Mutual Funds

About Mutual Funds

The inception of the first modern open-ended U.S. mutual fund dates back to 1924, and impressively, it continues to operate today. Mutual funds function fundamentally as companies owned by shareholders. However, instead of producing goods and services, they focus on investing capital, a strategy that allows them to avoid taxation at the corporate level, though not at the investor level. The Vanguard 500 fund, introduced in 1976 as the first index fund, was an open-ended mutual fund and a pioneering, albeit controversial, concept of its time.

Historically, the earliest investment companies similar in nature were actually closed-end funds. These funds were listed on exchanges and operated differently from open-end mutual funds, as they did not create and redeem shares on demand. Instead, they often traded at substantial variances — either at a premium or discount — compared to the actual value of their portfolio. We exclude closed-end funds from this discussion, primarily because they tend to carry higher costs, and there are no options available with zero fees.

In the realm of modern investments, exchange-traded funds (ETFs) represent a kind of hybrid between closed-end and open-end funds. They maintain a more accurate reflection of the fund's actual value by perpetually creating and redeeming shares, ensuring the premium or discount stays minimal.

From their early days to the present, mutual funds have offered investors the advantage of owning a diverse array of hundreds, even thousands, of stocks and bonds for a minimal initial investment. In exchange for a management fee, professionals manage these portfolios, addressing the challenges of cost, expertise, and diversification that come with buying individual stocks. However, in today's era of zero-commission trading and evidence suggesting that costly active management strategies do not consistently outperform low-fee index funds, these benefits might seem less obvious. Nevertheless, the industry has responded by introducing increasingly competitive low-fee index funds.

A notable development came in 2018 when Fidelity, a venerable giant in the mutual fund arena, launched its ZERO funds, boasting no annual expense ratio. While various other index funds come close in affordability, ZERO funds are revolutionary, offering investors the full benefit of dividends paid by companies, akin to direct ownership of numerous companies, without an intermediary fund.

Purchasing Fidelity ZERO funds requires direct engagement with Fidelity. However, given Fidelity's reputation for offering one of the most comprehensive investment platforms, this stipulation is hardly a significant drawback.

Despite the current buzz surrounding ETFs or exchange-traded funds, it's worth noting that only open-end mutual funds (identifiable by their five-letter ticker symbols ending in an 'X') trade at the fund price, devoid of a bid and ask spread, which adds incremental costs for ETF traders. In essence, even a zero-fee ETF isn't entirely free, despite the absence of commission trading, although the difference may be nominal for long-term investors.