Every investor has the primary goal of making maximum returns with minimum risks. This quest means we all look out for the best channels out there to put our hard-earned money; index funds are one of these channels.
This article discussed index funds and why they are on every investor’s list of considerations. But, more importantly, I pitched the two most talked-about low-cost index funds – the FZROX and VTSAX – to find out which is right for your portfolio.
Without wasting time, let’s get to it!
Key Takeaways
Don’t you have the time to go through the entire article? I have handpicked the key points for you below:
- Both FZROX and VTSAX are low-cost index funds offering investors vast exposure to the total stock market.
- FZROX’s benchmark index measures the total return of a broad range of U.S. stocks, while VTSAX’s index measures the return of the entire stock market.
- Both mutual funds are similar in their composition, considering they invest at least 99% in stocks from similar sectors.
- FZROX has no expense ratio nor minimum investment limit – it is completely free. VTSAX’s expense ratio is 0.03% and requires a $3,000 minimum investment
- VTSAX has an ETF equivalent, i.e., VTI, while FZROX has no ETF version.
- Consider the historical performance, fund size and holdings, expense ratio and fees, and volatility when choosing between the pair.
FZROX vs. VTSAX – At a Glance
Before we dive deep into the waters of these two funds, here is an overview of the Fidelity ZERO Total Market Index Fund (FZROX) and Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX). As mentioned earlier, both funds are index funds with major similarities and differences, which makes them the ideal pair to compare.
Let’s start with the VTSAX, which is a Vanguard index fund that captures the U.S. equity market. Since its inception in 1992, VTSAX has amassed several small, mid, and large-cap growth and value stocks in its portfolio. Vanguard describes the fund as offering “low costs, broad diversification, and the potential for tax efficiency.”
In essence, this index fund tracks the performance of the CRSP US Total Market Index, which measures the investment return of the entire stock market, i.e., the overall investable U.S. stock market, including all the stocks traded on NASDAQ and the New York Stock Exchange.
Fidelity issues FZROX as an index fund capturing a wide range of U.S. stocks. As you would expect from a total stock market index fund, a very large percentage of FZROX investments (up to 80%) goes into the stocks you find in the Fidelity U.S. Total Investable Market Index. It is ideal for investors looking to expose their portfolio to all traded security available publicly.
FZROX tracks the performance of the Fidelity US Total Investable Market Index, which mirrors the performance of the U.S. equity market, and includes small-cap, mid-cap, and large-cap stocks.
Moving on, let’s explore the investment strategies of both funds, as well as where and what they put their monies on.
FZROX vs. VTSAX – Composition Differences
Portfolio Size, Top Holdings, and Largest Sectors
Both FZROX and VTSAX are similar in their composition, considering they invest mainly in stocks (at least 99%), focusing on very similar sectors. In both cases, the top six sectors are Technology, Financial Services, Healthcare, Consumer Cyclical, Communication, and Industrials, respectively. However, the percentage each fund invests in each sector differs.
A similar trend is observed in the top 10 holdings of each fund, where the same nine (9) stocks are present in both lists, including Apple, Microsoft, Amazon, Facebook, Berkshire Hathway, and Tesla. The only differences are the presence of NVIDIA Corp in VTSAX and Johnson and Johnson in FZROX as their 10th stock. The top 10 holdings account for 22.33% of VTSAX’s total assets and 21.70% of FZROX’s.
Regarding portfolio size, VTSAX is the larger of the two, with 3,600 different stocks, against FZROX’s 2,500. The 1,000 stocks difference comes from the smaller companies VTSAX invests in. While these smaller cap stocks do not affect the overall portfolio, they make VTSAX more diverse and immune to market swings.
Investment Strategies
Both FZROX and VTSAX invest in U.S. domestic stocks, but with slight differences. According to Fidelity, at least 80% of FZROX’s funds go into the Fidelity U.S. Total Investable Market Index – an index that focuses primarily on mirroring the returns of the entire market. You may want to ask where the other 20% goes? Well, Fidelity is yet to make that clear to the public.
On the other hand, the Vanguard Total Stock Market Index Fund (VTSAX), despite tracking an index that represents the entire U.S. stocks, does not hold all the securities from this index. Instead, it holds a sample that reflects different features, including the weight of various sectors, market caps, and financial measures.
FZROX vs. VTSAX – Performance and Returns
Another important talking point when comparing to close index funds is the historical performance. Based on how both options have fared in the past, investors can predict what to expect in the future.
It is important to note that FZROX and VTSAX have different timelines due to the differences in inception dates. VTSAX, launched in 2000, has existed for 18 years before the launch of FZROX in 2018. This is perhaps why the former has $872 billion assets under management, against the latter’s $5.28 billion.
Both funds’ current Year-To-Date (YTD) return is not overly different, with FZROX at -7.81% and VTSAX at -8.03%. Investopedia describes the YTD return as “the amount of profit (or loss) realized by an investment since the first trading day of the current calendar year.” They both have performed well in the last three years, with FZROX returning 20.04% and VTSAX returning 19.87% within that period. The 1-year return is -5.36% and -5.70% for FZROX and VTSAX, respectively, which is really close.
Overall, there is nothing outright to separate the two funds in historical performance and capital gains. Now to the bigger picture, VTSAX has done 14.71% in returns in the last ten years and 15.43% over the previous five.
FZROX vs. VTSAX – Fees and Tax Efficiency
Minimum Investments
Interestingly, the minimum investment is one of the significant differences between VTSAX and FZROX. Of course, you would expect index funds to have a minimum investment ranging from $3,000 to $5,000. But there is a twist with Fidelity’s FZROX. The fund has no minimum investment, making it an excellent and irresistible choice for new investors who want to spend as little as possible to acquire good funds for their portfolio.
VTSAX is not a $0 minimum investment fund. Rather, the least you can invest in Vanguards VTSAX is $3,000. Therefore, only investors with considerable financial power can add this index fund to their portfolios. But if you do not have so much to spend and still want the same exposure as VTSAX, you should consider the ETF equivalent of VTSAX, i.e., VTI. More on that later.
Expense Ratio
Expense ratios are standard for every exchange-traded fund (ETFs), index fund, or mutual fund, and it is one of the major factors investors consider when deciding what funds to buy. A fund with a very high management fee is not attractive to most investors.
Vanguard is synonymous with low-cost funds, and fortunately, VTSAX’s expense ratio is not an exception. It is one of the lowest you can get out there, and it is cheaper than 85% of the actively managed mutual funds on the market at the moment. At 0.04%, you are only spending $4 as expenses on every $10,000 you buy.
FZROX’s expense ratio is 0%. Interesting, right? Yes. So, in addition to having no minimum investment, Fidelity’s FZROX has no expense ratio. As a result, you can buy as much as you want without paying a cent on management. Fidelity clearly beats Vanguard in its “low-cost” game here!
FZROX vs. VTSAX – ESG Ratings and Impacts
We are comparing the ESG ratings of FZROX and VTSAX to see which of the funds will hold it down better in the face of risks and opportunities associated with environmental, social, and governance matters.
Fidelity ZERO Total Market Index Fund (FZROX) has 24% of its holdings rated AAA or AA (leaders). Similarly, 24% of Vanguard Total Stock Market Index Fund; Admiral (VTSAX) funds are rated AAA or AA. (leaders).
Clearly, there is nothing to separate both mutual funds regarding ESG ratings and impacts. The MSCI ESG Research LLC’s ratings infer that they are both considerably resistant to changes due to environmental, social, and governance developments.
FZROX vs. VTSAX – Risks and Volatility
There is not much to report regarding the risks and volatility of both FZROX and VTSAX. Overall, stock market investments are more volatile and riskier than bonds investments. That said, FZROX is historically the more volatile of the pair, in this case, having gone down by over 30% in the past.
How do you buy Low-Cost Mutual Funds?
Index funds, like ETFs, are issued by different investment companies. For example, Fidelity issues FZROX while Vanguard issues VTSAX. Once you have decided which works best for your portfolio, you can buy your index fund from the issuer directly. Alternatively, you can buy from any brokerage company of proven reputation and reliability.
Note: You can only buy and trade Fidelity’s FZORX on the Fidelity platform. That makes it less flexible than Vanguard’s VTSAX, available on the Vanguard platform and other top brokerage platforms.
ETF Equivalents of FZROX and VTSAX Total Market Index Funds
Like I mentioned earlier, not everyone can afford the $3,000 minimum investment Vanguard has slapped on VTSAX. But there is an alternative, especially for new investors or those on a tight investment budget. ETFs are more flexible and offer you a simpler alternative to own index funds. In addition, you can invest in the ETF versions of these mutual funds, especially if you do not have a Fidelity or Vanguard account or are not American citizens.
The ETF equivalent of VTSAX is the Vanguard Total Stock Market Index Fund ETF Shares (VTI), which is even cheaper at a 0.03% expense ratio. However, there is no ETF equivalent of FZROX. You can only get it by opening an account with Fidelity and buying as much as you want for free.
Final Verdict
It’s been an extensive yet exciting comparison of two of the most popular U.S. stock index funds. VTSAX is more flexible – it is available on Vanguard and other top investment platforms and even has an ETF equivalent for non-American traders and new investors. FZROX, on the other hand, is only available on Fidelity. The only advantage it offers here is it’s zero minimum investment and expense ratio.
Which Total Market Index Fund Is Better For Your Portfolio?
From our discussion so far, one thing is clear: you can never go wrong, irrespective of which one you end up with, between FZROX and VTSAX. However, it is essential to say that Vanguard may edge this one slightly over Fidelity. But, even at that, the mutual fund that goes into your portfolio will entirely depend on your investment goals and preferences.
When considering which of the two index funds to pitch your tent with, I recommend that you prioritize important talking points like minimum investments, expense ratio, and ease of acquisition.