FZROX vs. FSKAX: Comprehensive Practical Comparison
Which Fidelity Total Market Fund Fits Your Portfolio Best?
FZROX vs. FSKAX: Comprehensive Practical Comparison
Which Fidelity Total Market Fund Fits Your Portfolio Best?
Fidelity’s FZROX and FSKAX are two of the most popular total market index funds offered by Fidelity. Both aim to provide comprehensive exposure to the entire U.S. stock market, but they come with distinct features and benefits that can influence an investor’s choice. In this article, we will delve deep into the nuances of FZROX and FSKAX, exploring their differences, advantages, historical performance, and how they fit into various investment strategies, particularly the classic 60/40 portfolio.
Table of Contents
- Introduction
- Understanding Total Market Index Funds
- FZROX vs. FSKAX: Detailed Comparison
- Performance Analysis
- Integrating FZROX and FSKAX into a 60/40 Portfolio
- Tax Considerations
- Dividend Policies and Reinvestment
- Suitability for Different Investor Profiles
- Comparing FSKAX and Vanguard’s VTI
- Conclusion: Choosing Between FZROX and FSKAX
- Frequently Asked Questions (FAQ)
Introduction
Investing in the stock market can be overwhelming, especially with the myriad of options available. Among the various investment vehicles, total market index funds have gained popularity due to their simplicity, diversification, and low costs. Fidelity offers two standout options in this category: FZROX and FSKAX. While both aim to replicate the performance of the entire U.S. stock market, subtle differences can impact your investment strategy and long-term returns.
This comprehensive comparison will help you understand which fund aligns better with your financial goals, investment horizon, and personal preferences.
Understanding Total Market Index Funds
Total market index funds seek to replicate the performance of a broad stock market index, such as the CRSP US Total Market Index or the Russell 3000 Index. These funds provide investors with exposure to the entire spectrum of publicly traded U.S. companies, ranging from large-cap giants to small-cap growth stocks.
Benefits of Total Market Index Funds
- Diversification: By holding thousands of stocks, these funds minimize the risk associated with individual stock performance.
- Low Costs: Passive management typically results in lower expense ratios compared to actively managed funds.
- Simplicity: Easy to incorporate into various investment strategies without the need for constant monitoring.
- Market Performance Tracking: These funds aim to match the market’s overall performance, making them suitable for long-term investors.
Considerations
- Market Risk: While diversified, these funds are still subject to overall market fluctuations.
- Limited Flexibility: Passive management means the fund won’t adjust holdings based on market conditions.
FZROX vs. FSKAX: Detailed Comparison
While both FZROX and FSKAX aim to cover the entire U.S. stock market, they have distinct characteristics that set them apart. Let’s explore these differences in detail.
Expense Ratios and Fees
Fidelity ZERO Total Market Index Fund (FZROX):
- Expense Ratio: 0% (ZERO fees).
- Additional Fees: No minimum investment requirement and no transaction fees within Fidelity accounts.
Fidelity Total Market Index Fund (FSKAX):
- Expense Ratio: 0.02%.
- Additional Fees: Slightly higher than FZROX but still among the lowest in the industry. FSKAX may have minimum investment requirements depending on the account type.
Comparison:
- Cost Efficiency: FZROX offers a clear advantage with its 0% expense ratio, making it an attractive option for cost-conscious investors.
- Value Added: While FSKAX charges a minimal fee, it still remains highly competitive and offers additional benefits like broader diversification and portability.
Holdings and Diversification
FZROX:
- Number of Holdings: Approximately 2,631 U.S. stocks.
- Market Coverage: Focuses on large and mid-cap companies, potentially excluding some smaller companies.
- Sector Allocation: Mirrors the broader market with significant exposure to technology, healthcare, financials, and consumer discretionary sectors.
FSKAX:
- Number of Holdings: Approximately 3,875 U.S. stocks.
- Market Coverage: Includes a wider array of companies, encompassing small-cap stocks that FZROX may exclude.
- Sector Allocation: Similar to FZROX but with additional exposure to smaller sectors due to increased diversification.
Comparison:
- Diversification: FSKAX offers broader diversification by including more stocks, particularly in the small-cap segment, which can enhance the fund’s ability to capture a wider market performance.
- Risk Profile: The inclusion of more small-cap stocks in FSKAX can introduce higher volatility but also potential for greater returns over the long term.
Eligibility and Portability
FZROX:
- Eligibility: Can only be held within Fidelity accounts.
- Portability: Limited to Fidelity’s ecosystem, which may restrict investors looking to diversify across different brokerages.
FSKAX:
- Eligibility: Transferable to other brokerages, offering greater flexibility.
- Portability: Easily moved between different investment platforms, enhancing its appeal to investors who value liquidity and flexibility.
Comparison:
- Flexibility: FSKAX provides superior portability, making it a better choice for investors who might want to switch brokerages or manage a diversified portfolio across multiple platforms.
- Account Consolidation: FZROX is ideal for those who prefer to keep all investments within Fidelity, benefiting from integrated account management and services.
Performance Analysis
Analyzing the performance of FZROX and FSKAX involves looking at their historical returns, risk metrics, and how they behave during different market conditions.
Historical Returns
Since its inception in 2018, FZROX has delivered returns closely tracking the overall U.S. stock market. FSKAX, with its broader diversification, has shown similar performance patterns, with slight variations attributable to the inclusion of additional small-cap stocks.
- FZROX: Consistently mirrors the market with minimal tracking error.
- FSKAX: Slightly higher returns during periods when small-cap stocks outperform but may lag when large-cap stocks are leading.
Risk Metrics
- Volatility: Both funds exhibit similar volatility levels, with FSKAX experiencing slightly higher fluctuations due to its small-cap exposure.
- Beta: Both have a beta close to 1, indicating that their performance moves in line with the overall market.
- Alpha: Minimal alpha as both are passive index funds designed to match market performance.
Stability During Market Volatility
During market downturns, both FZROX and FSKAX tend to follow the broader market trends. However, FSKAX’s additional small-cap exposure can lead to more pronounced declines during bearish phases and more significant rebounds during bullish phases.
- FZROX: Offers stability through its focus on large and mid-cap stocks.
- FSKAX: Enhanced growth potential but with increased risk due to small-cap inclusion.
Integrating FZROX and FSKAX into a 60/40 Portfolio
A classic 60/40 portfolio balances 60% in equities (stocks) and 40% in bonds, aiming for growth with a moderate risk profile. Both FZROX and FSKAX can serve as the equity component in this strategy.
Option 1: Using FZROX
| Asset | Fund | % |
|---|---|---|
| U.S. Stocks | Fidelity ZERO Total Market Index Fund (FZROX) | 60% |
| Bonds | Fidelity U.S. Bond Index Fund (FXNAX) | 40% |
Advantages:
- Cost Efficiency: 0% expense ratio maximizes net returns.
- Simplicity: Easy to manage within Fidelity accounts.
Considerations:
- Diversification: Slightly less diversified compared to FSKAX due to fewer holdings.
Option 2: Using FSKAX
| Asset | Fund | % |
|---|---|---|
| U.S. Stocks | Fidelity Total Market Index Fund (FSKAX) | 60% |
| Bonds | Fidelity U.S. Bond Index Fund (FXNAX) | 40% |
Advantages:
- Broader Diversification: More holdings, including small-cap stocks.
- Flexibility: Portability across different brokerages.
Considerations:
- Slightly Higher Fees: Minimal expense ratio of 0.02%.
- Potential for Higher Volatility: Due to small-cap exposure.
Backtesting Results
We conducted a 6-year backtest on both portfolio options using historical data. The results were nearly identical, with FZROX having a slight edge due to its 0% expense ratio. Over extended periods, this fee difference can compound significantly, favoring FZROX for long-term investors.
Key Findings:
- Return on Investment: FZROX slightly outperformed FSKAX on a net basis.
- Risk-Adjusted Returns: Both portfolios maintained similar Sharpe ratios, indicating comparable risk-adjusted performance.
- Long-Term Growth: The difference in returns becomes more pronounced over decades, benefiting FZROX due to zero fees.
Tax Considerations
Investors should be mindful of the tax implications associated with mutual funds. Both FZROX and FSKAX are subject to capital gains taxes when the fund manager rebalances the portfolio or sells securities.
- Capital Gains: Both funds distribute capital gains to investors, which can be taxable in non-retirement accounts.
- Dividend Taxes: Dividends are taxable unless held in tax-advantaged accounts.
- Tax Efficiency: While both funds are relatively tax-efficient, FSKAX’s broader diversification might result in slightly different tax outcomes. It’s essential to consult with a tax professional to optimize tax strategies.
Tax-Advantaged Accounts: Holding FZROX or FSKAX in accounts like IRAs or 401(k)s can defer taxes on dividends and capital gains, enhancing overall tax efficiency.
Dividend Policies and Reinvestment
Both FZROX and FSKAX distribute dividends quarterly, providing a steady income stream aligned with the total market average.
Dividend Reinvestment
- FZROX: Offers an optional Dividend Reinvestment Plan (DRIP), allowing dividends to be automatically reinvested into the fund.
- FSKAX: Also provides a DRIP option, facilitating compound growth over time.
Benefits of DRIP:
- Compounding: Reinvested dividends can significantly enhance long-term returns.
- Ease of Investment: Automatic reinvestment simplifies portfolio management without requiring manual intervention.
Suitability for Different Investor Profiles
FZROX
Ideal For:
- Cost-Conscious Investors: Those prioritizing minimal fees.
- Fidelity Account Holders: Investors who prefer to keep all investments within Fidelity.
- Long-Term Investors: Individuals focused on maximizing growth over decades with minimal costs.
Considerations:
- Limited Diversification: Slightly fewer holdings compared to FSKAX.
- Locked into Fidelity: Less flexibility for transferring investments to other brokerages.
FSKAX
Ideal For:
- Diversified Portfolios: Investors seeking broader market exposure, including small-cap stocks.
- Flexibility: Those who may want to transfer investments across different brokerages.
- Moderate to Long-Term Investors: Individuals comfortable with slightly higher fees for enhanced diversification.
Considerations:
- Minimal Fees: While slightly higher than FZROX, still very low.
- Potential for Higher Volatility: Due to small-cap inclusion.
Comparing FSKAX and Vanguard’s VTI
Vanguard’s VTI (Vanguard Total Stock Market ETF) is a direct competitor to Fidelity’s FSKAX. Here’s how they stack up:
| Feature | FSKAX | VTI |
|---|---|---|
| Expense Ratio | 0.02% | 0.03% |
| Holdings | ~3,875 U.S. stocks | ~4,000 U.S. stocks |
| Structure | Mutual Fund | Exchange-Traded Fund (ETF) |
| Portability | Highly portable across brokerages | Highly portable across brokerages |
| Tax Efficiency | Similar, though ETFs like VTI may offer better tax efficiency due to their structure | |
| Dividends | Quarterly dividends with DRIP option | Quarterly dividends with DRIP option |
Key Differences:
- Structure: VTI is an ETF, which may offer better tax efficiency and intraday trading flexibility. FSKAX is a mutual fund, which can be easier for certain account types like retirement accounts.
- Expense Ratio: Both are exceptionally low, with FSKAX slightly cheaper.
- Tax Efficiency: ETFs generally have a tax advantage over mutual funds due to their unique creation and redemption process.
Conclusion: Both FSKAX and VTI are excellent choices for total market exposure, with slight differences that may influence an investor’s preference based on their specific needs and brokerage relationships.
Conclusion: Choosing Between FZROX and FSKAX
Both FZROX and FSKAX are outstanding choices for investors seeking total market exposure within a 60/40 portfolio framework. Your decision between the two should hinge on the following factors:
- Cost Sensitivity: If minimizing fees is paramount and you plan to keep your investments within Fidelity, FZROX is the superior choice.
- Diversification and Flexibility: If you desire broader market coverage, including small-cap stocks, and the flexibility to transfer investments across brokerages, FSKAX is more suitable.
- Investment Horizon: Both are excellent for long-term growth, but the fee advantage of FZROX can lead to better compounded returns over decades.
Ultimately, both funds align well with the goal of building long-term wealth with minimal costs. Assess your individual preferences, investment goals, and brokerage relationships to make the best choice for your portfolio.
Frequently Asked Questions (FAQ)
Q: Is FSKAX or FZROX better?
Both are excellent options for total market exposure. FZROX has a 0% expense ratio, making it ideal for Fidelity investors who want to minimize costs. FSKAX offers broader diversification and portability to other brokerages, which may suit investors seeking flexibility.
Q: Does FZROX pay dividends?
Yes, FZROX pays dividends quarterly. The dividend yield varies but typically aligns with the total market average.
Q: Does FSKAX pay dividends?
Yes, FSKAX also pays dividends quarterly. The yield is comparable to FZROX, providing consistent income for investors.
Q: Does FZROX reinvest dividends?
Yes, FZROX offers an optional Dividend Reinvestment Plan (DRIP). This allows dividends to be reinvested automatically into the fund, helping investors compound their growth over time.
Q: Does FSKAX reinvest dividends?
Yes, FSKAX also provides a DRIP option for automatic reinvestment of dividends.
Q: Is FZROX a good investment for long term?
Yes, FZROX is an excellent choice for long-term investors. With its 0% expense ratio and broad market coverage, it’s designed to maximize growth with minimal costs.
Q: Which is better, FSKAX or VTI?
Both are highly similar in performance and diversification. Choose FSKAX if you prefer a mutual fund or are a Fidelity investor. VTI is an ETF, offering better tax efficiency and tradability for Vanguard users.
Q: How high will FZROX go?
The performance of FZROX depends on the growth of the U.S. economy and the total stock market. It’s built for long-term gains, not for predicting specific price levels. Use our Portfolio Tester to explore its historical performance alongside other assets.
Q: What are the tax implications of investing in FZROX vs. FSKAX?
Both FZROX and FSKAX are mutual funds and are subject to capital gains taxes when the fund manager sells securities within the fund. However, FSKAX’s broader diversification may lead to slightly different tax implications. It’s advisable to consult with a tax professional to understand how these funds fit into your overall tax strategy.
Q: Can I hold FZROX or FSKAX in a retirement account?
Yes, both FZROX and FSKAX can be held in various retirement accounts, including IRAs and 401(k)s. Holding these funds in a tax-advantaged account can help mitigate some tax liabilities associated with dividends and capital gains.
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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.