Sizing up the firm’s fee-war winner against a fund titan’s product shows other factors that still count
With its launch of two zero-fee index mutual funds in the US last week, Fidelity has won the race to the bottom in passive fund pricing. But when matched up against an index-based product from a mammoth rival, the new products may leave a little more to be desired.
“When I consider the once-undisputed champion, Vanguard, against Fidelity’s new Zero funds in five areas … I found Vanguard still came out on top,” wrote Wealth Logic founder Allan Roth in a piece for Financial Planning. “That said, it was a close call between the two rivals.”
Comparing the Fidelity Zero Total Market Index Fund (FZROX) with the US-listed Vanguard Total Stock Market ETF (VTI), Roth ruled Fidelity as the clear winner in fees. But when it came to diversification in holdings, Vanguard had 3,654 companies held in VTI, as opposed to 2,500 in FZROX’s index as of April 30.
“[I]ts extra 1,154 companies are all very small,” he said. “Nonetheless, Vanguard takes this round.”
Roth also looked at fee offsets that the providers enable. VTI comes with a 0.04% annual fee, but has matched the returns of the overall index it tracks; citing a Vanguard spokesperson, he added that the fund also returned two basis points to shareholders as a result of revenue earned in securities lending.
Because the zero-fee Fidelity funds are self-indexed and have no history, Roth had to examine the firm’s Total Market Index Fund Premium Class (FSTVX), launched in 1997, as a proxy indicator. He found that like VTI, FSTVX has historically exhibited positive tracking error that offset its annual expense ratio; some revenue earned by FSTVX from securities lending also flows through to fund holders, according to a Fidelity spokesperson.
“[B]ecause Fidelity has nearly matched the index over the past decade and bested the index of the fund’s life, I’m going to score the two firms as on equal footing in this area,” he said.
Focusing on tax efficiency, Roth found that VTI and other share classes passed through no capital gains in 2017, allowing fund holders to avoid or at least be in control of when they paid those taxes.
According to Elisabeth Kashner, director of ETF research at FactSet, Fidelity’s Total Market Index Fund (FSTVX) generated 0.79% in capital gains last year. “[F]or high-bracket taxable investors, capital gains distributions cost about 0.19% in taxes,” she said.
Because they have narrower portfolios than FSTVX, Roth reasoned, Fidelity’s zero-fee funds would trigger more capital gains as stocks are moved in and out of the index. He concluded that they would therefore be even less tax-efficient.
Finally, he noted that both firms have earned great investor trust: Fidelity with its move to zero funds and slashing of fees in other products, and Vanguard with it history of lowering costs and culture that sparked the fee wars.