Fidelity taxable: which is better - ETF or Mutual Fund?

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Topic Author
get_g0ing
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Fidelity taxable: which is better - ETF or Mutual Fund?

Post by get_g0ing »

Hi,

This is just a quick question. In a Fidelity taxable account:

1. For total stock market, which is more recommend:
ITOT (iShares Core S&P Total Market ETF) or FZROX (Fidelity ZERO Total Market Index Fund)

2. And for S&P 500, which is more recommend:
IVV (iShares Core S&P 500 ETF) or FXAIX (Fidelity 500 Index Fund)


I think this has sometime to do with whether ETF or Mutual Funds are more TAX favorable?
If there are conditions where one is better, and other situations where the other is better, please share those. I'd find that very helpful.

Thank you.
livesoft
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by livesoft »

If you are automatically investing a set amount periodically, then the mutual fund is better. You cannot do that with the ETF, so the ETF cannot be used and you have no choice.

If you are just buying every now and then at random, then the ETF is supposedly more tax efficient, but you have to buy an integral number of shares, too. If you leave cash behind, then you have cash drag, but if you add extra cash to be able to buy an integral number of shares, then you reduce cash drag elsewhere in your portfolio. One issue is that there are no long term track records for [one of] those Fidelity mutual funds to know how tax efficient they really are over the long term.

But on the tax efficiency: If one of them saves you 32 cents on taxes each year, how do you factor that in?

Edit: to show that one of those funds has a track record per stan1's comment
Last edited by livesoft on Mon Sep 30, 2019 7:09 am, edited 2 times in total.
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whodidntante
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by whodidntante »

ITOT and IVV are less likely to distribute capital gains. If you pay capital gains taxes now, you probably want to defer those taxes. If not, or if you expect the rate you pay to be higher in the future, maybe the mutual fund is better.

IVV will probably be more tax efficient than ITOT, due to more years of meeting the 100% qualified dividends threshold.
stan1
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by stan1 »

FXAIX has a long history of capital gains distributions. I would not buy it in taxable.
https://fundresearch.fidelity.com/mutua ... /315911750

FZROX is too new to know but my guess is Fidelity will try to manage it to lower likelihood of capital gains distributions to be competitive with ETFs. Also it can only be held at Fidelity so you would have to liquidate it if you ever want to leave Fidelity.

ITOT and IVV are expected to not have capital gains distributions.

Any of the four are "good enough" for qualified dividends.

Also, you didn't ask, but I would see no need to buy both a total stock market and an Index 500 product in a taxable account. Their performance is almost identical because the same large cap companies dominate both.

Personally I would buy ITOT or IVV because you can easily move it to a different broker if you want to, however some people like the zero fee concept enough to go with that despite some unknowns and drawbacks.
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by get_g0ing »

livesoft wrote: Mon Sep 30, 2019 6:58 am If you are automatically investing a set amount periodically, then the mutual fund is better. You cannot do that with the ETF, so the ETF cannot be used and you have no choice.

If you are just buying every now and then at random, then the ETF is supposedly more tax efficient, but you have to buy an integral number of shares, too. If you leave cash behind, then you have cash drag, but if you add extra cash to be able to buy an integral number of shares, then you reduce cash drag elsewhere in your portfolio. One issue is that there are no long term track records for [one of] those Fidelity mutual funds to know how tax efficient they really are over the long term.

But on the tax efficiency: If one of them saves you 32 cents on taxes each year, how do you factor that in?

Edit: to show that one of those funds has a track record per stan1's comment
whodidntante wrote: Mon Sep 30, 2019 6:59 am ITOT and IVV are less likely to distribute capital gains. If you pay capital gains taxes now, you probably want to defer those taxes. If not, or if you expect the rate you pay to be higher in the future, maybe the mutual fund is better.

IVV will probably be more tax efficient than ITOT, due to more years of meeting the 100% qualified dividends threshold.
livesoft and whodidntante, thanks for the responses. Very useful!
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get_g0ing
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by get_g0ing »

stan1 wrote: Mon Sep 30, 2019 7:04 am FXAIX has a long history of capital gains distributions. I would not buy it in taxable.
https://fundresearch.fidelity.com/mutua ... /315911750
Hi stan1,
So I am assuming the same would be true of FSKAX? Is that so.

And this is just a side-question:
I looked at that link, can you please share another link (preferably Vanguard fund) so I can compare the difference?

Thanks.
stan1
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by stan1 »

Yes FSKAX also has a history of capital gains distributions.
https://fundresearch.fidelity.com/mutua ... e=o-NavBar

Here is a link to Vanguard Index 500 Admiral distributions. Note no capital gains distributions.
https://investor.vanguard.com/mutual-fu ... ions/vfiax
Topic Author
get_g0ing
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by get_g0ing »

stan1 wrote: Mon Sep 30, 2019 7:28 am Yes FSKAX also has a history of capital gains distributions.
https://fundresearch.fidelity.com/mutua ... e=o-NavBar

Here is a link to Vanguard Index 500 Admiral distributions. Note no capital gains distributions.
https://investor.vanguard.com/mutual-fu ... ions/vfiax
Very cool, thanks. Just to check if I am looking at the right place, I pulled up FSKAX and VTSAX. Is this the sections to look for:
Image
Whereas VTSAX doesn't even have such a section.

So this is the way to know which fund is more tax favorable - to look for capital gain history?

Thanks.
Ferdinand2014
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by Ferdinand2014 »

get_g0ing wrote: Mon Sep 30, 2019 6:53 am Hi,

This is just a quick question. In a Fidelity taxable account:

1. For total stock market, which is more recommend:
ITOT (iShares Core S&P Total Market ETF) or FZROX (Fidelity ZERO Total Market Index Fund)

2. And for S&P 500, which is more recommend:
IVV (iShares Core S&P 500 ETF) or FXAIX (Fidelity 500 Index Fund)


I think this has sometime to do with whether ETF or Mutual Funds are more TAX favorable?
If there are conditions where one is better, and other situations where the other is better, please share those. I'd find that very helpful.

Thank you.
I prefer FXAIX. Reason? Established, super low fee at 0.015, can automatically invest, exact dollar amount transactions, no bid/ask, no premium/discount and follows a known index so you can exactly monitor how well it’s tracking. As far as tax efficiency, the difference will likely be small and may not exceed the expense ratio difference by much.

Ok, so you can look under “performance and risk” to get actual tax drag:


Ticker. 10 year average return. Return after taxes on all distributions and sale of fund (liquidation). % You keep
FXAIX 14.69%. 12.29%. 83.66%
IVV. 14.62%. 11.80%. 80.71%


This is directly from the Fidelity website.
So after fees, NAV to market difference (ETF issue), dividend taxes, capital gain distribution taxes (mutual fund issue), and capital gain from the sale of shares, the net total is better overall return with FXAIX. This is over the last 10 years. People talk about tax efficiency due to capital gains, but I prefer to look at actual ‘take home pay’ which takes into account all the factors. That’s what really matters.
Last edited by Ferdinand2014 on Mon Sep 30, 2019 8:07 am, edited 6 times in total.
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danaht
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by danaht »

For maximum tax efficiency - In a taxable Fidelity account - an ETF like ITOT might be better to avoid periodic capital gains. An ETF like ITOT tends to pay a qualified dividend - where a Fidelity index mutual fund tends to pay both a capital gain in addition to a dividend.
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get_g0ing
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by get_g0ing »

Ferdinand2014 wrote: Mon Sep 30, 2019 7:39 am
get_g0ing wrote: Mon Sep 30, 2019 6:53 am Hi,

This is just a quick question. In a Fidelity taxable account:

1. For total stock market, which is more recommend:
ITOT (iShares Core S&P Total Market ETF) or FZROX (Fidelity ZERO Total Market Index Fund)

2. And for S&P 500, which is more recommend:
IVV (iShares Core S&P 500 ETF) or FXAIX (Fidelity 500 Index Fund)


I think this has sometime to do with whether ETF or Mutual Funds are more TAX favorable?
If there are conditions where one is better, and other situations where the other is better, please share those. I'd find that very helpful.

Thank you.
I prefer FXAIX. Reason? Established, super low fee at 0.015, can automatically invest, exact dollar amount transactions, no bid/ask, no premium/discount and follows a known index so you can exactly monitor how well it’s tracking. As far as tax efficiency, the difference will likely be small and may not exceed the expense ratio difference by much.

Ok, so you can look under “performance and risk” to get actual tax drag:


Ticker. 10 year average return. Return after taxes on all distributions and sale of fund (liquidation). % You keep
FXAIX 14.69%. 12.29%. 83.66%
IVV. 14.62%. 11.80%. 80.71%


This is directly from the Fidelity website.
So after fees, NAV to market difference (ETF issue), dividend taxes, capital gain distribution taxes (mutual fund issue), and capital gain from the sale of shares, the net total is better overall return with FXAIX. This is over the last 10 years. People talk about tax efficiency due to capital gains, but I prefer to look at actual ‘take home pay’ which takes into account all the factors. That’s what really matters.
Very amazing post!
Thanks for sharing these numbers, what a useful and interesting comparison. According to this, even considering the supposed tax advantage of ETF, the Mutual Fund comes out ahead.

So let me ask, since you showed FXAIX is a little better than IVV, is this only true for this specific comparison? Or can we generalize it?

Thanks again.
Topic Author
get_g0ing
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by get_g0ing »

whodidntante wrote: Mon Sep 30, 2019 6:59 am
livesoft wrote: Mon Sep 30, 2019 6:58 am
danaht wrote: Mon Sep 30, 2019 7:48 am For maximum tax efficiency - In a taxable Fidelity account - an ETF like ITOT might be better to avoid periodic capital gains. An ETF like ITOT tends to pay a qualified dividend - where a Fidelity index mutual fund tends to pay both a capital gain in addition to a dividend.
Hey guys, can you please see the comparison posted by Ferdinand2014. What do you think?
It looks like (at least for this particular case), the MF is still better?

Thanks.
Ferdinand2014
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by Ferdinand2014 »

get_g0ing wrote: Mon Sep 30, 2019 10:13 am
Ferdinand2014 wrote: Mon Sep 30, 2019 7:39 am
get_g0ing wrote: Mon Sep 30, 2019 6:53 am Hi,

This is just a quick question. In a Fidelity taxable account:

1. For total stock market, which is more recommend:
ITOT (iShares Core S&P Total Market ETF) or FZROX (Fidelity ZERO Total Market Index Fund)

2. And for S&P 500, which is more recommend:
IVV (iShares Core S&P 500 ETF) or FXAIX (Fidelity 500 Index Fund)


I think this has sometime to do with whether ETF or Mutual Funds are more TAX favorable?
If there are conditions where one is better, and other situations where the other is better, please share those. I'd find that very helpful.

Thank you.
I prefer FXAIX. Reason? Established, super low fee at 0.015, can automatically invest, exact dollar amount transactions, no bid/ask, no premium/discount and follows a known index so you can exactly monitor how well it’s tracking. As far as tax efficiency, the difference will likely be small and may not exceed the expense ratio difference by much.

Ok, so you can look under “performance and risk” to get actual tax drag:


Ticker. 10 year average return. Return after taxes on all distributions and sale of fund (liquidation). % You keep
FXAIX 14.69%. 12.29%. 83.66%
IVV. 14.62%. 11.80%. 80.71%


This is directly from the Fidelity website.
So after fees, NAV to market difference (ETF issue), dividend taxes, capital gain distribution taxes (mutual fund issue), and capital gain from the sale of shares, the net total is better overall return with FXAIX. This is over the last 10 years. People talk about tax efficiency due to capital gains, but I prefer to look at actual ‘take home pay’ which takes into account all the factors. That’s what really matters.
Very amazing post!
Thanks for sharing these numbers, what a useful and interesting comparison. According to this, even considering the supposed tax advantage of ETF, the Mutual Fund comes out ahead.

So let me ask, since you showed FXAIX is a little better than IVV, is this only true for this specific comparison? Or can we generalize it?

Thanks again.
I don’t think you can generalize. You can go on fidelity website and under each fund click on ‘performance and risk’. Scroll down and both for ETF’s and for mutual funds you will see average annual total return, return after taxes on distributions, and return after taxes on distributions and sale of shares (total liquidation). Divide after liquidation return by total return and you get the numbers I gave you. This is a real world number using the highest tax bracket at the time of sale for qualified dividends and capital gains. It does not include state and local taxes for either ETF or mutual fund because obviously that will vary. They will also take into account tax loss harvesting, if there is a loss.

The math on FSKAX for 10 years is 83.84%, ITOT is 81.00%. So a 2.84% relative advantage after liquidation for FSKAX vs ITOT over the last 10 years annualized. The absolute difference after liquidation is 12.3% for FSKAX vs 11.80% for ITOT or 0.5% average annualized over the last 10 years. The absolute advantage before any sale, just return annualized the difference is 14.58% for ITOT and 14.67% for FSKAX.
FZROX is to new to carry out 10 years.

I suggest you confirm it for yourself.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
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get_g0ing
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by get_g0ing »

Ferdinand2014 wrote: Mon Sep 30, 2019 10:39 am
get_g0ing wrote: Mon Sep 30, 2019 10:13 am
Ferdinand2014 wrote: Mon Sep 30, 2019 7:39 am
get_g0ing wrote: Mon Sep 30, 2019 6:53 am Hi,

This is just a quick question. In a Fidelity taxable account:

1. For total stock market, which is more recommend:
ITOT (iShares Core S&P Total Market ETF) or FZROX (Fidelity ZERO Total Market Index Fund)

2. And for S&P 500, which is more recommend:
IVV (iShares Core S&P 500 ETF) or FXAIX (Fidelity 500 Index Fund)


I think this has sometime to do with whether ETF or Mutual Funds are more TAX favorable?
If there are conditions where one is better, and other situations where the other is better, please share those. I'd find that very helpful.

Thank you.
I prefer FXAIX. Reason? Established, super low fee at 0.015, can automatically invest, exact dollar amount transactions, no bid/ask, no premium/discount and follows a known index so you can exactly monitor how well it’s tracking. As far as tax efficiency, the difference will likely be small and may not exceed the expense ratio difference by much.

Ok, so you can look under “performance and risk” to get actual tax drag:


Ticker. 10 year average return. Return after taxes on all distributions and sale of fund (liquidation). % You keep
FXAIX 14.69%. 12.29%. 83.66%
IVV. 14.62%. 11.80%. 80.71%


This is directly from the Fidelity website.
So after fees, NAV to market difference (ETF issue), dividend taxes, capital gain distribution taxes (mutual fund issue), and capital gain from the sale of shares, the net total is better overall return with FXAIX. This is over the last 10 years. People talk about tax efficiency due to capital gains, but I prefer to look at actual ‘take home pay’ which takes into account all the factors. That’s what really matters.
Very amazing post!
Thanks for sharing these numbers, what a useful and interesting comparison. According to this, even considering the supposed tax advantage of ETF, the Mutual Fund comes out ahead.

So let me ask, since you showed FXAIX is a little better than IVV, is this only true for this specific comparison? Or can we generalize it?

Thanks again.
I don’t think you can generalize. You can go on fidelity website and under each fund click on ‘performance and risk’. Scroll down and both for ETF’s and for mutual funds you will see average annual total return, return after taxes on distributions, and return after taxes on distributions and sale of shares (total liquidation). Divide after liquidation return by total return and you get the numbers I gave you. This is a real world number using the highest tax bracket at the time of sale for qualified dividends and capital gains. It does not include state and local taxes for either ETF or mutual fund because obviously that will vary. They will also take into account tax loss harvesting, if there is a loss.

The math on FSKAX for 10 years is 83.84%, ITOT is 81.00%. So a 2.84% relative advantage after liquidation for FSKAX vs ITOT over the last 10 years annualized. The absolute difference is 12.3% for FSKAX vs 11.80% for ITOT or 0.5% average annualized over the last 10 years. The absolute advantage before any sale, just return annualized the difference is 14.58% for ITOT and 14.67% for FSKAX.
FZROX is to new to carry out 10 years.

I suggest you confirm it for yourself.
So I was poking around the Fidelity pages to try to redo how you got those numbers. One question, which column to use for the ETF: "NAV Return" or "Market Return"? I mean which is more realistic as experience by the end user.

Thanks.
Last edited by get_g0ing on Mon Sep 30, 2019 11:01 am, edited 2 times in total.
Ferdinand2014
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by Ferdinand2014 »

I believe NAV return? Someone who is more expert on ETF’s May weigh in. I used NAV. The NAV as I understand it is the end of the day value. Market is during the day as it can vary by the premium/discount? I used NAV as that seemed to be a more consistent comparison to the mutual fund NAV. I don’t think the difference will effect the outcome much.If it is liquid ETF like IVV or ITOT, the difference should be tiny over 10 years.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
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MrBobcat
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by MrBobcat »

get_g0ing wrote: Mon Sep 30, 2019 6:53 am Hi,

This is just a quick question. In a Fidelity taxable account:

1. For total stock market, which is more recommend:
ITOT (iShares Core S&P Total Market ETF) or FZROX (Fidelity ZERO Total Market Index Fund)

2. And for S&P 500, which is more recommend:
IVV (iShares Core S&P 500 ETF) or FXAIX (Fidelity 500 Index Fund)


I think this has sometime to do with whether ETF or Mutual Funds are more TAX favorable?
If there are conditions where one is better, and other situations where the other is better, please share those. I'd find that very helpful.

Thank you.
I prefer to have ETFs in my taxable account and it has nothing to do with tax efficiency. I know they will be portable if I ever decide to move them to another investment company.
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get_g0ing
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by get_g0ing »

Ferdinand2014 wrote: Mon Sep 30, 2019 10:59 am I believe NAV return? Someone who is more expert on ETF’s May weigh in. I used NAV. The NAV as I understand it is the end of the day value. Market is during the day as it can vary by the premium/discount? I used NAV as that seemed to be a more consistent comparison to the mutual fund NAV. I don’t think the difference will effect the outcome much.If it is liquid ETF like IVV or ITOT, the difference should be tiny over 10 years.
Many many thanks :beer
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by Duckie »

get_g0ing wrote:This is just a quick question. In a Fidelity taxable account:

1. For total stock market, which is more recommend:
ITOT (iShares Core S&P Total Market ETF) or FZROX (Fidelity ZERO Total Market Index Fund)
Be aware of the issue with Fidelity's ZERO funds. They are proprietary and can only be held at Fidelity. If you ever want to move to a different brokerage you will either have to sell them or not move. Selling is not a problem in tax-sheltered accounts like an IRA, but in a taxable account selling could trigger a big tax-hit.

So, in taxable either ITOT or FSKAX (Fidelity Total Market Index Fund 0.015%) would be appropriate. FZROX might be risky.
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by abuss368 »

If you are investing regularly and a set amount I think the mutual fund would probably be better.
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by frugaltigris »

Ferdinand2014 wrote: Mon Sep 30, 2019 7:39 am
get_g0ing wrote: Mon Sep 30, 2019 6:53 am Hi,

This is just a quick question. In a Fidelity taxable account:

1. For total stock market, which is more recommend:
ITOT (iShares Core S&P Total Market ETF) or FZROX (Fidelity ZERO Total Market Index Fund)

2. And for S&P 500, which is more recommend:
IVV (iShares Core S&P 500 ETF) or FXAIX (Fidelity 500 Index Fund)


I think this has sometime to do with whether ETF or Mutual Funds are more TAX favorable?
If there are conditions where one is better, and other situations where the other is better, please share those. I'd find that very helpful.

Thank you.
I prefer FXAIX. Reason? Established, super low fee at 0.015, can automatically invest, exact dollar amount transactions, no bid/ask, no premium/discount and follows a known index so you can exactly monitor how well it’s tracking. As far as tax efficiency, the difference will likely be small and may not exceed the expense ratio difference by much.

Ok, so you can look under “performance and risk” to get actual tax drag:


Ticker. 10 year average return. Return after taxes on all distributions and sale of fund (liquidation). % You keep
FXAIX 14.69%. 12.29%. 83.66%
IVV. 14.62%. 11.80%. 80.71%


This is directly from the Fidelity website.
So after fees, NAV to market difference (ETF issue), dividend taxes, capital gain distribution taxes (mutual fund issue), and capital gain from the sale of shares, the net total is better overall return with FXAIX. This is over the last 10 years. People talk about tax efficiency due to capital gains, but I prefer to look at actual ‘take home pay’ which takes into account all the factors. That’s what really matters.
Very insightful post. I checked your numbers and you are right.


For 1 year return, the final number (after sale of all of all shares) is 62.2 % for FXAIX versus 58.8% for ITOT.

Pretty amazing that a "tax-inefficient" MF is giving as a final result bigger number than "tax-efficient" ETF. I hope I am not missing something. If all this is true, is tax-inefficiency of Fidelity index funds in comparison to Vanguard funds overhyped?
Ferdinand2014
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by Ferdinand2014 »

frugaltigris wrote: Mon Sep 30, 2019 7:30 pm
Ferdinand2014 wrote: Mon Sep 30, 2019 7:39 am
get_g0ing wrote: Mon Sep 30, 2019 6:53 am Hi,

This is just a quick question. In a Fidelity taxable account:

1. For total stock market, which is more recommend:
ITOT (iShares Core S&P Total Market ETF) or FZROX (Fidelity ZERO Total Market Index Fund)

2. And for S&P 500, which is more recommend:
IVV (iShares Core S&P 500 ETF) or FXAIX (Fidelity 500 Index Fund)


I think this has sometime to do with whether ETF or Mutual Funds are more TAX favorable?
If there are conditions where one is better, and other situations where the other is better, please share those. I'd find that very helpful.

Thank you.
I prefer FXAIX. Reason? Established, super low fee at 0.015, can automatically invest, exact dollar amount transactions, no bid/ask, no premium/discount and follows a known index so you can exactly monitor how well it’s tracking. As far as tax efficiency, the difference will likely be small and may not exceed the expense ratio difference by much.

Ok, so you can look under “performance and risk” to get actual tax drag:


Ticker. 10 year average return. Return after taxes on all distributions and sale of fund (liquidation). % You keep
FXAIX 14.69%. 12.29%. 83.66%
IVV. 14.62%. 11.80%. 80.71%


This is directly from the Fidelity website.
So after fees, NAV to market difference (ETF issue), dividend taxes, capital gain distribution taxes (mutual fund issue), and capital gain from the sale of shares, the net total is better overall return with FXAIX. This is over the last 10 years. People talk about tax efficiency due to capital gains, but I prefer to look at actual ‘take home pay’ which takes into account all the factors. That’s what really matters.
Very insightful post. I checked your numbers and you are right.


For 1 year return, the final number (after sale of all of all shares) is 62.2 % for FXAIX versus 58.8% for ITOT.

Pretty amazing that a "tax-inefficient" MF is giving as a final result bigger number than "tax-efficient" ETF. I hope I am not missing something. If all this is true, is tax-inefficiency of Fidelity index funds in comparison to Vanguard funds overhyped?
I wonder if the 1 year totals are so much lower (for both ITOT and FXAIX - a better comparison might be FSKAX) because of less then 1 year calculated short term capital gains and unqualified dividends? When you go out to 3,5,10 years the return after sales (liquidation) improve significantly. As far as Vanguard vs Fidelity funds, I am not sure how to access real world data from vanguard for direct comparison. I only hold Fidelity accounts. There are threads that have tax efficiency spreadsheets that you can search, but I do not know if takes into account just the capital gains and distributions or the true real world returns vs liquidation numbers. The real world numbers take into account the many dozens of factors that can effect tax burden such as internal transactional costs, internal cash drag, turnover costs, index replication, investor flows (with mutual funds), etc. My main reason for using FXAIX vs IVV is I can do monthly automatic investments, exact dollar amounts, automatic dividend reinvestment, FXAIX tracks it’s index almost exactly, large, extremely liquid, well established fund and index (important in taxable so it doesn’t ever get liquidated), etc. I wasn’t really doing it for any improved tax efficiency vs IVV, but it is nice to know anyway. I don’t have any issue with ETF’s or iShares, it’s just mutual funds in general work better for my needs.
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by frugaltigris »

Ferdinand2014 wrote: Mon Sep 30, 2019 9:58 pm
frugaltigris wrote: Mon Sep 30, 2019 7:30 pm
Ferdinand2014 wrote: Mon Sep 30, 2019 7:39 am
get_g0ing wrote: Mon Sep 30, 2019 6:53 am Hi,

This is just a quick question. In a Fidelity taxable account:

1. For total stock market, which is more recommend:
ITOT (iShares Core S&P Total Market ETF) or FZROX (Fidelity ZERO Total Market Index Fund)

2. And for S&P 500, which is more recommend:
IVV (iShares Core S&P 500 ETF) or FXAIX (Fidelity 500 Index Fund)


I think this has sometime to do with whether ETF or Mutual Funds are more TAX favorable?
If there are conditions where one is better, and other situations where the other is better, please share those. I'd find that very helpful.

Thank you.
I prefer FXAIX. Reason? Established, super low fee at 0.015, can automatically invest, exact dollar amount transactions, no bid/ask, no premium/discount and follows a known index so you can exactly monitor how well it’s tracking. As far as tax efficiency, the difference will likely be small and may not exceed the expense ratio difference by much.

Ok, so you can look under “performance and risk” to get actual tax drag:


Ticker. 10 year average return. Return after taxes on all distributions and sale of fund (liquidation). % You keep
FXAIX 14.69%. 12.29%. 83.66%
IVV. 14.62%. 11.80%. 80.71%


This is directly from the Fidelity website.
So after fees, NAV to market difference (ETF issue), dividend taxes, capital gain distribution taxes (mutual fund issue), and capital gain from the sale of shares, the net total is better overall return with FXAIX. This is over the last 10 years. People talk about tax efficiency due to capital gains, but I prefer to look at actual ‘take home pay’ which takes into account all the factors. That’s what really matters.
Very insightful post. I checked your numbers and you are right.


For 1 year return, the final number (after sale of all of all shares) is 62.2 % for FXAIX versus 58.8% for ITOT.

Pretty amazing that a "tax-inefficient" MF is giving as a final result bigger number than "tax-efficient" ETF. I hope I am not missing something. If all this is true, is tax-inefficiency of Fidelity index funds in comparison to Vanguard funds overhyped?
I wonder if the 1 year totals are so much lower (for both ITOT and FXAIX - a better comparison might be FSKAX) because of less then 1 year calculated short term capital gains and unqualified dividends? When you go out to 3,5,10 years the return after sales (liquidation) improve significantly. As far as Vanguard vs Fidelity funds, I am not sure how to access real world data from vanguard for direct comparison. I only hold Fidelity accounts. There are threads that have tax efficiency spreadsheets that you can search, but I do not know if takes into account just the capital gains and distributions or the true real world returns vs liquidation numbers. The real world numbers take into account the many dozens of factors that can effect tax burden such as internal transactional costs, internal cash drag, turnover costs, index replication, investor flows (with mutual funds), etc. My main reason for using FXAIX vs IVV is I can do monthly automatic investments, exact dollar amounts, automatic dividend reinvestment, FXAIX tracks it’s index almost exactly, large, extremely liquid, well established fund and index (important in taxable so it doesn’t ever get liquidated), etc. I wasn’t really doing it for any improved tax efficiency vs IVV, but it is nice to know anyway. I don’t have any issue with ETF’s or iShares, it’s just mutual funds in general work better for my needs.
Here is the comparison for FXAIX, IVV and VFIAX (all tracking S&P 500)

10 years: (Before taxes) (After taxes on distributions and sale of fund shares) (Net percentage: After taxes on liquidation/before taxes return)

FXAIX: 13.22% 10.96% 82.90%

IVV: 13.17% 10.50% 79.73%

VFIAX: 13.21% 11.00% 83.27%

Here is for 5 years:

FXAIX: 10.83% 8.43% 77.84%

IVV: 10.79% 8.05% 74.61%

VFIAX: 10.80% 8.50% 78.7%

And for 1 year:

FXAIX: 4.24% 2.73% 64.38%

IVV: 4.22% 2.46% 58.29%

VFIAX: 4.22% 2.82% 66.82%


Interesting to note that Fidelity index fund gives a far better after-tax return on liquidation than Ishares ETF counterpart irrespective of time period chosen in 10 years. However, Vanguard index fund does perform better than Fidelity index fund. Important to note that Fidelity index funds had a larger expense ratio till recently and that contributed a drag in comparison to Vanguard funds. It will be interesting to see how Fidelity's lower expense ratios and especially Fidelity zero funds affect this analysis. Finally, all these are computed using highest tax bracket. Lower tax bracket might make differences even closer.

At least above example shows that for Fidelity users, FXAIX Fidelity index fund is a better choice than Ishares ETF IVV.
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jhfenton
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by jhfenton »

frugaltigris wrote: Tue Oct 01, 2019 8:37 am Here is the comparison for FXAIX, IVV and VFIAX (all tracking S&P 500)

10 years: (Before taxes) (After taxes on distributions and sale of fund shares) (Net percentage: After taxes on liquidation/before taxes return)

FXAIX: 13.22% 10.96% 82.90%

IVV: 13.17% 10.50% 79.73%

VFIAX: 13.21% 11.00% 83.27%

Here is for 5 years:

FXAIX: 10.83% 8.43% 77.84%

IVV: 10.79% 8.05% 74.61%

VFIAX: 10.80% 8.50% 78.7%

And for 1 year:

FXAIX: 4.24% 2.73% 64.38%

IVV: 4.22% 2.46% 58.29%

VFIAX: 4.22% 2.82% 66.82%


Interesting to note that Fidelity index fund gives a far better after-tax return on liquidation than Ishares ETF counterpart irrespective of time period chosen in 10 years. However, Vanguard index fund does perform better than Fidelity index fund. Important to note that Fidelity index funds had a larger expense ratio till recently and that contributed a drag in comparison to Vanguard funds. It will be interesting to see how Fidelity's lower expense ratios and especially Fidelity zero funds affect this analysis. Finally, all these are computed using highest tax bracket. Lower tax bracket might make differences even closer.

At least above example shows that for Fidelity users, FXAIX Fidelity index fund is a better choice than Ishares ETF IVV.
What is the source for your data? I don't see how the after-tax data for IVV could possibly be accurate.
frugaltigris
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by frugaltigris »

Data is from Fidelity website.

For IVV:

Go to https://screener.fidelity.com/ftgw/etf/ ... ymbols=IVV

and then click on Performance and Risk on left

and scroll down to Quarter-End Average Annual Total Returns

Data for Fidelity index fund can be found easily on Fidelity website and similarly for Vanguard index fund.

I am myself surprised that Fidelity index fund wins over IVV.
Ferdinand2014
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by Ferdinand2014 »

frugaltigris wrote: Tue Oct 01, 2019 9:40 am Data is from Fidelity website.

For IVV:

Go to https://screener.fidelity.com/ftgw/etf/ ... ymbols=IVV

and then click on Performance and Risk on left

and scroll down to Quarter-End Average Annual Total Returns

Data for Fidelity index fund can be found easily on Fidelity website and similarly for Vanguard index fund.

I am myself surprised that Fidelity index fund wins over IVV.
https://screener.fidelity.com/ftgw/etf/ ... ymbols=IVV

This gets right to the performance and risk page. Scroll down to see data. I do not know if this is data from Fidelity or Blackrock (iShares).
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
MisterBill
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by MisterBill »

So, one thing that I have not seen mentioned (and which was a surprise to me) is that when selling a portion of your mutual fund holdings, IRS rules dictate that the basis must be the average price of all shares. With an ETF, you could presumably choose the lower (or higher) priced shares, depending on what you wanted to achieve tax-wise. I understand that eventually you'll end up paying taxes, but I was looking for a lower basis and could not do that.
HomeStretch
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by HomeStretch »

MisterBill wrote: Tue Oct 29, 2019 3:19 pm So, one thing that I have not seen mentioned (and which was a surprise to me) is that when selling a portion of your mutual fund holdings, IRS rules dictate that the basis must be the average price of all shares.
I have never heard this before (not saying it isn’t true). Where did you see this?

Fidelity and Vanguard have reported gains and losses on my Forms 1099-B for partial sales of covered mutual fund holdings using Specific ID as the cost basis (which is my brokerage account election).

The BH wiki page seems to support the use of a Specific ID as an allowable cost basis method for federal tax reporting purposes here:
https://www.bogleheads.org/wiki/Specifi ... _of_shares

I couldn’t quickly find the appropriate IRS rule on this.

ETA: I believe Specific ID as a cost basis for Mutual Fund partial sales is acceptable to the IRS. IRS publication 550 “Basis of Assets” page 2 “Stocks and Bonds -Mutual Fund Shares” section (linked below) says to use actual cost but later says a taxpayer can elect to use average cost basis for mutual funds acquired at different times and prices with more information in IRS publication 551.
https://www.bogleheads.org/wiki/Specifi ... _of_shares
MisterBill
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by MisterBill »

HomeStretch wrote: Tue Oct 29, 2019 3:44 pm
MisterBill wrote: Tue Oct 29, 2019 3:19 pm So, one thing that I have not seen mentioned (and which was a surprise to me) is that when selling a portion of your mutual fund holdings, IRS rules dictate that the basis must be the average price of all shares.
I have never heard this before (not saying it isn’t true). Where did you see this?

Fidelity and Vanguard have reported gains and losses on my Forms 1099-B for partial sales of covered mutual fund holdings using Specific ID as the cost basis (which is my brokerage account election).

The BH wiki page seems to support the use of a Specific ID as an allowable cost basis method for federal tax reporting purposes here:
https://www.bogleheads.org/wiki/Specifi ... _of_shares

I couldn’t quickly find the appropriate IRS rule on this.

ETA: I believe Specific ID as a cost basis for Mutual Fund partial sales is acceptable to the IRA. IRS publication 550 “Basis of Assets” page 2 “Stocks and Bonds -Mutual Fund Shares” section (linked below) says to use actual cost but later says a taxpayer can elect to use average cost basis for mutual funds acquired at different times and prices with more information in IRS publication 551.
https://www.bogleheads.org/wiki/Specifi ... _of_shares
I found info on the Schwab site which said that it's an option for them.

https://www.schwab.com/resource-center/ ... cost-basis

On Fidelity they talk about "Average cost method" and say "We use this method to calculate cost basis for mutual funds and certain dividend reinvestment plans. To select a different cost basis method, please call us at 800-544-6666." I know that when I sold a mutual fund recently it would not allow me to select specific lots.

https://www.fidelity.com/tax-informatio ... cost-basis
HomeStretch
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by HomeStretch »

MisterBill wrote: Tue Oct 29, 2019 3:59 pm
HomeStretch wrote: Tue Oct 29, 2019 3:44 pm
MisterBill wrote: Tue Oct 29, 2019 3:19 pm So, one thing that I have not seen mentioned (and which was a surprise to me) is that when selling a portion of your mutual fund holdings, IRS rules dictate that the basis must be the average price of all shares.
I have never heard this before (not saying it isn’t true). Where did you see this?

Fidelity and Vanguard have reported gains and losses on my Forms 1099-B for partial sales of covered mutual fund holdings using Specific ID as the cost basis (which is my brokerage account election).

The BH wiki page seems to support the use of a Specific ID as an allowable cost basis method for federal tax reporting purposes here:
https://www.bogleheads.org/wiki/Specifi ... _of_shares

I couldn’t quickly find the appropriate IRS rule on this.

ETA: I believe Specific ID as a cost basis for Mutual Fund partial sales is acceptable to the IRA. IRS publication 550 “Basis of Assets” page 2 “Stocks and Bonds -Mutual Fund Shares” section (linked below) says to use actual cost but later says a taxpayer can elect to use average cost basis for mutual funds acquired at different times and prices with more information in IRS publication 551.
https://www.bogleheads.org/wiki/Specifi ... _of_shares
I found info on the Schwab site which said that it's an option for them.

https://www.schwab.com/resource-center/ ... cost-basis

On Fidelity they talk about "Average cost method" and say "We use this method to calculate cost basis for mutual funds and certain dividend reinvestment plans. To select a different cost basis method, please call us at 800-544-6666." I know that when I sold a mutual fund recently it would not allow me to select specific lots.

https://www.fidelity.com/tax-informatio ... cost-basis
I think that’s a Fidelity issue. Did you by any chance elect Specific ID as your cost basis after making your first purchase of the mutual fund? I did that and it caused the mutual fund to use Average Cost even for the tax lots purchased after I changed the cost basis to Specific ID. I noticed it after my 2nd or 3rd purchase (before the end of first tax year) and called Fidelity. They sent my request over to the “Cost Basis Team” who went through and fixed all my tax lots to show the actual cost basis for each. So when I sell I can select the specific tax lot to sell and it is reported its actual cost (not average cost).
MotoTrojan
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by MotoTrojan »

Why are you investing in both S&P500 and Total US?

I'd use ETFs at Fidelity to avoid capital gains distributions.
Ferdinand2014
Posts: 1807
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by Ferdinand2014 »

HomeStretch wrote: Tue Oct 29, 2019 4:22 pm
MisterBill wrote: Tue Oct 29, 2019 3:59 pm
HomeStretch wrote: Tue Oct 29, 2019 3:44 pm
MisterBill wrote: Tue Oct 29, 2019 3:19 pm So, one thing that I have not seen mentioned (and which was a surprise to me) is that when selling a portion of your mutual fund holdings, IRS rules dictate that the basis must be the average price of all shares.
I have never heard this before (not saying it isn’t true). Where did you see this?

Fidelity and Vanguard have reported gains and losses on my Forms 1099-B for partial sales of covered mutual fund holdings using Specific ID as the cost basis (which is my brokerage account election).

The BH wiki page seems to support the use of a Specific ID as an allowable cost basis method for federal tax reporting purposes here:
https://www.bogleheads.org/wiki/Specifi ... _of_shares

I couldn’t quickly find the appropriate IRS rule on this.

ETA: I believe Specific ID as a cost basis for Mutual Fund partial sales is acceptable to the IRA. IRS publication 550 “Basis of Assets” page 2 “Stocks and Bonds -Mutual Fund Shares” section (linked below) says to use actual cost but later says a taxpayer can elect to use average cost basis for mutual funds acquired at different times and prices with more information in IRS publication 551.
https://www.bogleheads.org/wiki/Specifi ... _of_shares
I found info on the Schwab site which said that it's an option for them.

https://www.schwab.com/resource-center/ ... cost-basis

On Fidelity they talk about "Average cost method" and say "We use this method to calculate cost basis for mutual funds and certain dividend reinvestment plans. To select a different cost basis method, please call us at 800-544-6666." I know that when I sold a mutual fund recently it would not allow me to select specific lots.

https://www.fidelity.com/tax-informatio ... cost-basis
I think that’s a Fidelity issue. Did you by any chance elect Specific ID as your cost basis after making your first purchase of the mutual fund? I did that and it caused the mutual fund to use Average Cost even for the tax lots purchased after I changed the cost basis to Specific ID. I noticed it after my 2nd or 3rd purchase (before the end of first tax year) and called Fidelity. They sent my request over to the “Cost Basis Team” who went through and fixed all my tax lots to show the actual cost basis for each. So when I sell I can select the specific tax lot to sell and it is reported its actual cost (not average cost).
You can choose actual or average cost basis.
You can choose LIFO, FIFO, tax sensitive, tax sensitive short term, high cost, high cost long term, low cost, low cost short term, intraday first in first out for disposal method.

accounts and trade>account features>brokerage and trading>cost basis information tracking. To change cost basis call them, to change disposal method do online yourself.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
HomeStretch
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Re: Fidelity taxable: which is better - ETF or Mutual Fund?

Post by HomeStretch »

Ferdinand2014 wrote: Tue Oct 29, 2019 4:28 pm You can choose actual or average cost basis.
You can choose LIFO, FIFO, tax sensitive, tax sensitive short term, high cost, high cost long term, low cost, low cost short term, intraday first in first out for disposal method.

accounts and trade>account features>brokerage and trading>cost basis information tracking. To change cost basis call them, to change disposal method do online yourself.
I couldn’t change disposal method online myself based on what I described above. Fidelity’s Cost Basis team said that’s the way their system works - I could only use Average Cost basis for purchases or sales after the first purchase or sale was made using (electing) Average Cost. Even when I changed the account cost basis to “Specific ID” the cost basis for each mutual fund tax lot purchased before and after the change continued to display as Average Cost with no other selection possible when I tried to sell.

They corrected all the tax lots to correctly show actual cost for each lot within a couple days. I track lots in Excel and could have adjusted the cost basis manually on Form 8949 but it was much easier to have them correct it so I can import the Fidelity 1099B sale and basis info.
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