Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

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JustinR
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by JustinR » Thu Aug 09, 2018 5:48 am

So after total costs (expense ratios and tax efficiency both considered), which comes out ahead: the Fidelity ZERO funds or their Vanguard equivalents?

In other words, which costs less in a taxable account?

Spirit Rider
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by Spirit Rider » Thu Aug 09, 2018 8:42 am

JustinR wrote:
Thu Aug 09, 2018 5:48 am
So after total costs (expense ratios and tax efficiency both considered), which comes out ahead: the Fidelity ZERO funds or their Vanguard equivalents?

In other words, which costs less in a taxable account?
Factoring net returns:
1. In tax advantaged accounts it is too close to call. Only time will tell.
2. In taxable accounts, Vanguard will continue to have the advantage by the other fund's increased tax drag of captital gains distributions until their patent exires.

Broken Man 1999
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by Broken Man 1999 » Thu Aug 09, 2018 1:43 pm

JustinR wrote:
Thu Aug 09, 2018 5:48 am
So after total costs (expense ratios and tax efficiency both considered), which comes out ahead: the Fidelity ZERO funds or their Vanguard equivalents?

In other words, which costs less in a taxable account?
Even with those two components known, there is still the matter of how the funds track their index. Fidelity is using their own index. There are a couple of things that can't be determined at this time.

1. How well will Fidelity track their index?
2. How well does Fidelity's index stand up to the indexes used by other fund providers?

The real goal is to make money. Suppose Fidelity tracks their index perfectly. Great, right? A good thing, we like to see funds tracking their index. But suppose at the end of day the indexes used by other fund families have a better return? Very possible. Also possible the Fidelity funds using their index will have a better return. At this time we just don't know.

Only after some period of time will investors be able to identify which funds have the greatest returns.

ERs are important. That is how we invest.
Tax Efficiency is important. That is how we invest.
Returns are important. That is WHY we invest. :moneybag

We only have investments at Vanguard. I really really really like the idea of factor investing. I am glad to see Vanguard rolling out some factor ETFs. But, as much as I am satisfied with Vanguard, I will not invest in their factor ETFs because they have no history. With all the financial investment opportunities available, I will not invest in anything that has no history. Right now there are factor ETFs available that have history. Vanguard's factor ETFs do not, yet.

So, yeah, investors should definitely consider ERs. And, investors should definitely consider tax efficiency.

But, investors should not ignore the elephant in the room : Returns!

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

duplin county
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by duplin county » Thu Aug 09, 2018 5:37 pm

I think the big issue is that Fidelity is now requiring no minimum amount to invest while Vanguard
requires $3000 to invest and $10000 for admiral shares. Fidelity's shares will all be equal to Vanguard's admiral
shares in expense ratio.

passiveTiger
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by passiveTiger » Thu Aug 09, 2018 8:48 pm

duplin county wrote:
Thu Aug 09, 2018 5:37 pm
I think the big issue is that Fidelity is now requiring no minimum amount to invest while Vanguard
requires $3000 to invest and $10000 for admiral shares. Fidelity's shares will all be equal to Vanguard's admiral
shares in expense ratio.
Removing minimums is one of the more significant changes that Fidelity recently made and it is a change that is fantastic for the smallest investors, but the Fidelity index funds (except for the two zero ER funds) will not be equal to the Admiral Shares class in expense ratio.

The Fidelity index funds (that are not 0.00% ER) will have a lower ER than Admiral Shares, not an equal one. In fact, the ERs will be lower than Vanguard's Institutional Plus share class for which the Vanguard minimum balance is $100,000,000.

spidercharm
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by spidercharm » Thu Aug 09, 2018 9:49 pm

passiveTiger wrote:
Thu Aug 09, 2018 8:48 pm
duplin county wrote:
Thu Aug 09, 2018 5:37 pm
I think the big issue is that Fidelity is now requiring no minimum amount to invest while Vanguard
requires $3000 to invest and $10000 for admiral shares. Fidelity's shares will all be equal to Vanguard's admiral
shares in expense ratio.
Removing minimums is one of the more significant changes that Fidelity recently made and it is a change that is fantastic for the smallest investors, but the Fidelity index funds (except for the two zero ER funds) will not be equal to the Admiral Shares class in expense ratio.

The Fidelity index funds (that are not 0.00% ER) will have a lower ER than Admiral Shares, not an equal one. In fact, the ERs will be lower than Vanguard's Institutional Plus share class for which the Vanguard minimum balance is $100,000,000.
When people talk about vanguard ownership model and the fact that they operate at cost (as an excuse to justify higher ER), it's not just about trading fees (which have come down significantly in the industry overall, so they should be insignificant portion of ER). How do we know if they are operating efficiently in terms of other costs including employee/headcount, infrastructure, technology and other operating expenses? How do these other costs get divided (I am assuming as overhead)? Does the ownership model and relative success over the years provide lack of incentive to optimize other costs?

I am not trying to say any of it is a problem. I love vanguard and have most of my assets with them. Also, I sincerely appreciate what vanguard has done leading the industry and we all have benefited from it. I want them to improve, that's all. And, they should continue to lead the way (or at least not fall behind so much in setting trends). Again, I am not comparing with new Fido zero cost funds, but rather more mature and existing institutional fund counterparts from fidelity and schwab.

bost
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by bost » Thu Aug 09, 2018 11:34 pm

Interesting point in the prospectus for the ZERO funds:
The fund may impose a purchase maximum on shareholders that would limit the ability of shareholders to purchase fund shares if their total purchases or account balance exceeds a dollar threshold.

Spirit Rider
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by Spirit Rider » Fri Aug 10, 2018 7:55 am

bost wrote:
Thu Aug 09, 2018 11:34 pm
Interesting point in the prospectus for the ZERO funds:
The fund may impose a purchase maximum on shareholders that would limit the ability of shareholders to purchase fund shares if their total purchases or account balance exceeds a dollar threshold.
It is common for mutual funds to reserve the right to limit purchases and especially sales. There is typically an initial ureported limit.

For example, you submit a $1M sale order. The mutual fund company may come back and say your order is limited to $500K pending market conditions. Then after all orders are received. They may limit some or all of the remainder depending on the quantity of total outflows, their cash position, etc... r. If your order is contrary to the flow, your full order is likely to be filled.

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jhfenton
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by jhfenton » Fri Aug 10, 2018 8:12 am

Spirit Rider wrote:
Fri Aug 10, 2018 7:55 am
bost wrote:
Thu Aug 09, 2018 11:34 pm
Interesting point in the prospectus for the ZERO funds:
The fund may impose a purchase maximum on shareholders that would limit the ability of shareholders to purchase fund shares if their total purchases or account balance exceeds a dollar threshold.
It is common for mutual funds to reserve the right to limit purchases and especially sales. There is typically an initial ureported limit.

For example, you submit a $1M sale order. The mutual fund company may come back and say your order is limited to $500K pending market conditions. Then after all orders are received. They may limit some or all of the remainder depending on the quantity of total outflows, their cash position, etc... r. If your order is contrary to the flow, your full order is likely to be filled.
+1 Vanguard has a Large Transaction Policy that allows them to limit buy or sell orders above a stated threshold. The thresholds appear to range from $25,000 for Target Retirement 2065 Institutional to $75,000,000 for the ST Inv-Grade funds. The big stock funds (500 Index, Total Stock) appear to be $10,000,000.

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GoldStar
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by GoldStar » Fri Aug 10, 2018 8:17 am

Spirit Rider wrote:
Thu Aug 09, 2018 8:42 am
JustinR wrote:
Thu Aug 09, 2018 5:48 am
So after total costs (expense ratios and tax efficiency both considered), which comes out ahead: the Fidelity ZERO funds or their Vanguard equivalents?

In other words, which costs less in a taxable account?
Factoring net returns:
1. In tax advantaged accounts it is too close to call. Only time will tell.
2. In taxable accounts, Vanguard will continue to have the advantage by the other fund's increased tax drag of captital gains distributions until their patent exires.
Can you provide more information or a reference on this patent for tax-drag-reduction-magic (or whatever it is) that gives Vanguard an edge in taxable accounts? To Lay People a 0% ER sure sounds better than anything else.


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jhfenton
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by jhfenton » Fri Aug 10, 2018 8:28 am

GoldStar wrote:
Fri Aug 10, 2018 8:17 am
Can you provide more information or a reference on this patent for tax-drag-reduction-magic (or whatever it is) that gives Vanguard an edge in taxable accounts? To Lay People a 0% ER sure sounds better than anything else.
It's been written about extensively in this thread and a few others recently. To summarize, all ETFs have a mechanism to offload low-basis shares in-kind to avoid selling them inside the fund and realizing capital gains that have to be distributed to shareholders. Mutual funds, by themselves, do not have that mechanism. Index funds can usually manage to minimize distributions, but they cannot always avoid them entirely if index changes and cash flows force them to sell shares at a gain that they aren't able to offset by selling other shares at a loss.

So in most cases, ETFs are better choices in taxable accounts than mutual funds. No one disputes that. It's just the reality of the legal and tax regime in the U.S.

Vanguard, however, has a patent (apparently expiring March 2021) that allows Vanguard to create an ETF as a share class of a mutual fund and pool investments with that mutual fund (e.g. VOO and VFIAX). The pooled investments allow both the index mutual fund and the ETF to offload the low-basis shares through the ETF and avoid capital gains distributions. (They also allow you to convert tax-free from the mutual fund to the ETF.)

So to summarize, in a taxable account you are probably better off with ITOT (iShares Total Market) or SCHB (Schwab Total Market) at 3 bp or VTI/VTSAX (Vanguard Total Stock ETF or Admiral Shares) at 4 bp than Fidelity ZERO Total Market at 0 bp. In the long run, the tax advantages of the former would outweigh the tiny expense advantage of the latter. It has nothing to do with Vanguard homerism.

Generator515
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by Generator515 » Fri Aug 10, 2018 10:04 am

passiveTiger wrote:
Thu Aug 09, 2018 8:48 pm
duplin county wrote:
Thu Aug 09, 2018 5:37 pm
I think the big issue is that Fidelity is now requiring no minimum amount to invest while Vanguard
requires $3000 to invest and $10000 for admiral shares. Fidelity's shares will all be equal to Vanguard's admiral
shares in expense ratio.
Removing minimums is one of the more significant changes that Fidelity recently made and it is a change that is fantastic for the smallest investors, but the Fidelity index funds (except for the two zero ER funds) will not be equal to the Admiral Shares class in expense ratio.

The Fidelity index funds (that are not 0.00% ER) will have a lower ER than Admiral Shares, not an equal one. In fact, the ERs will be lower than Vanguard's Institutional Plus share class for which the Vanguard minimum balance is $100,000,000.
You are right. The Fidelity funds will be lower. Total market for example at Fidelity will be 0.015% while vanguard admiral is 0.04%

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GoldStar
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by GoldStar » Fri Aug 10, 2018 11:03 am

jhfenton wrote:
Fri Aug 10, 2018 8:28 am
GoldStar wrote:
Fri Aug 10, 2018 8:17 am
Can you provide more information or a reference on this patent for tax-drag-reduction-magic (or whatever it is) that gives Vanguard an edge in taxable accounts? To Lay People a 0% ER sure sounds better than anything else.
It's been written about extensively in this thread and a few others recently. To summarize, all ETFs have a mechanism to offload low-basis shares in-kind to avoid selling them inside the fund and realizing capital gains that have to be distributed to shareholders. Mutual funds, by themselves, do not have that mechanism. Index funds can usually manage to minimize distributions, but they cannot always avoid them entirely if index changes and cash flows force them to sell shares at a gain that they aren't able to offset by selling other shares at a loss.

So in most cases, ETFs are better choices in taxable accounts than mutual funds. No one disputes that. It's just the reality of the legal and tax regime in the U.S.

Vanguard, however, has a patent (apparently expiring March 2021) that allows Vanguard to create an ETF as a share class of a mutual fund and pool investments with that mutual fund (e.g. VOO and VFIAX). The pooled investments allow both the index mutual fund and the ETF to offload the low-basis shares through the ETF and avoid capital gains distributions. (They also allow you to convert tax-free from the mutual fund to the ETF.)

So to summarize, in a taxable account you are probably better off with ITOT (iShares Total Market) or SCHB (Schwab Total Market) at 3 bp or VTI/VTSAX (Vanguard Total Stock ETF or Admiral Shares) at 4 bp than Fidelity ZERO Total Market at 0 bp. In the long run, the tax advantages of the former would outweigh the tiny expense advantage of the latter. It has nothing to do with Vanguard homerism.
I see - thanks for this succinct explanation.
Has anyone done a study or written a paper on this with current funds that can be referenced? For example a comparison of tax-drag difference between Fidelity Total Market (FSTVX) and Vanguard Total Market (VTSAX) which illustrates an example of the statement "In the long run, the tax advantages of the former would outweigh the tiny expense advantage of the latter"

mervinj7
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by mervinj7 » Fri Aug 10, 2018 11:29 am

GoldStar wrote:
Fri Aug 10, 2018 11:03 am
I see - thanks for this succinct explanation.
Has anyone done a study or written a paper on this with current funds that can be referenced? For example a comparison of tax-drag difference between Fidelity Total Market (FSTVX) and Vanguard Total Market (VTSAX) which illustrates an example of the statement "In the long run, the tax advantages of the former would outweigh the tiny expense advantage of the latter"
Someone mentioned that there was a spreadsheet to calculate the tax-drag. Anybody know about this?

Austintatious
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by Austintatious » Sat Aug 11, 2018 8:38 am

Jonathan Clements' Saturday morning perspective on Fidelity's zero funds:

http://www.humbledollar.com/2018/08/low-fidelity/

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DaftInvestor
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by DaftInvestor » Sat Aug 11, 2018 9:04 am

Reading through this thread there are a lot of statements/conclusions about the tax-drag of these funds being higher than the loss of the ER (with some pointing to a patent as evidence that it must be so) - and yet no evidence or concrete data appears (at least that I can see) that these funds will not be more cost effective post-tax to Vanguard equivalents. I haven't even been able to find comparisons of current fidelity index funds (with lower ERs) having a higher tax drag than Vanguard equivalents. Perhaps it is just wishful thinking of those that want to remain Vanguard diehards. The one thing we do know is that the ERs are lower - the talk of tax-drag effects negating this seems nothing more than speculation.

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ruralavalon
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by ruralavalon » Sat Aug 11, 2018 9:24 am

DaftInvestor wrote:
Sat Aug 11, 2018 9:04 am
Reading through this thread there are a lot of statements/conclusions about the tax-drag of these funds being higher than the loss of the ER (with some pointing to a patent as evidence that it must be so) - and yet no evidence or concrete data appears (at least that I can see) that these funds will not be more cost effective post-tax to Vanguard equivalents. I haven't even been able to find comparisons of current fidelity index funds (with lower ERs) having a higher tax drag than Vanguard equivalents. Perhaps it is just wishful thinking of those that want to remain Vanguard diehards. The one thing we do know is that the ERs are lower - the talk of tax-drag effects negating this seems nothing more than speculation.
Please see triceratop's spreadsheet for "2017 relative tax efficiency" for a comparison with current Fidelity funds. viewtopic.php?t=242137
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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DaftInvestor
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by DaftInvestor » Sat Aug 11, 2018 9:40 am

ruralavalon wrote:
Sat Aug 11, 2018 9:24 am
DaftInvestor wrote:
Sat Aug 11, 2018 9:04 am
Reading through this thread there are a lot of statements/conclusions about the tax-drag of these funds being higher than the loss of the ER (with some pointing to a patent as evidence that it must be so) - and yet no evidence or concrete data appears (at least that I can see) that these funds will not be more cost effective post-tax to Vanguard equivalents. I haven't even been able to find comparisons of current fidelity index funds (with lower ERs) having a higher tax drag than Vanguard equivalents. Perhaps it is just wishful thinking of those that want to remain Vanguard diehards. The one thing we do know is that the ERs are lower - the talk of tax-drag effects negating this seems nothing more than speculation.
Please see triceratop's spreadsheet for "2017 relative tax efficiency" for a comparison with current Fidelity funds. viewtopic.php?t=242137
That's only a single year and FSTVX distributed more cap gains in 2017 (and the year prior) that it has historically. In fact, this year is already proving to be lower (the April distribution was only .016 compared to .104 in April 2017). Comparing the numbers of a single year (or even 2 or 3 years) to make a decision is flawed.

retiringwhen
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Re: Fidelity Files for two Fidelity ZERO℠ Funds (0.00% ER total stock and total international mutual funds)

Post by retiringwhen » Sat Aug 11, 2018 10:20 am

DaftInvestor wrote:
Sat Aug 11, 2018 9:40 am
ruralavalon wrote:
Sat Aug 11, 2018 9:24 am
DaftInvestor wrote:
Sat Aug 11, 2018 9:04 am
Reading through this thread there are a lot of statements/conclusions about the tax-drag of these funds being higher than the loss of the ER (with some pointing to a patent as evidence that it must be so) - and yet no evidence or concrete data appears (at least that I can see) that these funds will not be more cost effective post-tax to Vanguard equivalents. I haven't even been able to find comparisons of current fidelity index funds (with lower ERs) having a higher tax drag than Vanguard equivalents. Perhaps it is just wishful thinking of those that want to remain Vanguard diehards. The one thing we do know is that the ERs are lower - the talk of tax-drag effects negating this seems nothing more than speculation.
Please see triceratop's spreadsheet for "2017 relative tax efficiency" for a comparison with current Fidelity funds. viewtopic.php?t=242137
That's only a single year and FSTVX distributed more cap gains in 2017 (and the year prior) that it has historically. In fact, this year is already proving to be lower (the April distribution was only .016 compared to .104 in April 2017). Comparing the numbers of a single year (or even 2 or 3 years) to make a decision is flawed.
I concur, I looked at his spreadsheet for the purpose of defining fund placement in a nearly three-fund portfolio model and the results are so near each other that the data did not present a clear answer. You have to guess on future price appreciation returns vs. dividends, etc. And as we say around here, "nobody knows nuthin'".

Now to the point, looking at each fund's unrealized gains (and realized gains) as reported on their websites / reports can give you an idea of what would happen in the near term. But, also the actual number of times a fund pays capital gains is a longer-term evidence of how the fund is operated from a tax-efficiency standpoint. If you plan to hold for a long-time you can assume that the tax-efficiency of non-Vanguard funds is going to improve after the much discussed patent expires, but that is a hypothetical that has to be discounted to some degree because you are not assured that all funds and fund families will implement the system and if they do will be able to execute as effectively for any number of reasons.

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