fidelity zero index - no accum gains - advantage?

[sambb]

I was going to pull the trigger on moving over to fidelity, now that they have a lwoer expense ratio for total market funds.
More interesting, for future money, is that they have no accumulated long term gains that are awaiting distribution, whereas vangurad funds seem to have a lot, which would be a disadvantage with staying with vanguard. For those accumulating, it seems that it woudl be preferable to move to fidelity for new investments, but wanted input on the undisitrbued gains issue.

[retiredjg]

I believe the two zero funds have been open only 1 day - last Friday. Seems like they would have trouble accumulating much of anything during that few hours....

[sambb]

My point is that vangauard admiral total stoick has $25.. yes $25 of unrelaized appreciation per share! So the fidelity offering is far preferable since you dont assume any unrealized appreciation. Probably a good time I think?

[drk]

My point is that vangauard admiral total stoick has $25.. yes $25 of unrelaized appreciation per share! So the fidelity offering is far preferable since you dont assume any unrealized appreciation. Probably a good time I think?

The difference is that Vanguard Total Stock Market has the ETF class to offload assets with capital gains. Despite the difference in unrealized appreciation, one can reasonably expect VTSAX's advantage in tax-efficiency to persist.

[jhfenton]

It shouldn't matter that they're starting at $0 in accumulated gains, because you shouldn't own any non-Vanguard equity mutual funds in a taxable account.

You should stick to ETFs or Vanguard index mutual funds with their patented ETF-as-a-share-class structure that allows them to share in the ETFs' tax advantages. ETFs and Vanguard index mutual funds will simply be more tax efficient than non-Vanguard index mutual funds following similar indices.

[sambb]

So expense ratio doesn’t matter anymore? I see so many threads in expense ratios. Fidelity is lower !

[jhfenton]

I'd rather pay 3 or 4 bp in expense and 0 bp in capital gains than 0 bp in expense and 50 bp in capital gains.

The Fidelity ZERO funds would be excellent choices in tax-advantaged accounts. In taxable accounts, ETFs should always be more tax-efficient than mutual funds following a similar index, with Vanguard mutual funds being the only exception until their patent expires.

[drk]

I don't know if you've ever looked at triceratop's tax-efficiency spreadsheet, but it may be useful in illustrating this point. When I plug in my numbers, the ER for VTSAX is a fraction of the total holding cost for me (4 out of 36 bps) and for FSTVX (3.5 out of 46 bps). Eliminating the ER on the latter would still leave it with a higher holding cost than VTSAX.

[runner3081]

So expense ratio doesn’t matter anymore? I see so many threads in expense ratios. Fidelity is lower !

You will see love for Vanguard here, just like people have love for Apple.

Sometimes valid, other times, not so much.

[sambb]

there is $25 unrealized gains in Vanguard total stock, that could be routed to new investments, despite the ETFs.

[drk]

You will see love for Vanguard here, just like people have love for Apple.

Sometimes valid, other times, not so much.

This isn't about love for Vanguard. I will also continue to use and recommend Schwab and iShares ETFs over these funds. The 0% ERs are good marketing, but they elide more important factors.

[drk]

there is $25 unrealized gains in Vanguard total stock, that could be routed to new investments, despite the ETFs.

I don't know what you mean by this. Can you elaborate?

[inforapenny]

I don't know if you've ever looked at triceratop's tax-efficiency spreadsheet, but it may be useful in illustrating this point. When I plug in my numbers, the ER for VTSAX is a fraction of the total holding cost for me (4 out of 36 bps) and for FSTVX (3.5 out of 46 bps). Eliminating the ER on the latter would still leave it with a higher holding cost than VTSAX.

Respectfully, I'm not sure that it is correct to treat annual tax expenses as an equivalent expense to ER for this purpose. As I understand it, implied tax expenditure comes in the form of qualified dividends which has the effect of reducing the unrealized capital gains of (in this example) FSTVX vs. VTSAX. When your position in VTSAX is eventually liquidated, taxes on those gains will be paid at that point, resulting in equivalent taxes being paid unless your long term capital gains rate has changed (and that change could be positive or negative depending on income and legislative changes). While people generally assume that income will be lower in retirement resulting in a lower federal income tax rate, the LTCG brackets are coarse enough that many people will stay in the same LTCG bracket in retirement.

Is that incorrect?

[triceratop]

I don't know if you've ever looked at triceratop's tax-efficiency spreadsheet, but it may be useful in illustrating this point. When I plug in my numbers, the ER for VTSAX is a fraction of the total holding cost for me (4 out of 36 bps) and for FSTVX (3.5 out of 46 bps). Eliminating the ER on the latter would still leave it with a higher holding cost than VTSAX.

Respectfully, I'm not sure that it is correct to treat annual tax expenses as an equivalent expense to ER for this purpose. As I understand it, implied tax expenditure comes in the form of qualified dividends which has the effect of reducing the unrealized capital gains of (in this example) FSTVX vs. VTSAX. When your position in VTSAX is eventually liquidated, taxes on those gains will be paid at that point, resulting in equivalent taxes being paid unless your long term capital gains rate has changed (and that change could be positive or negative depending on income and legislative changes). While people generally assume that income will be lower in retirement resulting in a lower federal income tax rate, the LTCG brackets are coarse enough that many people will stay in the same LTCG bracket in retirement.

Is that incorrect?

It is true that LTCG increase one’s cost basis. As a result the numbers are not directly comparable to ER. But they’re very close. Why don’t you do the math for a 30 year holding period and report back? By the way don’t forget about state taxes.

You are incorrect when you say that the taxes will be equivalent — to see that you’ll have to do the math and see how compounding hurts you versus a one-time tax hit at the end. Intuitively you can think about this as the money you spend on tax today cannot be invested to produce gains over the next N years (at which point only gains will be taxed). That time value of money thing hurts you.

[inforapenny]

I don't know if you've ever looked at triceratop's tax-efficiency spreadsheet, but it may be useful in illustrating this point. When I plug in my numbers, the ER for VTSAX is a fraction of the total holding cost for me (4 out of 36 bps) and for FSTVX (3.5 out of 46 bps). Eliminating the ER on the latter would still leave it with a higher holding cost than VTSAX.

Respectfully, I'm not sure that it is correct to treat annual tax expenses as an equivalent expense to ER for this purpose. As I understand it, implied tax expenditure comes in the form of qualified dividends which has the effect of reducing the unrealized capital gains of (in this example) FSTVX vs. VTSAX. When your position in VTSAX is eventually liquidated, taxes on those gains will be paid at that point, resulting in equivalent taxes being paid unless your long term capital gains rate has changed (and that change could be positive or negative depending on income and legislative changes). While people generally assume that income will be lower in retirement resulting in a lower federal income tax rate, the LTCG brackets are coarse enough that many people will stay in the same LTCG bracket in retirement.

Is that incorrect?

It is true that LTCG increase one’s cost basis. As a result the numbers are not directly comparable to ER. But they’re very close. Why don’t you do the math for a 30 year holding period and report back? By the way don’t forget about state taxes.

You are incorrect when you say that the taxes will be equivalent — to see that you’ll have to do the math and see how compounding hurts you versus a one-time tax hit at the end. Intuitively you can think about this as the money you spend on tax today cannot be invested to produce gains over the next N years (at which point only gains will be taxed). That time value of money thing hurts you.

You are correct about the compounding factor of the annually withheld taxes. I generally don't think about state income taxes as I am not subject to them in my current state and income level but I understand that most folks are. Perhaps would these be the fair caveats? Tax efficiency should be considered an additional holding cost if:
- The funds are held in a taxable account
- You are subject to >0% LTCG or state income tax
- You would not otherwise be taking equivalent withdrawals from the fund (for example, while in retirement)

[triceratop]

I don't know if you've ever looked at triceratop's tax-efficiency spreadsheet, but it may be useful in illustrating this point. When I plug in my numbers, the ER for VTSAX is a fraction of the total holding cost for me (4 out of 36 bps) and for FSTVX (3.5 out of 46 bps). Eliminating the ER on the latter would still leave it with a higher holding cost than VTSAX.

Respectfully, I'm not sure that it is correct to treat annual tax expenses as an equivalent expense to ER for this purpose. As I understand it, implied tax expenditure comes in the form of qualified dividends which has the effect of reducing the unrealized capital gains of (in this example) FSTVX vs. VTSAX. When your position in VTSAX is eventually liquidated, taxes on those gains will be paid at that point, resulting in equivalent taxes being paid unless your long term capital gains rate has changed (and that change could be positive or negative depending on income and legislative changes). While people generally assume that income will be lower in retirement resulting in a lower federal income tax rate, the LTCG brackets are coarse enough that many people will stay in the same LTCG bracket in retirement.

Is that incorrect?

It is true that LTCG increase one’s cost basis. As a result the numbers are not directly comparable to ER. But they’re very close. Why don’t you do the math for a 30 year holding period and report back? By the way don’t forget about state taxes.

You are incorrect when you say that the taxes will be equivalent — to see that you’ll have to do the math and see how compounding hurts you versus a one-time tax hit at the end. Intuitively you can think about this as the money you spend on tax today cannot be invested to produce gains over the next N years (at which point only gains will be taxed). That time value of money thing hurts you.

You are correct about the compounding factor of the annually withheld taxes. I generally don't think about state income taxes as I am not subject to them in my current state and income level but I understand that most folks are. Perhaps would these be the fair caveats? Tax efficiency should be considered an additional holding cost if:
- The funds are held in a taxable account
- You are subject to >0% LTCG or state income tax
- You would not otherwise be taking equivalent withdrawals from the fund (for example, while in retirement)

Sure but I don’t quite understand why you call them caveats. I suspect they apply to the vast majority of taxable investors.

[inforapenny]

I don't know if you've ever looked at triceratop's tax-efficiency spreadsheet, but it may be useful in illustrating this point. When I plug in my numbers, the ER for VTSAX is a fraction of the total holding cost for me (4 out of 36 bps) and for FSTVX (3.5 out of 46 bps). Eliminating the ER on the latter would still leave it with a higher holding cost than VTSAX.

Respectfully, I'm not sure that it is correct to treat annual tax expenses as an equivalent expense to ER for this purpose. As I understand it, implied tax expenditure comes in the form of qualified dividends which has the effect of reducing the unrealized capital gains of (in this example) FSTVX vs. VTSAX. When your position in VTSAX is eventually liquidated, taxes on those gains will be paid at that point, resulting in equivalent taxes being paid unless your long term capital gains rate has changed (and that change could be positive or negative depending on income and legislative changes). While people generally assume that income will be lower in retirement resulting in a lower federal income tax rate, the LTCG brackets are coarse enough that many people will stay in the same LTCG bracket in retirement.

Is that incorrect?

It is true that LTCG increase one’s cost basis. As a result the numbers are not directly comparable to ER. But they’re very close. Why don’t you do the math for a 30 year holding period and report back? By the way don’t forget about state taxes.

You are incorrect when you say that the taxes will be equivalent — to see that you’ll have to do the math and see how compounding hurts you versus a one-time tax hit at the end. Intuitively you can think about this as the money you spend on tax today cannot be invested to produce gains over the next N years (at which point only gains will be taxed). That time value of money thing hurts you.

You are correct about the compounding factor of the annually withheld taxes. I generally don't think about state income taxes as I am not subject to them in my current state and income level but I understand that most folks are. Perhaps would these be the fair caveats? Tax efficiency should be considered an additional holding cost if:
- The funds are held in a taxable account
- You are subject to >0% LTCG or state income tax
- You would not otherwise be taking equivalent withdrawals from the fund (for example, while in retirement)

Sure but I don’t quite understand why you call them caveats. I suspect they apply to the vast majority of taxable investors.

I suppose that comes down again to whether you pay state income tax (which I concede most do). As I recall, roughly half of taxpayers are in the 0% LTCG bracket. I won't speculate as to what percentage of investors are in the withdrawal phase.

Making a bunch of potentially unjustified assumptions, if you assume FZROX will be exactly the same as FSTVX other than expense ratio, the "breakeven" point appears to be when you reach a state income tax level of 5% if you are a 0% LTCG taxpayer. In other words, FZROX will have less total cost to you than VTSAX if your state income tax is below that level and more if above.

[triceratop]

I suspect the distribution of tax brackets of those investing in taxable accounts is different from the overall population. There are marginal cases where one does not have access to retirement programs, but the number of overall taxpayers in the 0% LTCG bracket is not really meaningful to this analysis. Talking about overall taxpayer statistics when we’re really talking about investors putting (let’s assume they do this for correct reasons like they’ve maxed out retirement savings) funds in taxable accounts is missing the point.

[jhfenton]

So expense ratio doesn’t matter anymore? I see so many threads in expense ratios. Fidelity is lower !

You will see love for Vanguard here, just like people have love for Apple.

Sometimes valid, other times, not so much.

This has nothing to do with "love for Vanguard." iShares, Schwab, Fidelity, SPDR, Vanguard, and others all offer fantastic low-cost, tax-friendly ETFs suitable for holding in taxable accounts. Mutual funds, even index mutual funds, are usually less than ideal choices in taxable accounts compared to ETFs. ETFs have a legal means to avoid capital gains that most mutual funds simply don't have, and you see the results show up in mutual funds' capital gains distributions.

The only exceptions are Vanguard mutual funds. Vanguard literally has a patent on making an ETF a share class of a mutual fund and allowing the ETF and mutual fund to share the capital-gains avoidance mechanism. Until the patent expires (in 2021?) and other fund families copy the structure, I would not hold any other equity mutual funds in taxable.

In addition, mutual funds are less portable than ETFs. If you buy a mutual fund, it may be stuck at that broker. ETFs are portable. And Vanguard, again because of its patent, allows tax-free mutual fund-to-ETF conversions for its equity index funds.

But maybe I just love Vanguard or something.

[ruralavalon]

So expense ratio doesn’t matter anymore? I see so many threads in expense ratios. Fidelity is lower !

Tiny differences in expense ratio only matter a tiny bit.

A few hundredths of a percent difference in expense ratio is easily outweighed by differences in tax efficiency, or the index used, or tracking error.

[welderwannabe]

Personally, I wouldn't pick a brokerage over the difference between the .04% for VTSAX and .00% for the new Fidelity fund. On a $100K balance that is a difference of $40 a year.

I am a huge Fidelity fan and use them for all my tax advantaged accounts, but this $40/yr doesn't mean a hill of beans difference one way or the other.

[grabiner]

I don't know if you've ever looked at triceratop's tax-efficiency spreadsheet, but it may be useful in illustrating this point. When I plug in my numbers, the ER for VTSAX is a fraction of the total holding cost for me (4 out of 36 bps) and for FSTVX (3.5 out of 46 bps). Eliminating the ER on the latter would still leave it with a higher holding cost than VTSAX.

Respectfully, I'm not sure that it is correct to treat annual tax expenses as an equivalent expense to ER for this purpose. As I understand it, implied tax expenditure comes in the form of qualified dividends which has the effect of reducing the unrealized capital gains of (in this example) FSTVX vs. VTSAX. When your position in VTSAX is eventually liquidated, taxes on those gains will be paid at that point, resulting in equivalent taxes being paid unless your long term capital gains rate has changed (and that change could be positive or negative depending on income and legislative changes).

However, the gains are deferred for a very long time, reducing the effect. If you have a $1000 realized gain this year, you pay $150 in tax. If you have a $1000 unrealized gain, the $150 can stay in the account and grow. If the account grows fourfold after-tax before you sell, the $150 becomes $600, which becomes $450 after you pay that $150 tax; the benefit of the $150 tax deferral was a savings of $112. Thus a deferred tax is not quite as good as an expense reduction, but it is close.

In addition, you might never pay tax on the gain, if you donate the stock with deferred gains to charity or leave it to your heirs.

[drk]

Respectfully, I'm not sure that it is correct to treat annual tax expenses as an equivalent expense to ER for this purpose. As I understand it, implied tax expenditure comes in the form of qualified dividends which has the effect of reducing the unrealized capital gains of (in this example) FSTVX vs. VTSAX. When your position in VTSAX is eventually liquidated, taxes on those gains will be paid at that point, resulting in equivalent taxes being paid unless your long term capital gains rate has changed (and that change could be positive or negative depending on income and legislative changes). While people generally assume that income will be lower in retirement resulting in a lower federal income tax rate, the LTCG brackets are coarse enough that many people will stay in the same LTCG bracket in retirement.

Is that incorrect?

I feel comfortable fudging it because (a) I can (reasonably expect to) completely avoid short-term capital gains by opting for a more tax-efficient fund and (b) my current marginal tax rate makes me want to defer as much income as I can. From my perspective, those factors make taxes walk and talk like a holding cost similar enough to ER.

[sambb]

fact is that the fidelity fund doesnt really have unrealized gain, and the vanguard one does have a large unrealized gain. the fidelity one also is cheaper. Hard to see how the vanguard one is preferred.

[grabiner]

fact is that the fidelity fund doesnt really have unrealized gain, and the vanguard one does have a large unrealized gain. the fidelity one also is cheaper. Hard to see how the vanguard one is preferred.

Vanguard has a large unrealized gain, but with the ETF class, it should never be realized. Fidelity's index funds do tend to distribute small capital gains because index turnover forces some sales. Therefore, I would expect Vanguard's fund to be more tax-efficient.

[indexlover]

Here is a good article on this topic from WCI:

https://www.whitecoatinvestor.com/expense-ratios/

[drk]

fact is that the fidelity fund doesnt really have unrealized gain, and the vanguard one does have a large unrealized gain. the fidelity one also is cheaper. Hard to see how the vanguard one is preferred.

You still haven't elaborated on why you think unrealized gains are important. It would be helpful to spell that out because you're clearly concerned about it despite our assurances that it doesn't matter.