanguard?

If forced to use Fidelity as a brokerage I would prefer iShares; however, I would prefer to not use Fidelity. I do most of my investing in non-retirement accounts and as a result tax efficiency is a concern. For this, ETFs (by any provider) and Vanguard mutual funds are typically superior to straight index mutual funds. The reason Vanguard mutual funds are unique in this respect is that they hold a patent allowed assets to be comingled between their ETF and mutual fund share classes, so the superior tax efficiency aspects of the ETF can be shared with the mutual fund (and vice versa).

Also, Vanguard as a corporation is owned by its fund shareholders as opposed to external shareholders while Fidelity is owned by a private group. I don't trust any company enough to lock up my money with them and possibly have to pay capital gains tax to switch later, if they decide to raise fees or make the investment not align with shareholders in some respect. As whitepoplar says, they're a profit-seeking entity. Due to the inverted corporate ownership structure of Vanguard this is not a concern. This argument also applies to iShares.

>The reason Vanguard mutual funds are unique in this respect is that they hold a patent allowed assets to be comingled between their ETF and mutual fund share classes, so the superior tax efficiency aspects of the ETF can be shared with the mutual fund (and vice versa).

Wait, what? What does this actually look like for you on your taxes? This sounds like something that would be out of your hands/tax responsibility.

The way this shows up on your taxes is that Vanguard stock mutual funds (almost) never make capital gains distributions, while other mutual fund companies do. Capital gains distributions are taxed, and are inefficient as they cost you money.

Most of Vanaguard's ETFs are just another class of the overall mutual fund. So for example, the Vanguard Total Stock Market Index Fund has four (I think) share classes: Investor, Admiral, Institutional, and ETF. Vanguard arranges things such that shares of stock in the underlying fund that have lots of built-in gains are shoved into ETF shares, which means they don't have to sell them when people redeem shares of the mutual fund classes.

tl;dr: basically they just never have to sell shares with built-in capital gains so you rarely see a capital gains distribution when you use Vanguard index funds.

Not parent, but I wouldn't use these funds because there's a fundamental conflict of interest. Fidelity is a private company that seeks to profit from its customers. Vanguard is a company owned by its customers.

What happens in the future if passive indexing falls out of favor, there's an exodus out of index funds, and Fidelity jacks up fees? If you're investing in a taxable account, you'd (presumably) incur a capital gain to leave the fund. At Vanguard, expenses may increase, but they won't seek to profit off of you. In a tax-advantaged account, I suppose the Fidelity funds are fine.

I'm curious to hear tanderson92's answer, though.

Not parent, but I wouldn't use these funds because there's a fundamental conflict of interest. Fidelity is a private company that seeks to profit from its customers. Vanguard is a company owned by its customers

There is always a profit motive. The company itself may be customer owned but the employees are still trying to make money. I’m not saying that it’s wrong. It just is.

It is true, but I think it's reasonable to suspect that principal-agent problems are less of a concern when you have non-collaborating individuals trying to extract money from an institution which doesn't structurally have a principal-agent problem than in the situation where the corporation itself poses a principal-agent problem with respect to its customers.

True! Case in point: Vanguard's advisory services and their actively managed funds.

Vanguard's expense ration for VTSAX is listed as 0.04% - is this income realized in this fee, or is it realized separately via the fund's performance?

No, it isn't realized in the expense ratio.

This, exactly. It's worth noting that this is one of a few income streams that take advantage of retail investor appetites -- another is when when retail brokers who do "smart routing" of orders lease a feed with advance look at those orders to HFT firms. That kind of income is generally NOT returned to investors, and at some retail brokerages can make up 80% of profits.

It's true that if something is free you are the product... but even when you're paying you may be getting sold on the side.

I think you're close. I believe they loan shares to short sellers.

Selling short calls would leave them open to the risk of shares being called away and would be an entirely different fund. You can buy ETFs that do this, some distribute the premium and others roll it into the fund's cash.

I still trust Vanguard now because they're not-for-profit. I own a certain percentage of it by buying their index funds and I know their interests are beholden to mine.

The ER for Vanguard still only 0.15%, which is about $12/mo per $100k invested.

The term "not-for-profit" is almost meaningless here. They are not a charitable organization or advocating the social cause of "helping people invest". Vanguard makes profit. They probably make a crap-ton of profit. In fact, that's their main goal - to make as much money as possible. The caveat here is they don't have shareholders to report to, nor are they obligated to publicly report their financial statements. The top dogs at Vanguard probably make insane amounts of money all the while being "not-for-profit"... and nobody really knows because this stuff is private.

And I say this as a Vanguard customer for over a decade now, and I will probably continue to purchase funds from them for many reasons. But don't be fooled by thinking that they are doing some sort of public service by being "not-for-profit".

Per wiki Jack Bogle has a net worth in the tens of millions of dollars. That’s not nothing, but Ned and Abigail Johnson (son and granddaughter of the founder of Fidelity) are together worth 24 billion dollars.

All things considered Jack Bogle did not become rich from Vanguard. For the size of their fund they have almost no employees and are not exactly flush with cash.

Vanguard is doing a sort of public service: http://freakonomics.com/podcast/stupidest-thing-can-money-re...

Didn't become rich? He said he's worth about $100 million. Maybe less than expected for the founder of $5 trillion investment firm, but he's most certainly "rich". Also, almost no employees? According to Wikipedia they have over 16k employees. And I don't know how you know their cash flow, considering they're privately held and that information is not out there, but their AUM is over $5 trillion so it's hard to believe they'd have any sort of cash flow issues.

Being an executive at a not-for-profit organization is amazingly lucrative. Hell, being a mid-level personnel at one is pretty nice too. What you lose in salary you gain back in the form of massive bonuses.

> The caveat here is they don't have shareholders to report to

Sort of. The funds own Vanguard. So shareholders of those funds own Vanguard.

This is key. Finance companies love playing bait-and-switch games once they have your assets and build up sufficient friction to keep you from moving to greener pastures when they decide to reign in profitability again.

ERs are a pure marketing gimmick once you get down to early 2000s-era Vanguard fees. Beyond that the devil is in the details with how incentives are aligned for those managing, including security lending practices which can either juice returns to completely offset those minimal fees or buy those yachts that the clients never seem to have, and especially for index funds you have tracking error which adds several basis points for/against you depending on manager competence in accurately sampling the index while minimizing several forms of risk, latency/frequency in updating positions that are a discrete approximation of continuous compounding, and the hugely overlooked problem that large institutional investors have to use complicated derivative orders, exchange dark pool agreements, swaps, and other methods of obscuring huge pool transactions where HFT will gnaw away at basis points here and there knowing that those large blocks of shares must be rebalanced at specific times to meet predetermined liquidity demands.

Don't misunderestimate the activeness of passive index funds. :)


When a for-profit company has money in the bank after paying all the expenses, they get to call it "profit".

When a non-profit company has money in the bank after paying all the expenses, they get to call it "reserves".

Executives in both sectors are tasked with bulking those up to ensure the long-term survival of the org.

But not for profit doesn't mean what most people think. They're welcome to make all of the profit they want. And they are welcome to pay their executives as grossly as they want. They just don't have shareholders to answer to.

And they don't ever report it.

I used to work there. They are pretty transparent in most of their ranks about the salary ranges. However, people at the top are paid an unknown amount of money. Probably an obscene amount, disguised through alternative compensation methods.

0.04% for Admiral shares, aka the ones for people who have $100k.

Admiral shares come in at 10k for most of their funds. E.g. VTSAX has the 0.04% ER and a 10k minimum, while the Investor class is at 0.14% (VTSMX).


> Admiral Shares

> * $10,000 for most index funds and tax-managed funds.

> * $50,000 for most actively managed funds.

> * $100,000 for certain sector-specific index funds.

Does that include target retirement funds and the like that include a mix of different asset classes? Last time I looked I didn't think it did, so you would need more than $10k if you want to do the sensible thing and not have 100% of your assets in stocks.

The target date funds seem to have a 1k minimum with an ER of 0.13-0.15%. [1] There are no admiral shares for target date funds. Across their other mutual fund offerings, investor shares generally have a similar expense ratio to the target date funds with a 3k minimum.

When I was getting started, it took awhile before I was diversified beyond a single fund (currently not using the target date funds), then eventually getting up to admiral shares.

> Last time I looked I didn't think it did, so you would need more than $10k if you want to do the sensible thing and not have 100% of your assets in stocks.

Looking through all their target date funds, none have more than 90% stocks. The 2015-2040 funds have 60% to 15% bonds, with all later dates at 10%.

[1] https://investor.vanguard.com/mutual-funds/list#/mutual-fund...

Right, target date retirement funds are never 100% stocks because only a crazy person would have a portfolio of 100% stocks.

You can't have a sane portfolio of admiral shares with only $10k because you would have to be invested 100% in a single asset class which is never a good idea.

which sounds like a lot, but if you are actually investing long term ins't much. Remember these are stock funds, you should never invest in stocks if you need the money within 5 years - the historical odds are often against you breaking even if you need the money in 5 years. You cannot retire on $100k, which is one of the most common investments people make.

Actually, no. If you have decent low fee trading, your expected gain is just scaled according to compound interest rules compared to holding for 10x the time. The volatility is much larger relative to the lower gain you got, so the simple classification, of keeping it in cash would have had more yield than the fund.

So, the rule is not investing for 5+ years, but only investing as much as you can loose without feeling like a soon-dead human....

admiral shares of the total stock market fund (VTSAX) have a minimum investment of $10k. that's also the case for the S&P 500 fund (VFIAX) and the total bond market fund (VBTLX, 0.05% ER).


Vanguard is great as long as you don't ask much of them.

I used to have my accounts split between Fidelity and Vanguard. But after several botched transactions where Vanguard reps gave me inaccurate information about their own processes, and lost or claimed to have never received multiple mailed signed documents (with difficult-to-obtain Medallion signatures), I switched everything to Fidelity and am much happier. I have never failed to get a knowledgeable/expert person on the phone whenever I've called Fidelity, which is a stark contrast to my experience with Vanguard.

This is true to my experience as well, although I'm still a loyal Vanguard customer. I actually got dubious tax advice from a Vanguard rep that could have screwed me if I didn't do a bit more research. That being said, I do tend to prefer them over Fidelity (I am currently a customer of both), but maybe it's worth taking a closer look now.

Does Vanguard offer tax advice? Why not reach out to a tax accountant?

I asked what the tax implications were for performing a backdoor IRA conversion for an account I hold with them, and what they told me regarding tax implications was straight up incorrect. I did eventually speak to an accountant, which is how I wasn't burned by them.

For those interested in more detail and discussion, this is probably the most informed place on the internet to discuss it:


What people fail to see with this is that Fidelity (and other large money managers) effectively control supply. You think "oh great zero ratio!" but in reality the cost of having these market concentrations far exceeds a few basis points to individual investors. I would argue that the next financial crisis will be very much linked to ETFs and related beta products.

Yeah, ETFs are basically a herd-following strategy. When a higher proportion of traders aren't herd-following, this is an efficient strategy. However, as the proportion of herd-followers increases, the information held in a company's stock price increase is less indicative of faith in that company and more of faith in the overall sector. This has led to our current bubble, where everyone is buying stock, so the price goes up, so everyone wants to buy stock.

No clue where the top is going to be, but it feels like this one is going to be uglier than 2008.

> No clue where the top is going to be, but it feels like this one is going to be uglier than 2008.

Pretty sure an asset bubble (which we've experienced many times in the past) will not be worse than the entire financial system melting down.

Control supply of what? The index fund? If you can find investors, you can create one.

Also, Fidelity is one of many index fund owners and my understanding is that their market share is lower than competitors.

Yes. For instance one way they make money is by lending shares for short selling.

Fidelity has stated they make no income from lending shares for these funds

I wonder if there's a natural cost to operating a fund, that would make this kind of product unsustainable, long-term? In contrast, Robinhood can provide free trades, and M1 Finance can provide free portfolio-oriented management, but they also both have good explanations for their underlying business models.

To be transparent, I work at M1 Finance, and I invest in a few Fidelity ETF's; still not sure how I feel about this one.

I recently spec'd out an ETF based on the number of employees working in a given MSA with the management proceeds going to support entrepreneurship in that area. Fixed costs for operating a single ETF is about $250K, which means a minimum AUM of $50M with a 0.5% fee. Most platforms won't even list an ETF with < $40M because they know its not sustainable below that level.

That said, for a manager of many ETFs, the fixed costs are much lower because they can be spread across multiple funds.

I could be wrong about this, but many of these companies are selling their trading ledgers to market makers, which in addition to making money on interest allows them to make quite a bit.

>> have good explanations for their underlying business models

Where could I find this? I havent seen it anywhere and have been half-worried they will either jack up prices or sell-out customers hanging like CapitalOne/ShareBuilder did. What is their short term and long term revenue model that would make their [awesome] product sustainable?

Aside: I love M1, especially after CapitalOne/ShareBuilder left their customers hanging.

I think both Robinhood and M1 Finance collect interest on their customers' cash and securities. Robinhood also makes money by offering margin to its customers and I believe M1 Finance has a similar but more general offering called M1 Borrow where the money borrowed can be used anywhere instead of just trading.

Vanguard returns 94% of the securities lending business of the fund, back to the fund. Fidelity is around 40%, iShares is 50%. Meaning even with fees, Vanguard is a better deal as you get more money back on the money that you own.

It's more complex than just simply measuring fees.

These are some additional factors to consider:

Tracking Error

Capital Gains

Securities lending

Mutual Ownership Structure



If I'm understanding correctly, if I compare the performance of my VTSAX fund vs all of the stocks that make it up, VTSAX would show better performance because it includes money made from lending out securities? This seems like a major spot for consumer confusion - how do these funds decide what percentage to return back to the fund vs keep? Why wouldn't Fidelity keep 100% of these fees, and then charge a negative fee?

> VTSAX would show better performance because it includes money made from lending out securities

Correct, VTSAX would probably perform better by a small margin, but it's also hard to compare given that everyone rolls their own "Total Market Index" with slightly different stock composition. At the very least, you're getting more of your money back to you.

> how do these funds decide what percentage to return back to the fund vs keep?

Depending on how much money they want to make :)

vanguard is actually a mutually owned firmed, the only one. So they have little incentive to tax themselves. When you buy vanguard funds, you are also buying ownership of vanguard.

> Why wouldn't Fidelity keep 100% of these fees, and then charge a negative fee?

Because people have no idea how any of this works and "0% expense" rings out. They can make more money this way.

It's also more complex than simply measuring how much of the securities lending revenue ends up back in the fund.

Most of that 60% for Fidelity's funds don't end up back in Fidelity's pockets either, but instead in the pockets of the people who borrowed stock from Fidelity investors in the form of rebates. You can understand this like: the borrower puts up 100-105% of the collateral and so should get some portion of the short-term rate on that cash. It's not clear why the disparity exists between Vanguard and Fidelity though.

iShares is truly different where they actually take 15-30% of profits for themselves.

The disparity to me is obvious; vanguard is a mutually owned company, whereas the others are for-profit. When you buy vanguard, you're buying vanguard itself, not just a product from them.

I already explained that while 60% of the revenue doesn't go to the fund investors, it doesn't go to Fidelity either. If you look at the Statement of Additional Informtaion for the fund, 56.7% goes back to the borrower (not Fidelity, the security borrower) in the form of a rebate. The profit motive doesn't explain this, at least not in the simple framing you've made of the issue.

https://nordnetab.com/ has zero expense index funds for Finland, Sweden, Norway and Denmark.

They are only available for their customers, but it's a great way to get new customers. They don't have any extra fixed fees either, so it's not a scam. It's just good marketing.

To restate the question that was raised below and then downvoted, I'm curious what the business model and business strategy are with these funds. The press release gives us a sense of the benefit to consumers; what is the flipside?

Matt Levine discussed this in "Money Stuff" yesterday (sorry, can't find a link). My understanding is that there are two reasons:

1) The bank still makes some money charging a fee to lend the shares in the ETF to short sellers.

2) Fidelity sees this as a loss leader for higher-priced funds and traditional investment advice / wealth management.

Coffee Break has a great video about Index Funds:


The TL;DW is that in many different studies, index funds preform better in the very long term than almost any managed fund. Why pay some monkeys to manage your money when an even distribution over a bunch of common stocks does just as well?

Two points in favor of paying someone.

First, most funds have goals other than beating the index, so if the index is your goal we should ignore them. However why is the index your goal? If you are far away from retirement (or whatever your reason for investing is), then the index is a good goal, but as you get closer to retirement you need to have an asset allocation that won't drop in value right when you need the money. The index will not do that for you.

Second, of those that attempt to match/beat the index, some of them do beat the index year after year. IF you can get in one of them you are better off. Note that IF is in all caps - this is a big if, very few managed funds beat the index on a regular basis. However if some fund manager beats the index year after year, that manager ought to be worth a lot of money to you (so long as after expenses he beats the market)

After considering the above, most of my money is in a target date retirement fund with a low expense ratio. I know I'm not going to beat the index, but as I get older they balance things. I know someone invested all in an index who retired right before a crash, the crash combined with his withdrawals to live cut his principal enough that he is now broke. (I suspect he didn't have enough savings to retire in other than best case scenarios, but even so his required capital to retire is higher in a stock index). I do have some play money in an index fund, if things go well I'll retire early on that cash, if things go bad, at least my normal retirement is not in trouble.

Re beating the index: Here's a bunch of managed funds that try to beat the index. Some do better, some do worse - say, 50/50. The next year, half do better, half do worse, and it's (for the most part) unrelated to the year before. So now you have 25% of the funds having beaten the index two years in a row. As you said, very few managed funds beat the index year after year. But even for those funds, the question is, will they beat the index next year with greater than 50% probability? I'm not sure that any of them will.

One year is far too small a time period. I'm only interested in are funds that over a 10 year period have beat the index. A good manager will have good and bad years. One or two years of doing worse than the index are perfectly fine with me. Unfortunately after about 10 years the manager tends to retire, so just as we finally learn which funds are worth the price a new manager takes over, and new managers have a tendency to not do as well.

> just as we finally learn which funds are worth the price a new manager takes over, and new managers have a tendency to not do as well.

This seems like a testable hypothesis. If experience pays dividends, or if novices pay a penalty, you'd expect to find this to persist over time.

That is an interesting hypothesis, but it isn't the one I was suggesting.

I was suggesting that the rare great manager regardless of experience will do well over long time periods. Those managers do not pass their experience/knowledge on to those who take over from them.

I'm not sure great fund managers exist at all. I'm sure you can find a few emphatically bad ones, I guess.

For whatever rare managers who do well over long periods of time, why isn't that knowledge transferable? I can think of two possibilities:

1. They have had an incredible run of luck. When you have process with randomness baked in, and thousands of managers, someone is expected to beat the average 10 years in a row.

2. A well cultivated network of insider information, or other nefarious means. Madoff claims to have started his Ponzi scheme in the early 90's, and it took multiple decades for that to be uncovered. Similarly, Cornblum and Grmovsek took 14 years to be discovered.

If you are far away from retirement (or whatever your reason for investing is), then the index is a good goal, but as you get closer to retirement you need to have an asset allocation that won't drop in value right when you need the money. The index will not do that for you.

Say your goal is to have a mix of stocks/bonds/cash that gets more conservative the closer you get to retirement. Would an actively manage fund on average beat a fund with the same mix of investments where each component was an index?

Maybe. In the case of bonds there is more room for an active manager - some bonds are riskier than others, so it is easier to be a good bond manager, which just means read the actual data behind the bond and decide which are going to go bankrupt and which will pay off. (In theory ratings agencies do this, but being 1% better than the agency is enough and you can do that just be splitting the agency categories into more levels) Of could you must be an expert at bonds to do this.

However I don't want to sped a large amount of time managing my accounts. A fund that always comes in at just less than what the index would is worth it just because I don't have to think.

Not thinking is in fact an import part of my investment plan. People who don't think about their investments too much don't make as many bad decisions. https://www.businessinsider.com/forgetful-investors-performe...

For people wondering how this can be of any benefit to Fidelity, here's a couple options:

1) They lend the stock to shorters and make money off the interest.

2) They get people into their ecosystem. As most people don't keep a dozen different accounts, they can get people to start using their checking and savings accounts (where Fidelity makes money from lending a fraction of the balance). People might also be more likely to use their loan products, credit cards, or other services, which are obviously benefical to Fidelity.

There's likely other benefits to them as well, especially given that index funds don't require any real human oversight.

Edit: Given other info posted, it's really just #2. This is a loss leader to get customers.

I read #2 in their press release;

But; it seems like a poor marketing decision; You're attracting people who want no fees and subscribe the the Random Walk Model - then you prove the Random Walk Model. I don't see how this encourages people to go into more different funds.

Maybe for asset allocation for near term cash volatility.

As a counter-example, I chose Schwab for their low fees, because the bulk of my investments are in index funds.

But that doesn't mean they all are. Schwab is also both my bank and my active investment broker of choice. The reason for that is because it's nice to have all my stuff in one place, viewable from a single screen.

- Account transfer out: $25 (Vanguard: $0)

- Reorganization fee (?): $39 (Vanguard: $0)

- Late Settlement Fee: $25 (Vanguard: 0)

So that's how they make money off of this. It's index funds, the payday loan edition.

Those are not exactly common fees! I think you're pretty off base here. The first two fees probably ~once every five years on the upper end (how often do you change the registration on an account?) and the last is entirely up to you.

Besides which, these fees are 0.25-0.39% each on a 10k account. I bet most of their accounts are much larger, and so the fees are proportionally smaller. Suppose you're charged $39 every three years - hard to imagine on that fee schedule - on your 10k account, that's around 0.13% per year. And that's a crazy high estimate for a relatively small brokerage account. It's not a way for Fidelity to stay in business.

I don't understand why the difference between .05%.15%, .001%, etc is such a big deal. IT's all within a tenth of a percent. Unless you live to 300 or something and never move the money, it won't matter that much. I think SPY is the best because it has low fees and can be traded like a stock, which means you are getting the best possible execution down to the penny.

It's a big deal because the numbers will (hopefully) get large quickly.

A $3M account that pays an extra 0.1% per year is dinged for $3,000 a year, every year. The cumulative compounded effect over 20 years is north of $75K.

I've noticed a lot of consolidation in 401Ks moving towards Fidelity. This has caused me some doubt as to their long term trustworthiness since greater power usually results in lower value for end customers. so, i'm pleasantly surprised to see them offering such a great product.

I would prefer they offered funds at cost plus some profit . It seems all "free" products come with some major downside because the company that offers them must make money through some sleazy backdoor. See Google, Facebook and others.

Agree - I applaud the effort but I will stick with Vanguard for the foreseeable future.

It's been a while I'm thinking about this. As an european (french if that helps), living in asia , does that worth it to invest in an american fund ? Anyone has a recommendation?


Sooo... if it's possible (I have a Fidelity 401k), is it a good or terrible idea to put a small % of my 401k into this?

The lowest fee broad index fund has always been the ideal investment for your long term savings.

A Random Walk Down Wall Street was published in 1973 and studied decades of data and funds. Jack Bogle started Vanguard in 1974. And 8 years ago, most every newspaper published a cycle of how the S&P 500 almost always beats active investing, especially after fees.

So, a small%, only if you like paying active funds money to not make you money.

tldr; Unless you're retiring in the next 10 years; the lowest fee broad index is your best investment with something resembling "diversity" and risk resembling slight "diversity"

401(k)s usually have limited investment options, you'll have to check if these funds will be available under your company's plan.

To answer your question, why on Earth would it be a terrible idea? They are two index funds - total market index and international index. Investing in low cost index funds is generally considered the best way to invest for the average person.

Furthermore, with 401(k)s you can freely trade without having to worry about triggering capital gains taxes, so there's no reason not to move the entirety of your investments in these asset classes fully over to the new funds in a 401(k).

There would be that nasty early withdraw penalty on that (probably). Not sure if it would be worth it in the long run. (IANA investor)


Changing your fund allocations within your 401(k), in general, doesn't trigger any penalties and is not a withdraw.

I was under the impression that it was about taking funds out of the 401k entirely (because the article doesn't mention 401k anywhere), not about changing the fund allocations within the 401k.

Whether the funds would be removed wasn't explicitly clear, but in a roundabout way, you brought up a good point. 401k's typically have a select 20-40 funds you can choose from, and this won't necessarily be available to GP.

That being said, I haven't had a 401k with Fidelity in 3 years and don't recall if I had access to "everything" or if the fund choices are limited.

I know Fidelity has limited Vanguard options in the past in its 401k and IRA funds options, presumably for control/competition reasons. I'm definitely curious how well Fidelity will promote its own index funds over actively managed ones, given they are still competing on active fees versus passive, but now just with themselves.

I am planning to take a look at my own Fidelity accounts this weekend and see if they've surfaced these index funds well. It seemed encouraging from the email this morning.

How can they make money?

The cost to run an etf does not (or at least should not) increase with Assets Under Management (AUM). So if anything the providers should be charging a fixed fee for the whole index fund instead of charging based on the AUM.

There's a cost associated with buying and selling the underlying equities which is proportional to AUM.

Hmmm... why? What is so different between trading 100 shares vs 1,000 shares vs 100,000 shares? Trading is automated enough that a linear cost is not justified.

Is there? For large index ETFs that is surely done by broker dealers arbitraging miniscule pricing differences between the underlying and ETF price.

how is fidelity making money on this product ?

Is this an example of the capitalism "race to the bottom" that everyone warns me about?

If so, more please!

Interestingly, the reason expense ratios are now so low is that Vanguard entered the market, basically innovated the index fund, slashed all the expense ratios, and now everyone has to compete with them.

But Vanguard is not-for-profit company because it's owned by its shareholders.

I think capitalism works in a lot of situations and I'm not against it, but there are certain scenarios where the "free market" logic doesn't really work or apply because of various reasons. In medicine it seems to be a race to higher prices.

> But Vanguard is not-for-profit company because it's owned by its shareholders.

Isn't every company owned by its shareholders, for-profit or not?

Whoops, I meant to say it's not-for-profit because it's owned by its customers. If you buy any of their funds, you also buy a small piece of Vanguard.

To be pedantic, I don't know if you would classify that as not-for-profit or not, but the point is there isn't some external entity trying to make a profit off of you.

That "not for profit" (mis)intetrpretation is a huge myth. The execs of vanguard take home salaries and bonuses based on their performance, as decided by management (themselves). That's economically equivalent to them being owners and taking profits.

I think he means by its fundholders. If you own a share of VTSAX (for example), you also own a piece of Vanguard. If you own a share of a fidelity index fund, you do NOT own a piece of fidelity.

Medicine is nowhere near a free market, hence why there aren't suppliers entering the market to push the price down.

It’s all supply and demand. In the UK you don’t have a free market — you have essentially price caps (capped at “free”) — this causes shortages. In the US, you don’t have the same price caps, but then generally you don’t have shortages. A person willing to pay market rates can almost always get care in the US, while no amount of money can speed up a UK NHS surgery waiting list.

Really the answer is a balance somewhere in the middle, but my point is that the free market does work, when it’s allowed to. The problem in the US is that the market is highly distorted by Medicaid and Medicare reimbursement rates as well as opaque price competition.

Yes, it's an example of disrupters entering the market (Vanguard, Robin Hood) and an established brand reacting correctly, and consumers gaining by it. Other examples are Uber and T-mobile. Too bad there's been no similar disrupter in health care yet, but maybe that's coming.

If you don't pay for the service, you end up the product.

This line would make a great square for "Hacker News bingo."

While usually true, it's not 100% true in all cases. In this case, it's almost certainly a loss leader for other higher priced funds and other financial advising/services they offer.

I don't buy it. This is a financial company. They don't compete with their own funds for the opportunity to up-sell their customers.

And why not? Being a 'financial company' is not really a convincing argument against them possibly up-selling here.

I'm not referring to the up-sell. They can upsell a cheaper service. Having a free service means that every customer is extra cost. When you sell something, however little you charge, you still charge just above recurring cost (unless you're a startup). If you don't charge, then every customer is an expense. Trusting that your sales team can up-sell hard enough to compensate for the recurring cost of a customer is wishful thinking.

You're assuming that all fidelity customers are competent investors, when in fact many (most?) of them are customers of fidelity only because fidelity is the custodian for their company retirement plans. Many (most?) of these folks had no idea why a ER > 1.0% was not good for them, but now that the word is out, this could easily be a gimmick to convince more folks to choose fidelity for servicing retirement plans and investments. So, 1) pick trendy topic among casual (retirement) investors, 2) blow competition out of water by offering it for free to get their attention, 3) gain trust and additional business from casual investors

My employer uses fidelity for retirement plans (so I'm a customer, whether I like it or not), and I'm bombarded by emails/communications very regularly to sign up for various services from fidelity for 'planning for my future'. These services ultimately cost a lot of money. Many of my coworkers have signed up.

Running ads pays 0, well below recurring cost. It's an expense. Free tier is an expense. Many products have a free teir, such as AWS, Google Drive, and Trader Joe's samples.

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