Passive Investing With Fidelity
Fidelity pushed index-fund fees all the way to zero with its ZERO funds. Here's how to use them for passive investing, and the one place a 0.00% fund can quietly cost you.
Don't have time? Here's what you need to know:
- 1Fidelity's ZERO index funds charge a genuine 0.00% expense ratio, alongside $0 ETF commissions and fractional shares.
- 2ZERO funds can't be transferred in kind, so in a taxable account leaving Fidelity means selling and owing capital-gains tax.
- 3A practical split is ZERO funds in your IRA and transferable ETFs (VTI, ITOT, VXUS, BND) in a taxable account.
- 4Fidelity supports automatic recurring contributions, letting small amounts be fully invested with no fee drag.
Fidelity's Zero-Fee Index Funds
In 2018, Fidelity did something the industry assumed was impossible: it launched index mutual funds with an expense ratio of exactly 0.00%. The ZERO lineup — including index funds covering the total U.S. market, large caps, international stocks, and beyond — charges no annual fee at all. For a passive investor, whose entire edge comes from minimizing costs, a genuinely free fund is a striking proposition.
Fidelity can offer these because they function partly as a loss leader to attract assets and because the firm earns revenue elsewhere — securities lending, cash management, and its broader business. Alongside the ZERO funds, Fidelity also offers $0 commissions on ETF and stock trades, fractional shares, and a full suite of conventional low-cost index funds. It's a complete, low-friction home for a passive portfolio.
The Catch With the ZERO Funds
A 0.00% expense ratio is real, but the ZERO funds come with one meaningful limitation: they are proprietary Fidelity mutual funds that cannot be transferred 'in kind' to another brokerage. If you ever move your account to a different firm, you have to sell the ZERO funds first — and in a taxable account, selling means realizing capital gains and triggering a tax bill. You are, in effect, somewhat locked in.
Inside a tax-advantaged account like an IRA, this barely matters: selling and rebuying triggers no tax, so the lock-in is a minor inconvenience. In a taxable brokerage account, however, the portability problem is real. For taxable money, many investors prefer a standard, transferable ETF — Fidelity's own FBND for bonds, or a broadly held fund like VTI or ITOT — accepting a tiny expense ratio in exchange for the freedom to move it later without a tax event.
Important: Fidelity's ZERO funds can't be transferred in kind to another broker. In a taxable account that means selling — and paying capital-gains tax — if you ever leave. Prefer transferable ETFs for taxable money.
Two Ways to Build It at Fidelity
Fidelity gives you two clean paths to a passive portfolio, and which you choose depends mostly on the account type. In a tax-advantaged account, the ZERO mutual funds are hard to beat on cost — a total-market ZERO fund, an international ZERO fund, and a bond fund cover the globe at essentially no expense-ratio cost. In a taxable account, a portfolio of transferable ETFs keeps your options open.
The table contrasts the two approaches. Either is a sound passive setup; the deciding factor is whether you value the literal 0.00% fee or the portability of a standard ETF. Many Fidelity investors sensibly use the ZERO funds in their IRA and ETFs in their taxable brokerage account, getting the best of both.
| Approach | Example holdings | Best for | Trade-off |
|---|---|---|---|
| Fidelity ZERO funds | Total-market + international ZERO funds | Tax-advantaged accounts (IRA) | Not transferable in kind |
| Transferable ETFs | VTI / ITOT + VXUS + BND or FBND | Taxable brokerage accounts | Tiny (~0.03%) expense ratio |
Tip: A practical split: hold the 0.00% ZERO funds inside your IRA, and use standard transferable ETFs in your taxable account where portability and in-kind transfers matter.
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Automating Contributions
Fidelity supports recurring automatic investments into both mutual funds and, via fractional shares, ETFs. You can schedule a fixed-dollar contribution from your bank account on a chosen day and have it invested automatically, which is exactly the dollar-cost averaging discipline that makes passive investing work. Set it up once and the system handles every subsequent purchase.
This is where Fidelity's combination of zero-fee funds, $0 commissions, and fractional shares pays off: a small recurring contribution can be fully invested with no fee drag whatsoever. The whole point of passive investing is to remove ongoing decisions, and an automated Fidelity setup does precisely that. Our automatic investing guide covers the mechanics step by step.
Frequently Asked Questions
Are Fidelity's ZERO funds really free?
Yes — the ZERO index funds carry an expense ratio of exactly 0.00%, with no annual management fee. Fidelity offers them partly to attract assets and earns revenue elsewhere in its business. For a passive investor focused on minimizing costs, a genuinely fee-free total-market fund is a strong building block, especially inside a tax-advantaged account.
What's the downside of Fidelity's ZERO funds?
They can't be transferred in kind to another brokerage because they're proprietary Fidelity mutual funds. If you ever move firms, you must sell them — and in a taxable account that realizes capital gains and a tax bill. Inside an IRA the lock-in is harmless since selling triggers no tax, so the ZERO funds shine there and ETFs are often better for taxable money.
Should I use ZERO funds or ETFs at Fidelity?
It depends on the account. In a tax-advantaged account like an IRA, the ZERO mutual funds are hard to beat on cost and the non-portability doesn't matter. In a taxable brokerage account, transferable ETFs such as VTI, ITOT, VXUS, and BND keep your options open with only a tiny (~0.03%) fee. Many investors use ZERO funds in the IRA and ETFs in taxable.
Can I automate passive investing at Fidelity?
Yes. Fidelity supports recurring automatic investments into mutual funds and, through fractional shares, into ETFs. You schedule a fixed-dollar amount from your bank on a chosen day and it's invested automatically — the dollar-cost averaging routine that makes passive investing work. Combined with zero-fee funds and $0 commissions, small contributions face essentially no fee drag.
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Alex Harrington
CFA Level II Candidate, Finance & Economics
Alex Harrington is an independent ETF researcher and personal finance writer with over 8 years of experience analyzing exchange-traded funds. A CFA Level II candidate with a background in economics, Alex has reviewed 800+ ETFs and helped thousands of beginners build their first investment portfolios through clear, jargon-free education.
This content is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.