Is Fidelity's new no fee index fund a good deal? Maybe not...

[REWahoo]

I'm no longer an indexer so I have no dog in this fight, but thought this was an interesting look at why all indexes are not created equal and how the lowest cost might not be the best way to choose an index fund:

Saving a few pennies on index funds could cost you many dollars

We can all celebrate the competition between index providers that has brought expenses as low as they now are. But one consequence of these low ratios is that they no longer are near the top of the list of factors we should take into account when choosing an index fund.

More important are the benchmark the fund follows, tracking error and tax efficiency - and new funds like Fidelity's zero expense ratio funds are less tax efficient than funds with a longer track record.

 

[redduck]

I'm no longer an indexer...

Uh, if not an indexer, then what?

 

[REWahoo]

Uh, if not an indexer, then what?

Wellesley and Wellington funds mostly. But then you probably already knew that.

 

[Dtail]

Seems a little more theoretical than actual proof of lower returns, but the points appear to be reasonable.

 

[redduck]

Wellesley and Wellington funds mostly. But then you probably already knew that.

Oh, yeah. I did know that--just not right at the moment I read your post and typed my post. Glad you responded so quickly because my not knowing (and my rapidly increasing panic) would have interfered with my upcoming nap. Thanks.

 

[thefinancebuff]

More important are the benchmark the fund follows, tracking error and tax efficiency

If someone is looking for absolutely the best, just looking at the 0% expense ratio won't do it. However I would say the difference in the above factors is also very small. Not being absolutely the best doesn't push the fund into "not a good deal." It's still a magnitude better than so many other deals.

 

[audreyh1]

More important are the benchmark the fund follows, tracking error and tax efficiency - and new funds like Fidelity's zero expense ratio funds are less tax efficient than funds with a longer track record.

How do they know it’s less tax efficient?

 

[REWahoo]

How do they know it’s less tax efficient?

From the article:

As a general rule, funds that have been around for longer are able to be more tax efficient since they will have a larger pool of so-called tax-loss carry-forwards. These are capital losses that the funds realized in the past and which they can use to shelter capital gains. This is one factor that potentially could adversely impact these new Fidelity funds relative to longer-lived total-market index funds.

I should have said "potentially" less tax efficient.

 

[Lawrencewendall]

I may be assuming incorrectly but... FZROX will be managed by the same company (Geode Capital Management), that manages FSTMX which still charges a fee. The assumption that the holdings will be similar may be well off. Since FZROX just started, they have no track record but FSTMX has a record going back to 1998. 10 year returns of FSTMX, which includes the 37% crash in 2008 is 10.67% annually. If you calculate 15 years (2003), it’s even better returns. I haven't compared the holdings between the 2. Not sure if they've even been published for FZROX. Nothing about holdings in the FZROX Prospectus but both FZROX and FSTMX Prospectus say:

"Principal Investment Strategies

Normally investing at least 80% of assets in common stocks included in the Dow Jones U.S. Total Stock Market Index℠, which represents the performance of a broad range of U.S. stocks.
Using statistical sampling techniques based on such factors as capitalization, industry exposures, dividend yield, price/earnings (P/E) ratio, price/book (P/B) ratio, and earnings growth to attempt to replicate the returns of the Dow Jones U.S. Total Stock Market Index℠ using a smaller number of securities.
Lending securities to earn income for the fund."

 

[RetireBy90]

More important are the benchmark the fund follows, tracking error and tax efficiency - and new funds like Fidelity's zero expense ratio funds are less tax efficient than funds with a longer track record.

So I'm thinking you didn't intend a longer track record makes a fund more tax efficient, which was my initial thought. However, wondering if you see any reason to worry about tax efficiency if held in retirement (IRA) account ?

 

[REWahoo]

So I'm thinking you didn't intend a longer track record makes a fund more tax efficient, which was my initial thought. However, wondering if you see any reason to worry about tax efficiency if held in retirement (IRA) account ?

I have no opinion on this article, I simply thought it interesting. As to your question, I'm like Sgt Schultz...

 

[audreyh1]

From the article:



I should have said "potentially" less tax efficient.

It’s all theory and speculation and a bit wrong-headed it seems. IMO most surviving funds ran out of tax loss carry forwards after 2013, and again after 2017. Funds that have been around longer are now more likely to have built up larger unrealized capital gains.