FZROX: Gamechanger or Marketing Trick?

Since its launch in 2018, FZROX has become one of Fidelity’s flagship funds, amassing billions of dollars in assets under management (AUM) in a relatively short period. What’s the hype? Let’s learn.

Fees? ZERO.

FZROX is part of Fidelity’s young “ZERO” family of funds, introduced in 2018 as the first mutual funds with a 0% expense ratio. This means you pay no management fees—a stark contrast even to the lowest-cost funds from competitors. The “ZERO” family consists of four funds, each offering exposure to a specific market segment:

Fund	Tracks	Purpose
FZROX	U.S. Total Market Index	Broad exposure to the U.S. equity market.
FNILX	U.S. Large Cap Index	Focused exposure to large-cap U.S. stocks.
FZIPX	U.S. Extended Market Index	Complements large-cap funds with mid- and small-cap stocks.
FZILX	International Stocks Index	Diversification through international equities.

First impression? It looks like Fidelity is boldly pursuing the ultimate realization of the vision of Vanguard’s founder, John Bogle, who emphasized the importance of low costs for long-term investment success. The compounding effect works for gains—but it also works for fees. And indeed, there’s nothing lower than ZERO!

Less is More?

While other similar funds track benchmarks like the S&P 500, FZROX tracks the Fidelity U.S. Total Investable Market Index, a proprietary index designed to reflect the performance of the U.S. equity market, without holding every constituent.

As a result, FZROX holds approximately 2,600 stocks, fewer than some comparable funds. For instance, Vanguard’s Total Stock Market Index Fund (VTI) includes about 3,854 stocks.

Does it work? Let’s take a look:

Performance

The ZERO funds are still relatively young, but since its launch on August 2, 2018, FZROX has delivered competitive returns, often outperforming similar funds. For instance, over a five-year period, FZROX achieved an annualized return of 13.81%, beating the S&P 500’s 12.50%. In just six years, the total return stands at a staggering 126%, compared to 110% for the S&P 500:

Well done, Fidelity! Well done.

Considerations (What the Community Says)

While all of that sounds great, but we aggregated comments from popular investing communities, and those are the considerations people often point out:

1. Fidelity’s Marketing Strategy: Some users point out that the ZERO funds are a marketing tool for Fidelity to attract and retain customers. By offering a fund with no expense ratio, Fidelity hopes investors will keep their assets within their platform.

2. Portability Limitations: A major drawback is that FZROX cannot be transferred to another brokerage without selling the position, which can lead to taxable events in non-retirement accounts. This makes portability-focused investors lean toward ETFs like VTI. This lack of portability is a significant consideration for those who might want to switch brokers in the future.

3. Suitable for Tax-Advantaged Accounts: Numerous commenters recommend holding FZROX in tax-advantaged accounts like Roth IRAs or 401(k)s. This is because selling FZROX in taxable accounts can trigger capital gains taxes if you decide to switch brokerages, as the fund cannot be transferred in-kind.

4. Tax Efficiency in Taxable Accounts: FZROX is a mutual fund, not an ETF, which can make it less tax-efficient in taxable accounts. Mutual funds may distribute capital gains annually, potentially leading to unexpected tax liabilities.

5. Proprietary Index Concerns: While FZROX has generally outperformed its peers, some of its success can be attributed to the performance of its proprietary index rather than its expense ratio alone. Will it continue?

6. Differences in Holdings: The fund holds fewer stocks (about 2,600) compared to other total market funds like FSKAX or VTSAX, which hold around 3,500 to 4,000 stocks. The missing companies are typically small-cap stocks, and while they represent a tiny fraction of the market, some investors prefer broader diversification.

7. Dividend Distribution Frequency: The fund distributes dividends less frequently than some investors might prefer, which could be a drawback for those relying on dividend income. However, for long-term growth investors, this is often a minor concern.

8. Long-Term Viability and Trust: Investors generally express trust in Fidelity as a reputable institution. While the proprietary nature of the index raises questions for some, the consensus is that Fidelity’s management and transparency alleviate major concerns. Skeptics question whether Fidelity will maintain the 0% expense model indefinitely or introduce changes that could impact the fund’s attractiveness.

9. Alternative Recommendations: For those concerned about portability and tax efficiency, many commenters suggest using ETFs like VTI (Vanguard Total Stock Market ETF) or ITOT (iShares Core S&P Total U.S. Stock Market ETF) in taxable accounts. Fidely also offers an ETF alternative: FSKAX. Read: FZROX vs. FSKAX

Conclusion

FZROX’s zero fees, solid performance, and alignment with long-term investing principles make it a standout choice for cost-conscious investors. However, it’s best suited for tax-advantaged accounts, where its lack of portability and tax implications are non-issues. For taxable accounts, ETFs like FSKAX, VTI or ITOT may provide greater flexibility and tax efficiency.

Ultimately, FZROX is a bold step in the “zero fee revolution” and a practical realization of John Bogle’s low-cost investment philosophy. Vanguard, your move!

FAQ

Q: Is FZROX a good fund?

Yes, FZROX is a good choice for investors seeking broad U.S. market exposure with no expense ratio, making it cost-effective for long-term growth.

Q: Is FZROX a dividend stock?

FZROX is not a traditional dividend stock, but it does pay dividends quarterly, distributing income generated from its holdings.

Q: What is the future of FZROX?

FZROX’s performance depends on the overall growth of the U.S. stock market. As a total market fund, it tracks the ups and downs of the economy and provides diversified exposure.

Q: What type of stock is FZROX?

FZROX is a mutual fund that represents the total U.S. stock market, holding large-cap, mid-cap, and small-cap stocks.

Q: Does FZROX follow the S&P 500?

No, FZROX follows the Fidelity U.S. Total Market Index, which includes a broader range of stocks than the S&P 500.

Q: How much to invest in FZROX?

The amount depends on your financial goals, risk tolerance, and overall portfolio. FZROX is suitable for both small and large investments.

Q: Is FZROX taxable?

Yes, FZROX is taxable if held in a regular brokerage account. Dividends and capital gains distributions are subject to taxes.

Q: How does FZROX work?

FZROX tracks the Fidelity U.S. Total Market Index, investing in a diversified portfolio of U.S. stocks across all market caps.

Q: Is FZROX US only?

Yes, FZROX focuses exclusively on U.S. companies and does not include international stocks.

Q: Which is better, FZROX or FNILX?

Both are excellent zero-fee funds. FZROX provides total market exposure, while FNILX focuses on large-cap stocks. Your choice depends on your investment goals.

Q: Is FZROX passively managed?

Yes, FZROX is passively managed, meaning it tracks the Fidelity U.S. Total Market Index without active stock selection.

Q: How often does FZROX pay dividends?

FZROX pays dividends quarterly, providing a consistent income stream.

Q: How much of FZROX is a large cap?

A significant portion of FZROX is invested in large-cap stocks, as they make up the majority of the U.S. stock market.

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Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investing involves risks, including the possible loss of principal. Always conduct your own research before making investment decisions.