Tax efficiency of Fidelity index funds like FSKAX/FZROX

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Topic Author
divviit
Posts: 5
Joined: Sun Dec 30, 2018 2:32 pm

Tax efficiency of Fidelity index funds like FSKAX/FZROX

Post by divviit » Sun Dec 30, 2018 2:41 pm

I am restructuring my taxable Fidelity account and I was planning on the following allocation: 60% FZROX, 30% FZIPX, 10% FZILX. I'm young (23), so I want a more aggressive portfolio - thus the tilt towards mid/small cap via FZIPX.

But I did some research and came across many past threads on the topic of Fidelity index funds being tax inefficient and should be avoided in taxable accounts:

viewtopic.php?t=238318#p3726360
viewtopic.php?t=237005
viewtopic.php?f=1&t=236846&p=3701347
viewtopic.php?t=256008
viewtopic.php?t=246105
viewtopic.php?t=215742#p3314746

The issue is that they have more dividends and capital gains distributions that cause taxable events than ETFs like ITOT (which is what I would use in Fidelity since it is commission-free) and VTI (in Vanguard).

However, I looked at the dividends and capital gains history of these funds in 2018, and VTI seems to be worse than the other two:

ITOT: 0.2487 + 0.2595 + 0.2978 + 0.3494 = 1.1554
VTI: 0.5661 + 0.6034 + 0.7142 + 0.7209 = 2.6046
FSKAX: 0.0160 + 0.2567 + 0.2580 + 1.1990 = 1.7297

What am I missing? And what commission-free iShares funds could replace FZIPX and FZILX?
Last edited by divviit on Sun Dec 30, 2018 2:48 pm, edited 1 time in total.

livesoft
Posts: 67296
Joined: Thu Mar 01, 2007 8:00 pm

Re: Tax efficiency of Fidelity index funds like FSKAX/FZROX

Post by livesoft » Sun Dec 30, 2018 2:47 pm

The Fidelity Zero funds are too new to really know much about them. I don't think Fidelity has published any information that would help would know if they are going to be like tax-efficient Vanguard funds or tax-efficient Fidelity funds.

Also note that new funds are typically tax-inefficient in their first year or two of existence.

One more thing: If Fidelity is lending shares out and collecting interest in order to pay the expenses, then there will likely be less qualified dividend income and thus these funds may be less tax-efficient than similar index funds.

But the bottom line is: No one really knows right now and things can change, too.
Wiki This signature message sponsored by sscritic: Learn to fish.

Topic Author
divviit
Posts: 5
Joined: Sun Dec 30, 2018 2:32 pm

Re: Tax efficiency of Fidelity index funds like FSKAX/FZROX

Post by divviit » Sun Dec 30, 2018 2:53 pm

What about the non-free fidelity funds like FSKAX that have been around for a while? I'm confused about how to compare its tax efficiency with VTI and ITOT, as the 2018 distribution numbers seems to show VTI as worse.

marcopolo
Posts: 2166
Joined: Sat Dec 03, 2016 10:22 am

Re: Tax efficiency of Fidelity index funds like FSKAX/FZROX

Post by marcopolo » Sun Dec 30, 2018 3:05 pm

divviit wrote:
Sun Dec 30, 2018 2:41 pm
I am restructuring my taxable Fidelity account and I was planning on the following allocation: 60% FZROX, 30% FZIPX, 10% FZILX. I'm young (23), so I want a more aggressive portfolio - thus the tilt towards mid/small cap via FZIPX.

But I did some research and came across many past threads on the topic of Fidelity index funds being tax inefficient and should be avoided in taxable accounts:

viewtopic.php?t=238318#p3726360
viewtopic.php?t=237005
viewtopic.php?f=1&t=236846&p=3701347
viewtopic.php?t=256008
viewtopic.php?t=246105
viewtopic.php?t=215742#p3314746

The issue is that they have more dividends and capital gains distributions that cause taxable events than ETFs like ITOT (which is what I would use in Fidelity since it is commission-free) and VTI (in Vanguard).

However, I looked at the dividends and capital gains history of these funds in 2018, and VTI seems to be worse than the other two:

ITOT: 0.2487 + 0.2595 + 0.2978 + 0.3494 = 1.1554
VTI: 0.5661 + 0.6034 + 0.7142 + 0.7209 = 2.6046
FSKAX: 0.0160 + 0.2567 + 0.2580 + 1.1990 = 1.7297

What am I missing? And what commission-free iShares funds could replace FZIPX and FZILX?
You are missing a couple of things.

First, those distribution numbers are per share, you have to look at the distribution as a percentage of the price of each share, not as an absolute number.

Second, not all distributions are the same. Qualified dividend and long term capital gains are taxed at lower rate than non-qualified dividends and long term capital gains.
Once in a while you get shown the light, in the strangest of places if you look at it right.

drk
Posts: 1403
Joined: Mon Jul 24, 2017 10:33 pm
Location: Seattle

Re: Tax efficiency of Fidelity index funds like FSKAX/FZROX

Post by drk » Sun Dec 30, 2018 3:25 pm

divviit wrote:
Sun Dec 30, 2018 2:53 pm
What about the non-free fidelity funds like FSKAX that have been around for a while? I'm confused about how to compare its tax efficiency with VTI and ITOT, as the 2018 distribution numbers seems to show VTI as worse.
If you want to learn more about how to compare tax efficiency, check out triceratop's excellent spreadsheet. He has the formula there with actual 2017 data for FSTVX (which was merged into FSKAX), ITOT, and VTI.

As for the new 0% ER funds, there is not enough information to expect them to be worse than the 0.015% ER versions, but there is also no reason to expect that they should be better.

DA200
Posts: 208
Joined: Fri Feb 06, 2015 3:47 pm

Re: Tax efficiency of Fidelity index funds like FSKAX/FZROX

Post by DA200 » Sun Dec 30, 2018 4:16 pm

divviit wrote:
Sun Dec 30, 2018 2:41 pm
I am restructuring my taxable Fidelity account and I was planning on the following allocation: 60% FZROX, 30% FZIPX, 10% FZILX. I'm young (23), so I want a more aggressive portfolio - thus the tilt towards mid/small cap via FZIPX.

But I did some research and came across many past threads on the topic of Fidelity index funds being tax inefficient and should be avoided in taxable accounts:

viewtopic.php?t=238318#p3726360
viewtopic.php?t=237005
viewtopic.php?f=1&t=236846&p=3701347
viewtopic.php?t=256008
viewtopic.php?t=246105
viewtopic.php?t=215742#p3314746

The issue is that they have more dividends and capital gains distributions that cause taxable events than ETFs like ITOT (which is what I would use in Fidelity since it is commission-free) and VTI (in Vanguard).

However, I looked at the dividends and capital gains history of these funds in 2018, and VTI seems to be worse than the other two:

ITOT: 0.2487 + 0.2595 + 0.2978 + 0.3494 = 1.1554
VTI: 0.5661 + 0.6034 + 0.7142 + 0.7209 = 2.6046
FSKAX: 0.0160 + 0.2567 + 0.2580 + 1.1990 = 1.7297

What am I missing? And what commission-free iShares funds could replace FZIPX and FZILX?
Here is a quick and dirty comparison. Using last Friday's fund prices, % distributed from each fund in 2018:

ITOT 1.1554/56.22 = 2.05%
VTI 2.6046/126.53 = 2.06%
FSKAX 1.7297/69.97 = 2.47%

ITOT and VTI are lower than FSKAX. More accurate tax efficient analysis is referenced in the triceratop post mentioned in this thread.

Topic Author
divviit
Posts: 5
Joined: Sun Dec 30, 2018 2:32 pm

Re: Tax efficiency of Fidelity index funds like FSKAX/FZROX

Post by divviit » Sun Dec 30, 2018 10:34 pm

Thanks for the rough calculations! I was able to confirm the difference with triceratop's spreadsheet.

For FZIPX and FZILX, I found the iShares equivalents of IJR and IDEV, respectively (not exactly equivalent but the closest I could find that are commission-free). IJR has an ER of 0.07% so normally I wouldn't consider it because I'm used to ERs < 0.04%, but I plugged it into the spreadsheet and found its total cost is on the lower end:

Image

This is really surprising to me. A fund that I would have discounted because of ER actually costs less than the funds with small ER.

arf30
Posts: 524
Joined: Sat Dec 28, 2013 11:55 am

Re: Tax efficiency of Fidelity index funds like FSKAX/FZROX

Post by arf30 » Sun Dec 30, 2018 10:44 pm

Anecdotal, but I've got FZROX in my HSA and it distributed short and long term capital gains on December 14th and 28th. Glancing at VTSAX in my Vanguard brokerage shows zero capital gains for 2018 and 2017.

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