Author Topic: FZROX vs. VTSAX (New Fidelity 100% Free Fund)  (Read 11355 times)

FoCoFriend

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FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« on: March 01, 2019, 04:17:22 PM »
Dear Mustachians,

My 401k is through Fidelity, and they charge a one time $75 dollar fee to invest in VTSAX.  The alternative is FZROX, a total market stock index with zero fees or expenses.  The fund was just created in August 2018 and apparently they save money by creating their own version of the S&P500 so that they don't pay licensing fees to use the S&P500 Index. 

Link to the Fidelity fund:
https://fundresearch.fidelity.com/mutual-funds/summary/31635T708

Any guidance on investing in a relatively new fund like this?  I'm getting out of a life-target fund in my 401k.

Thanks!

DavidAnnArbor

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #1 on: March 01, 2019, 05:09:06 PM »
Yes just go with the fee free option, Fidelity.

shinn497

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #2 on: March 02, 2019, 01:03:09 AM »
A high speed race across the galaxy...exactly how i would describe an etf


chasesfish

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #3 on: March 02, 2019, 06:27:29 AM »
I own both.   Its really marginal at this insanely low level of fees

The best equivalent to VTSAX at Fidelity is FSKAX.   On $10,000 invested over ten years, the funds have a $160 difference in performance. 

FZROX is still new with a lower asset base, so I don't think they have fully built out their stock holdings and some people are commenting they don't own as many companies yet as VTSAX.


MustacheAndaHalf

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #4 on: March 02, 2019, 10:38:19 AM »
According to morningstar's data, FZROX has 2500+ stocks and $2.5 billion in assets.  That's about the same as Schwab's U.S. Broad Market ETF ("SCHB") which has $14 billion in assets.
https://www.morningstar.com/funds/xnas/fzrox/quote.html

The downside of only having 1 quarter of performance data (3-5 months) is that it's a total stock market fund.  There isn't much experimental about that, and Fidelity has experience with this exact kind of fund.

But there is one surprise that will be interesting to track going forward.  Which of the following total stock market ETFs/funds performed best in 2018 Q4?
Fidelity's FZROX (0.00% fee)?
Schwab's SCHB (0.03% fee)?
iShares' ITOT (0.03% fee)?
Vanguard's VTI (0.04% fee)?

I would expect their performance to line up in the same order as their expense ratios, but....
VTI and ITOT are tied: -14.20%
SCHB comes next: -14.30%
FZROX is last: -14.31%

The absolute performance isn't my point: the 0.11% gap in performance that can't be explained by a 0.04% difference in expense ratios.  And although ITOT and VTI have different expenses (0.03%, 0.04%), they had identical performance.

I believe the mystery is actually solved easily: VTI and ITOT have ~3500 stocks, while SCHB and FZROX hold ~2500 stocks.  So their difference in holdings (~1000 socks) impacted performance more than their expense ratios.  And that holds even though all 4 have the goal of holding the broad US stock market.

Indexer

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #5 on: March 02, 2019, 02:11:10 PM »
Quote
I would expect their performance to line up in the same order as their expense ratios, but....
VTI and ITOT are tied: -14.20%
SCHB comes next: -14.30%
FZROX is last: -14.31%

Two things going on here.

1. How well do they track their index? Some providers cut corners by creating a rough copy of the index with less holdings instead of true replication. It's obviously cheaper to do it this way, but when you get in the sub 0.05% space even a very small difference in performance can offset the expenses. VTI's parent fund, VTSAX, has over 700 billion in assets. That gives them insane economies of scale so they can buy every stock in the index and still keep costs very low. Going back to 2000, VTSAX is tracking within 0.02% of it's index, and for 10 years it's within 0.01%.

2. Securities lending income: I can't speak for the Fidelity or Schwab funds, but VTI brings in a lot of securities lending income and since Vanguard is client owned they give that income back to the clients. Note, this is income, not an expense, so they can't use it to lower the stated expense ratio. It comes to you in the form of higher performance. In the case of VTI, the expenses and SL income offset each other almost perfectly so your actual cost is only about 0.01%. If they drop the ER again as they are expected to that should drop to 0. It would still show 0.03% on paper, but in reality it would be effectively free. Some of Vanguard's funds bring in so much securities lending income they actually pay you to own them. VEXAX is a great example. The securities lending income is about 0.18% of assets, but the expense ratio still has to reflect only expenses so it's stated expense ratio is 0.08%. As a result, VEXAX has outperformed it's index by 0.1% on average since 2000.

FoCoFriend

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #6 on: March 02, 2019, 04:58:04 PM »
thanks all.  I think I would feel more comfortable going with the tried and true (and larger holding) option so will probably eat the $75 dollar fee and switch to VTSAX.

Radagast

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #7 on: March 02, 2019, 11:41:23 PM »
thanks all.  I think I would feel more comfortable going with the tried and true (and larger holding) option so will probably eat the $75 dollar fee and switch to VTSAX.
OK, sorry that is the worst choice. Unless you are putting in $1,000,000 or more. Use a fee free fund.

MustacheAndaHalf

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #8 on: March 03, 2019, 04:58:30 AM »
Quote
I would expect their performance to line up in the same order as their expense ratios, but....
VTI and ITOT are tied: -14.20%
SCHB comes next: -14.30%
FZROX is last: -14.31%

Two things going on here.

1. How well do they track their index? Some providers cut corners by creating a rough copy of the index with less holdings instead of true replication. It's obviously cheaper to do it this way, but when you get in the sub 0.05% space even a very small difference in performance can offset the expenses. VTI's parent fund, VTSAX, has over 700 billion in assets. That gives them insane economies of scale so they can buy every stock in the index and still keep costs very low. Going back to 2000, VTSAX is tracking within 0.02% of it's index, and for 10 years it's within 0.01%.

2. Securities lending income: I can't speak for the Fidelity or Schwab funds, but VTI brings in a lot of securities lending income and since Vanguard is client owned they give that income back to the clients. Note, this is income, not an expense, so they can't use it to lower the stated expense ratio. It comes to you in the form of higher performance. In the case of VTI, the expenses and SL income offset each other almost perfectly so your actual cost is only about 0.01%. If they drop the ER again as they are expected to that should drop to 0. It would still show 0.03% on paper, but in reality it would be effectively free. Some of Vanguard's funds bring in so much securities lending income they actually pay you to own them. VEXAX is a great example. The securities lending income is about 0.18% of assets, but the expense ratio still has to reflect only expenses so it's stated expense ratio is 0.08%. As a result, VEXAX has outperformed it's index by 0.1% on average since 2000.
The way ETFs work, I don't think VTI benefits from being another share class of VTSAX.  All ETFs, including VTI, gain more shares through certain institutional investors buying "creation units" of the underlying stocks, and turning those over to get equivalent shares of VTI (at a tiny profit, which is why they participate).  Since Vanguard outsources this, I don't think they benefit from economies of scale when creating new shares.

Also, if economies of scale explained the difference, VTI with $100 billion should have done much better than ITOT with just $19 billion.  And SCHB should be close behind with $14 billion.  But instead VTI and ITOT have the exact same performance in 2018 Q4.  That's why I concluded my earlier message by saying " VTI and ITOT have ~3500 stocks, while SCHB and FZROX hold ~2500 stocks.  So their difference in holdings (~1000 socks) impacted performance more than their expense ratios."

The investment income data you mention is interesting - where did you get that?  I didn't find anything like it on Morningstar when I was looking up performance and holdings data.

chasesfish

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #9 on: March 03, 2019, 05:09:03 AM »
thanks all.  I think I would feel more comfortable going with the tried and true (and larger holding) option so will probably eat the $75 dollar fee and switch to VTSAX.
OK, sorry that is the worst choice. Unless you are putting in $1,000,000 or more. Use a fee free fund.

+1.  I listed the exact Fidelity fund that tracks VTSAX

CheezM

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #10 on: March 03, 2019, 06:31:54 AM »
My Simple IRA is through Fidelity.  I hate them.  I did find out that, at least for the Simple, you can use a different institution.  I have Vanguard. So I filled out the form and voila, Fidelity automatically sends my IRA funds every month to my Vanguard account.  Not sure if that's possible with a 401k, but at least something to inquire about.  Fidelity is a rip off.

Indexer

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #11 on: March 03, 2019, 08:45:20 AM »
Quote
Also, if economies of scale explained the difference, VTI with $100 billion should have done much better than ITOT with just $19 billion.  And SCHB should be close behind with $14 billion.  But instead VTI and ITOT have the exact same performance in 2018 Q4. That's why I concluded my earlier message by saying " VTI and ITOT have ~3500 stocks, while SCHB and FZROX hold ~2500 stocks.  So their difference in holdings (~1000 socks) impacted performance more than their expense ratios."

To clarify, I wasn't saying economies of scale are that important. How they track the index is the most important factor here and that is why point #1 was titled, "How well do they track their index?" As I described in my post, some index funds replicate the index, and some try to cut corners. The funds that replicated their index tracked the index closer. I pointed out economies of scale as an extra tidbit that is helping VTSAX.

Quote
The investment income data you mention is interesting - where did you get that?  I didn't find anything like it on Morningstar when I was looking up performance and holdings data.

It's something that isn't talked about much unless you ask the right questions or do the right research. I recommend researching it more. Basically funds can loan out their securities and earn interest on the loan. When a hedge fund shorts a stock they need to borrow it from someone else. Specifically, they need to borrow it from someone who has no intention of selling it during the time period the hedge fund wants to short it. Funds that include smaller companies tend to benefit from it more. If you want to borrow Apple stock there are plenty of people holding it in margin accounts you can borrow it from. However, what about some small cap stock few people have heard of? If you want to borrow that stock your best bet is a big index fund that includes small caps, like VTSAX or VEXAX. They have the stock you want, a lot of it, and they have no plans to ever sell it.

For specific funds, I read the annual reports. The way I stumbled onto this topic was that I noticed VEXAX was consistently beating it's benchmark over time, but I couldn't find out why. Then I found securities lending income and started researching the topic.



VTI as part of VTSAX: Consider that funds will have some fixed expenses, like the computers to run the calculations to track the index, the regulatory compliance costs, the employees who run the fund, etc. Those are costs VTI can share with VTSAX, where a smaller fund is going to see those costs represent a larger share of total assets.

MustacheAndaHalf

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #12 on: March 03, 2019, 10:24:12 PM »
Since VTI, ITOT, SCHB and FZROX all performed within 0.11% of each other, I didn't think diverging from their index is a big factor.  And if I recall correctly, VTI and SCHB being 0.10% apart is actually on the high side - they are usually even closer.  I previously visited Morningstar's website and looked up VTI and SCHB, and walked through their quarterly performance numbers.

I understand that securities lending happens, but what I meant was where did you get specific numbers for specific funds?  For example, you said VEXAX makes more money on securities lending than it spends for it's expense ratio.  Where did you find the specific amount of securities lending done by VEXAX?

Indexer

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #13 on: March 04, 2019, 04:15:28 PM »
Since VTI, ITOT, SCHB and FZROX all performed within 0.11% of each other, I didn't think diverging from their index is a big factor.  And if I recall correctly, VTI and SCHB being 0.10% apart is actually on the high side - they are usually even closer.  I previously visited Morningstar's website and looked up VTI and SCHB, and walked through their quarterly performance numbers.

0.10% doesn't seem like much, unless you are comparing a fund that claims to be free to a fund that charges 0.03 to 0.04%. Then 0.10% is a huge hidden cost associated with the 'free' fund.


Quote
I understand that securities lending happens, but what I meant was where did you get specific numbers for specific funds?  For example, you said VEXAX makes more money on securities lending than it spends for it's expense ratio.  Where did you find the specific amount of securities lending done by VEXAX?

I read the annual reports.

Telecaster

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #14 on: March 07, 2019, 12:52:10 PM »
This is almost like the question of going with VFINX or VTSAX.   Over the next ten years, one of those funds will outperform the other by a little bit.  We don't know which one, but they will be pretty close to each other, because they are pretty close to the same thing.     

For the OP, if you go with VTSAX you start off $75 in the hole guaranteed.   That might pay off over the long run, but it might not.  Since VTSAX and FZROX are almost the same thing, they are going to wind up being pretty close over the long term.   I'd go with FZROX and be happy with it.   

Car Jack

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #15 on: March 07, 2019, 01:11:52 PM »
VTSAX, VTI, FSKAX, FZROX, SCHB are all virtually the same.  Aside from VTSAX, I own all of these.  When FZROX came out, I split my equity position in my IRA in half.  My buy was Aug 6.  So equal in both funds.  Here's where they are as of the close yesterday:

FSKAX: $330,276.24
FZROX: $330,557.92

There ya go.

TechVestor

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #16 on: March 07, 2019, 02:28:34 PM »

I own VTSAX at Vanguard and FSKAX at Fidelity.
just go with Fidelity's FSKAX and get best of both worlds. FSKAX is equivalent to Vanguard's VTSAX and the Expense ratio is 50% less than VTSAX.
 

MustacheAndaHalf

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #17 on: March 07, 2019, 08:47:30 PM »

I own VTSAX at Vanguard and FSKAX at Fidelity.
just go with Fidelity's FSKAX and get best of both worlds. FSKAX is equivalent to Vanguard's VTSAX and the Expense ratio is 50% less than VTSAX.
You could also say the expenses are 0.02% apart, instead of claiming it's that significant ("half").  And if Fidelity's is saving you 0.02%, shouldn't it also beat Vanguard's by 0.02% every year?  Here's their quarter-by-quarter performance for comparison:

2018  FSKAX  VTSAX
Q4  -14.35     -14.26
Q3    7.10       7.09
Q2    3.88       3.91
Q1   -0.60     -0.60

And here's a year by year comparison (FSKAX data goes back to 2014)
year:   2014     2015    2016     2017    2018
FSKAX 12.47    0.47    12.68    21.18    -5.28
VTSAX 12.56    0.39    12.66    21.17    -5.17
+/-     +0.09   -0.08    -0.02    -0.01    +0.11

The performance difference is often much wider than 0.02%, and overall favors VTSAX despite charging 0.02% more.

Padonak

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #18 on: March 12, 2019, 10:58:00 AM »
Is there a good Schwab equivalent of VTSAX? I opened a SEP account with Schwab and need to invest about 1500 this year.

Car Jack

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #19 on: March 12, 2019, 11:37:59 AM »
Is there a good Schwab equivalent of VTSAX? I opened a SEP account with Schwab and need to invest about 1500 this year.

SCHB would be similar on the ETF side of things.  But it's not the same index.  I hold SCHB and the ETF version of VTSAX, VTI.  In my mind, they're the same.

Padonak

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #20 on: March 17, 2019, 01:40:47 PM »
Is there a good Schwab equivalent of VTSAX? I opened a SEP account with Schwab and need to invest about 1500 this year.

SCHB would be similar on the ETF side of things.  But it's not the same index.  I hold SCHB and the ETF version of VTSAX, VTI.  In my mind, they're the same.

Thanks a lot. I bought SCHB.

robertkiri

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Re: FZROX vs. VTSAX (New Fidelity 100% Free Fund)
« Reply #21 on: May 29, 2019, 03:24:39 PM »
My Simple IRA is through Fidelity.  I hate them.  I did find out that, at least for the Simple, you can use a different institution.  I have Vanguard. So I filled out the form and voila, Fidelity automatically sends my IRA funds every month to my Vanguard account.  Not sure if that's possible with a 401k, but at least something to inquire about.  Fidelity is a rip off.

I have Vanguard  account and trying to do same thing that yo did? My question is do I have to have simple ira account with Vanguard or I can transfer to traditional account? Could you please tell me which form you used for the transfer?