FZROX vs VTSAX: Which is the Best Low-Cost Index Fund?

When it comes to investing, one of the simplest strategies is to find a good low-cost total stock market index fund to invent in.

This has the advantage of diversifying your money across all industries and even across virtually all American companies. It also helps ensure that you lose very little of your investment to fees.

There are lots of good options out there, but there are two that really stand out: Fidelity’s FZROX and Vanguard’s VTSAX.

I’m going to be comparing these funds based on their investment strategies, expenses, minimum investments, and turnover. I’ll also give consideration to the two companies that provide these investment options. To spoil the final verdict, it’s hard to go wrong with either of these funds, and each has unique advantages that may appeal to you depending on your situation.

Investment Strategies

Vanguard Total Stock Market Index Fund (VTSAX)

VTSAX attempts to track the CRSP US Total Market Index. This index represents all U.S. stocks, including large cap, medium cap, and even micro-cap stocks traded on the New York Stock Exchange and Nasdaq.

The fund doesn’t hold all securities from the CRSP US Total Market Index, but rather a sampling that seeks to replicate various characteristics such as the weighting of different sectors, market capitalization, as well as financial measures like the price/earnings ratio and dividend ratio.

Fidelity ZERO Total Market Index Fund (FZROX)

The prospectus for FZROX says that it invests “at least” 80% of its funds in the Fidelity U.S. Total Investable Market Index. This index is designed to replicate the performance of the market as a whole.

Like VTSAX, it tracks its index using statistical sampling but attempts to replicate key characteristics such as the weighting of industries and market capitalization.

What’s odd is the fact that the prospectus says that “at least 80%” of the fund’s asset go toward replicating its index, but it’s not clear what the other up to 20% is doing.

The Bottom Line

Whatever differences these funds may have, chances are they are downstream and relatively minor. To illustrate this point, are the most recent lists of the top 10 holdings of each fund:

	FZROX	VTSAX
1	Apple Inc	Apple Inc
2	Microsoft Corp	Microsoft Corp
3	Amazon.com Inc	Amazon.com Inc
4	Facebook Inc	Alphabet Inc
5	Tesla Inc	Facebook Inc
6	Alphabet Inc CL A	Tesla Inc
7	Alphabet Inc CL C	JP Morgan Chase & Co
8	Berkshire Hathaway	Berkshire Hathaway
9	Johnson & Johnson	Johnson & Johnson
10	JP Morgan Chase & Co	Visa Inc

The two lists are very similar, and what differences there are could be due to the fact that Fidelity listed their top 10 holdings as of 12/31/2020 and Vanguard listed theirs as of 02/28/2021. Fidelity also seems to be separating out when they hold two different classes of stock from the same company (in this case Alphabet, the company behind Google) while Vanguard is rolling them into one.

Both funds are market capitalization weighted, which means they invest more money in the most valuable companies. These 10 holdings make up nearly 23% of the total holdings for both funds.

The Winner

I’m giving this one to Vanguard’s VTSAX, primarily based off the fact that Fidelity’s prospectus was more ambiguous.

Expenses and Fees

One of the biggest advantages of index funds is that they cost so little to hold. Excessive fees hurt your portfolio way more than you would think and ultimately leave you with less money compounding on your behalf.

So how do the two funds compare on fees?

Vanguard Total Stock Market Index Fund (VTSAX)

The only fee that VTSAX charges besides its expense ratio is a $20 annual account service fee “for certain fund account balances below $10,000.” It’s not clear what is meant by “certain,” but it seems not all balances below $10,000 are subject to this fee.

The expense ratio itself it an impressive 0.4% of which .03% is for management fees and the other .01% is for “other expenses.” The total expense ratio of 0.4% means that if you were to invest $10,000 in VTSAX and we were to assume a 5% rate of return, here’s how much you would pay in fees over various time periods (these are actual examples from the prospectus, not my calculations):

1 Year	3 Years	5 Years	10 Years
$4	$13	$23	$51

Fidelity ZERO Total Market Index Fund (FZROX)

This is where FZROX really shines. The “ZERO” in the name “Fidelity ZERO Total Market Index Funds” is there to indicate that there are ZERO fees or expenses of any kind. That’s the promise. And according to the prospectus, they deliver:

That’s as good as it gets.

The Bottom Line

Lower fees are always better. If we wanted to play devil’s advocate, we could say that once you get below a .05% expense ratio, this category becomes less meaningful.

To illustrate, here’s how a one-time $10,000 investment receiving 5% annual returns would fare over 40 years if it were subject to a 2% expense ratio:

I won’t lie, that’s pretty terrible. I mean, look at the chart, more than half of our money was eaten away by fees. Earning 5% on our investment, we should have ended up with a $70,400 portfolio, but we’ve actually only ended up with $31,377.

Let’s look at what happens in the same situation, but swapping out the horrible 2% expense ratio for a more reasonable 1%:

Much better! We are now keeping $47,096 of a possible $70,400. What happens if we go down to a .5% expense ratio?

Now we are keeping $57,610 and losing only $12,790 to the fees. But we can still do much better. Let’s look at what would happen under a microscopic expense ratio of 0.04%, the expense ratio charged by VTSAX:

Ah, finally. This is more like it. We are keeping $69,282 out of a possible $70,400 and losing out on a mere $1,118 due to fees. Surely we don’t need to get greedy and demand better than this, right? Well…

The Winner

FZROX wins this one going away. Even though the expense ratio might not matter as much below 0.05%, fees always matter.

The chart speaks for itself:

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The Tyranny of Compounding Costs: How Fees Silently Eat Your Wealth

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Minimum Investments

Vanguard Total Stock Market Index Fund (VTSAX)

VTSAX carries a minimum investment of $3,000.

If you don’t have enough money to make the minimum investment, you can invest in VTI, the ETF equivalent of VTSAX (ETF stands for “exchange traded fund.” It’s like a mutual fund, except it can be traded throughout the day while mutual funds are traded at the end of the day when the market closes). VTI is available for the price of one share (which, at the time of writing, is about $212).

Fidelity ZERO Total Market Index Fund (FZROX)

FZROX has no minimum to invest. You could get started right now with $20 (or less).

The Winner

Another open-and-shut case. FZROX is the clear winner.

Fund Turnover

The phrase “turnover” refers to a fund selling its existing holdings and buying new holdings. It’s relevant for two reasons:

• Buying and selling forces the fund to pay transaction costs such as commissions which can hurt the performance of the fund
• Turnover might result in more taxes for the investor who holds the fund in a regular taxable account (as opposed to a tax-protected retirement account like an IRA)

The Bottom Line

When it comes to turnover, a lower turnover percentage is always better, especially for those investing in the fund in a taxable account.

This is an area where index funds do really well, especially compared to actively managed mutual funds. Both these funds have wonderfully low turnover.

Here are the turnover rates for both funds, which represent the percent of the average assets of the portfolio that were turned over in the time period analyzed (for VTSAX this was the past fiscal year, for FZROX the time period was unspecified):

VTSAX Turnover Rate	FZROX Turnover Rate
4%	6%

The Winner

VTSAX is the clear winner

Company Comparison

This is a softer comparison than the last few which have all been driven by hard data. It still might be valuable though, as its important to understand the company that will be managing your nest egg.

Vanguard

Vanguard was founded in 1975 by John C. Bogle, who also happens to be the inventor of the index fund.

What really sets Vanguard apart was Bogle’s innovative idea to structure the company to be client-owned. This means that there are no outside shareholders looking for a profit above and beyond the company’s costs. The clients of Vanguard share ownership of the funds, and the funds own Vanguard.

This allows Vanguard to offer investment options at cost. There is no profit factored into their fees, they’re just trying to pay the bills.

Fidelity

Fidelity is a privately owned company based in Boston, Massachusetts. It was founded by Edward C. Johnson II in 1946. Currently, Abigail Johnson and her family own 49% of the company, while current and former employees own 51%.

The Bottom Line

The reason why you would want to own part of a corporation is to share in the corporations ability to generate value and profit (that’s why we’re investing in stocks in the first place). Corporations make money off their customers to generate profit for their shareholders.

At Fidelity, you are the customer, not the shareholder. At Vanguard, you are in a sense both the customer and the owner. There’s no conflict of interest between the owner’s interest and the customer’s interest because they are the same group. Normally the interests of the owner (charge more) and the interests of the customer (pay less) are at odds, but Vanguard solved this problem. This let them offer the lowest cost investment options for a very long time.

Of course, as we’ve seen, Fidelity actually offers FZROX at a lower expense ratio than Vanguard’s VTSAX. How did they pull this off? In theory, Vanguard’s fees represent rock-bottom costs.

The best answer I can venture from the outside is that Fidelity is using FZROX as a “loss leader.” This is a common sales strategy where you get your foot in the door by offering a product you sell at a loss, then make up for it by selling the customer products with a higher profit margin. One problem with this approach is that many customers might choose to only buy the loss leader, causing your company to paradoxically lose money as it gets more customers.

It’s been my experience working on the sales side of a business that loss leaders eventually go away. Either the company runs across hard times or new management comes in that doesn’t tolerate selling products at a loss. Eventually all loss leaders get removed from the market or the fees get raised dramatically.

Right now Fidelity has the lowest fees, and that is a critical feather in its cap. Will they be able to keep it up over the long run? I have my doubts, but I ultimately don’t know.

Winner

Vanguard

The Final Verdict

These are both great funds that I feel fully comfortable investing in.

Which one is right for you might come down to individual preference. If you are mostly investing in tax-protected accounts like an IRA, you might prefer FZROX for its lower expense ratio. If you are investing in a regular (taxable) brokerage account, you might prefer VTSAX for its increased tax efficiency due to a lower turnover ratio. One effective strategy might look like this:

• Invest in FZROX in an IRA until you hit the annual contribution limit
• Open a brokerage account with Vanguard and invest in VTSAX for the rest of the year

This plan lets you capitalize on both the low cost of Fidelity and the tax efficiency of Vanguard.

Whichever of these funds ultimately ends up being better for you, it’s clear that this is a choice between a really good option and a great option. The only bad option is to delay getting your money into the market because you couldn’t decide between two outstanding options.

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