Beware Zero-Fee ETFs-5 Reasons NOT to buy Zero-Fee Index Funds

1. Zero-fee ETFs require upselling.
2. Zero-fee ETFs are not sustainable.
3. Zero-fee ETFs will sell your information.
4. Zero-fee ETFs require expensive specialty skills.
5. Zero-fee ETFs are acts of desperation by the firms that sell them.

When markets decline, ads for annuities come out of the woodwork. When markets rise, as they have recently, a newer phenomenon of ads for "zero-fee" ETFs have sprung like weeds. Beware zero expense ratio ETFs and their mutual fund siblings!

Here's a recent Bloomberg story about Fidelity's "Fee War" with Vanguard.

So what gives here. What could possibly be wrong with major fund companies and brokerages (read Fidelity, Schwab, Blackrock and others) competing with Vanguard using"zero fees" or more precisely zero-expense ratios?*

Consider why this is happening. Vanguard, the father of equity index funds, is maybe the second largest fund manager in the world with over $ FIVE TRILLION in assets. This is "the house Bogle built" on plain vanilla broad based "passive" index funds (VFINX, VOO, VTI and the like).  Traditional active fund managers like Fidelity have seen their active managed assets evaporate in the face of indexing success.

Indexing is a highly specialized skill requiring knowledge and experience few have. The "tracking error" or difference between the index return and the index fund or index ETF return is everything for index investors. Be careful of what you actually are investing in.

It very well may be impossible for active management to beat indexing in any rising market. I suspect there's a proof for that. Active managers do outperform occasionally during market declines but this out-performance does not last, is inconsistent and unpredictable. 

*Don't confuse zero expense ratios with no-load funds. No-loads don't have sales charges. Zero-fee index funds don't compensate fund managers! Big difference!

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.