The hidden cost of Fidelity’s ZERO funds

[abuss368]

This is really good and thanks for sharing. I guess that could work two ways correct? Reinvesting dividends quarterly (in place of annually) in a down market could accelerate losses but one is reinvesting and lowering cost basis.

No. Dividends payments are reinvested back into the fund. There is no economic impact. Distributions are strictly to generate reportable tax events for your 1099.

I understand that but it appears the research focuses on the timing of the reinvestment of the dividends. This the higher cost from lost returns.

That is not what the spreadsheet is showing. However, even if that were not the case and we are talking about time timing issue - still not true. Distributions and reinvestments are about changes the size of the slices of the pie - you don't actually make the pie smaller or larger. It has a accounting impact, not a economic one.

I may be misunderstanding. If a company (held in a fund) pays a dividend, the fund collects the dividend, and the fund will either reinvest the dividend or pay the fund shareholder. Agree there is zero impact at that moment in time (accounting and not economic). If the fund holds on the dividend and either pays to fund shareholder or reinvests for fund shareholder by year end, there could be impact as the NAV will have either increased, decreased, or no change.

Is that a fair assumption?

[abuss368]

This is really good and thanks for sharing. I guess that could work two ways correct? Reinvesting dividends quarterly (in place of annually) in a down market could accelerate losses but one is reinvesting and lowering cost basis.

Please review the rest of this thread. The article I linked to was 100% wrong. I especially recommend reading alex_686's explanation

Thanks!

[alex_686]

I may be misunderstanding. If a company (held in a fund) pays a dividend, the fund collects the dividend, and the fund will either reinvest the dividend or pay the fund shareholder. Agree there is zero impact at that moment in time (accounting and not economic). If the fund holds on the dividend and either pays to fund shareholder or reinvests for fund shareholder by year end, there could be impact as the NAV will have either increased, decreased, or no change.

Is that a fair assumption?

No, this is not how it works. I have a pretty clear idea of how it works since I was deeply involved in the mechanics.

Cash coming in from dividends, the amount of cash held by the mutual funds, and the redemption / purchase / exchange are 3 separate things and are managed independently. There are some interconnecting pieces so you have to be aware of the other 3.

Here is a example which might help out.

A stock goes ex-div date on 12/27/2019 for $100. The accrual income general ledge is increased by $100.

The mutual fund distributes on 12/31/2019. Mutual funds must distribute all income by year end so they can send out 1099s. Share NAV is adjusted, etc. Lots of accounting stuff happens, very little economic stuff happens.

Are the distributions paid out in cash? eh - maybe. Portfolio managers liquidate assets to cover this. This is the little bit of economics stuff that happens. That being said, this operates exactly the same when you put in a sales order on any other day. Is it busier? Sure - but that is in scale, not substance.

Lastly - and here is the kicker - the stock went ex-div on 12/27/2019 actually pays out the cash. Maybe it is 1/15/2020. Maybe 6/30/2020. Does not really matter. The portfolio has fresh cash. They will treat that fresh cash exactly the same way as if you had purchased new shares in the mutual fund. Most likely invest. Portfolio managers are really encouraged to invest and not just sit on a horde of cash.

I hope this example helps.

[abuss368]

I may be misunderstanding. If a company (held in a fund) pays a dividend, the fund collects the dividend, and the fund will either reinvest the dividend or pay the fund shareholder. Agree there is zero impact at that moment in time (accounting and not economic). If the fund holds on the dividend and either pays to fund shareholder or reinvests for fund shareholder by year end, there could be impact as the NAV will have either increased, decreased, or no change.

Is that a fair assumption?

No, this is not how it works. I have a pretty clear idea of how it works since I was deeply involved in the mechanics.

Cash coming in from dividends, the amount of cash held by the mutual funds, and the redemption / purchase / exchange are 3 separate things and are managed independently. There are some interconnecting pieces so you have to be aware of the other 3.

Here is a example which might help out.

A stock goes ex-div date on 12/27/2019 for $100. The accrual income general ledge is increased by $100.

The mutual fund distributes on 12/31/2019. Mutual funds must distribute all income by year end so they can send out 1099s. Share NAV is adjusted, etc. Lots of accounting stuff happens, very little economic stuff happens.

Are the distributions paid out in cash? eh - maybe. Portfolio managers liquidate assets to cover this. This is the little bit of economics stuff that happens. That being said, this operates exactly the same when you put in a sales order on any other day. Is it busier? Sure - but that is in scale, not substance.

Lastly - and here is the kicker - the stock went ex-div on 12/27/2019 actually pays out the cash. Maybe it is 1/15/2020. Maybe 6/30/2020. Does not really matter. The portfolio has fresh cash. They will treat that fresh cash exactly the same way as if you had purchased new shares in the mutual fund. Most likely invest. Portfolio managers are really encouraged to invest and not just sit on a horde of cash.

I hope this example helps.

That was excellent and thank you. Definitely helped explain.

[FIREchief]

It's amazing what level of stupidity can be published online these days.

LOL!!! I was going to use the word "silly," but I doubt I can say it any better than Nate79.

[FIREchief]

...THANK YOU for the detailed response. This was very interesting. I regret that I accidentally spread misinformation but I'm glad that this forum turned this into a learning opportunity...

It often does. As an old Internet saying goes--"Ward Cunningham's Law"--"The best way to get the right answer on the Internet is not to ask a question, it's to post the wrong answer."

I've understood this for years but never knew it had a name. While I don't believe I have ever deliberately posted a "wrong answer," I have certainly posted what I think is the right answer while inviting "corrections." One thing about the internet, people feel highly motivated to let somebody know that they are "wrong."

[telemark]

This is interesting. I understand, I think, what it means for an individual stock to issue dividends, but had never thought about how it works for mutual funds. If I understand this correctly, it also explains why CITs never post dividends: since they're only available in tax-advantaged accounts, there's no need and no point.

[alex_686]

If I understand this correctly, it also explains why CITs never post dividends: since they're only available in tax-advantaged accounts, there's no need and no point.

To be a bit more precise, they are only available in employee sponsored retirement plans so they fall only under the Department of Labor's regulations. That is the trick. They do not fall under SEC regulations.

[whodidntante]

This is a long thread considering the premise is wrong.

[alex_686]

This is a long thread considering the premise is wrong.

Are you not entertained? Are you not informed?

[whodidntante]

This is a long thread considering the premise is wrong.

Are you not entertained? Are you not informed?

I am entertained.

[nedsaid]

If there is a hidden cost, it'll show up in the returns. I think there may very well be one, but it's certainly less than 5 basis points. VTSAX is up 24.11% YTD. FZROX is up 24.49%. Doesn't look like much of a hidden cost to me!

I actually own both, including in the same account in my HSA for historical reasons (transferred VTI in kind from HSA Bank/TDA to Fidelity), and consider them equivalent.

Ditto. I agree with the above. Keep in mind that Fidelity uses its own proprietary index so that it doesn't have to pay licensing fees to a company like S&P, my guess is that the Fidelity Index is very, very close to whatever index Vanguard is using. The differences are so small that they are hardly worth considering. There gets to be a point where close enough is close enough and it seems like there is a lot of niggling going on here. I would expect the two funds above would track each other very closely.

[House Blend]

I have always thought if Vanguard will ever end up paying dividends each month (instead of quarterly or yearly)?

Why? Paying dividends is a drag on performance. The accounting is tricky, so extra accountants are needed. If not done correctly one could blow up the fund. Assets have to be liquidated at a unfortunate time of the year to meet the cash-outs.

Several years ago, many (most?) Vanguard stock index funds other than TSM and 500 Index distributed dividends once annually. Around 2012(?) they switched to quarterly for (almost?) all of them.

I remember at the time that Vanguard presented this as a cost saving measure. I don't recall if there were any details provided to explain why/how this would save on costs, but there is circumstantial evidence in that the ERs on these funds did drop during this period. (That said, simple increases in AUM probably had a larger effect...)

[House Blend]

If there is a hidden cost, it'll show up in the returns. I think there may very well be one, but it's certainly less than 5 basis points. VTSAX is up 24.11% YTD. FZROX is up 24.49%. Doesn't look like much of a hidden cost to me!

I actually own both, including in the same account in my HSA for historical reasons (transferred VTI in kind from HSA Bank/TDA to Fidelity), and consider them equivalent.

Ditto. I agree with the above. Keep in mind that Fidelity uses its own proprietary index so that it doesn't have to pay licensing fees to a company like S&P, my guess is that the Fidelity Index is very, very close to whatever index Vanguard is using. The differences are so small that they are hardly worth considering. There gets to be a point where close enough is close enough and it seems like there is a lot of niggling going on here. I would expect the two funds above would track each other very closely.

Color me skeptical.

When we are haggling over differences measured in basis points, the effect of having the two funds tracking different indexes is likely to swamp any differences in skill/execution/costs.

See: https://www.bogleheads.org/wiki/US_tota ... ex_returns

[aristotelian]

YTD per Morningstar:

VTSAX: 24.50%
SWTSX: 24.58%
SCHB: 24.61%
FZROX: 24.83%

Total return includes dividends reinvested.

With 2484 holdings, SCHB would seem to follow the closest index to FZROX. In any case, if there is a hidden cost to FZROX, I am not seeing it.

[MichCPA]

Thanks to nisiprius for pointing out the true facts.

This article seems to simply be yet another Vanguard-Fan's attempt to de-throne Fidelity's win in having the lowest ERs.

In a world with no ETF commissions and ERs for most indices under .1, some people are having a hard time admitting that these products are basically commodities. There is minimal difference in quality or cost. This is a huge win for the investor and a major loss for the finance industry and financial media.

There is no secret sauce.

[lukestuckenhymer]

YTD per Morningstar:

VTSAX: 24.50%
SWTSX: 24.58%
SCHB: 24.61%
FZROX: 24.83%

Total return includes dividends reinvested.

With 2484 holdings, SCHB would seem to follow the closest index to FZROX. In any case, if there is a hidden cost to FZROX, I am not seeing it.

Within 33 basis points of each other... I'd call that tracking error. There's no appreciable difference between them except tax efficiency.