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

Investing in the stock market can seem like a difficult endeavor. In the movies, you often see stock investments associated with stressed people screaming over the phone. Everywhere else, complex acronyms are thrown left and right along with percentages and other intimidating words.

Usually, financial firms will charge fees to clients for their services, or funds will require large minimum investments. In this case, however, we are going over two low-cost funds, namely FZROX and VTSAX.

In reality, it doesn’t have to be hard. You may have to learn a few things, but you can start small. Some tools like these index funds are great for beginners and don’t require much knowledge about the stock market. The reason is these funds are intended to represent the totality of the market. More experienced or risky investors may want to put their money in specialized funds or particular securities.

First, we will describe what an index fund is, how low-cost funds work, and what risks they propose. Then we will shortly present these funds and the companies behind them. And finally, we will compare FZROX vs. VTSAX in terms of strategy, fees, and results. Read on to see which is the best low-cost index fund for your portfolio.

What Is an Index Fund?

Investing in individual stocks is risky. Particular stocks can fluctuate a lot in price and can crash without warning. Therefore, the traditional way to reduce risk is to invest in different stocks. The more stocks you include, the less likely it that changes in value will cause large losses in your portfolio.

That’s the reasoning behind broad investment funds, and it does often work as intended.

Investment funds can be composed of very different assets and follow different strategies. In this case, we will learn about index funds. These funds follow a benchmark index, meaning they isolate a particular market segment.

You may have heard about a few well-known benchmark indexes are the S&P 500 and the Dow Jones Industrial Average. The Dow Jones is an index composed of 30 of the most traded stocks on the New York Stock Exchange. It is widely accepted as an indicator of where the stock market is heading.

FZROX and VTSAX are also index funds, but they follow broad indexes. In general, they attempt to reflect the state of the equity market as a whole.

How Are Low-Cost Index Funds Possible?

Running an investment fund as big as these comes with many expenses. In the case of free funds, those have to be covered by the company. How do these businesses get away with doing this and not lose money? Usually, by lending the stocks owned by this fund to short-sellers, who profit from speculating with them.

You should know, many non-free funds will do that too, and share those profits with shareholders. So keep an eye on earnings when analyzing an investment fund. Big companies like these that already maintain other investment funds can reduce costs significantly. That helps businesses like Fidelity and Vanguard run these funds at such competitive prices.

On average other funds charge 0.89% in net expense fees and 0.52% in management fees. That can be quite a sum, but it’s not a lot compared to annual market price fluctuation in securities.

What Are the Risks Associated With Low-Cost Index Funds?

As with all investments, some risks come with investing in low-cost index funds. It would be best if you always considered this, as the possibility of losing money is always present. It is better to think about this as a long-term investment to improve your chances.

If you need your money back when the fund is not doing well, that can be counterproductive. Instead, having the time to let your assets recover is always better.

Stock market risk is probably the biggest way these funds can result in losses. This is the risk of a large decline in overall prices. Sometimes indexes incline towards particular sectors of the market. If that sector is not doing well in general, you will see that reflected in the fund’s performance.

Keep in mind the market tends to move in cycles, with ups and down being completely normal events.

As there is some variance depending on the methods used by each company, securities in the funds can differ from those in the indexes. In such cases, the performance of these funds can be worse than expected. There is also a possibility that the sampling of indexes does not work as intended.

This should not happen often and will be corrected quickly by those who work in the funds.

Remember, these funds do not have an insurance policy, and investment is under your responsibility.

What Are FZROX and VTSAX?

Among some of the most popular low-cost investment funds, we find FZROZ and VTSAX. These two present broad investment opportunities with barely any fee added to your earnings.

Let’s first learn about the history of each and see a bit about how these two giant firms work. This will show why they are so well established, providing financial advice and investment opportunities.

What Is FZROX?

FZROX is a short name for the Fidelity Zero Total Market Index Fund. This fund follows an index developed by Fidelity Investments Inc, including most companies listed in U.S. markets. Companies having a market cap of less than $75 million or a six-month trading volume below $25 million are excluded.

It became popular quickly due to having no fees, which not many investment funds can boast about. There are no minimum limits to investing in FZROX either, meaning you can put in as much as you want.

This fund has 2662 holdings, which is a high amount compared to other funds and includes most options in the market. This provides more stability and increases the likelihood that the fund reflects the equity market’s performance. That means if the market generally does well, this FZROX should see good results.

Nearly all of the assets composing this fund are stocks, with only 1% in foreign stocks and 0.4% in cash. For a good reason, top holdings include stocks from Apple Inc, Microsoft Corp, Amazon.com Inc, and Facebook Inc Class A.

What Is VTSAX?

The Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) is a large blend fund developed by the Vanguard Equity Index Group. Like FZROX, it includes a wide range of securities. Broad diversification and low costs are the most important properties of this fund, along with the potential for tax efficiency.

When working with Vanguard to invest in VTSAX, you have to overcome a minimum investment of $3,000. After that number, minimum investments are $1.

The expense ratio of VTSAX is 0.04%. This is the approximate percentage of your assets that will go towards paying for the fund’s workings. For example, if you invest $10,000, you can expect to pay $400 for expenses after a year. Keep in mind this is an approximation and does not include taxes that may apply depending on your condition.

What Companies Make FZROX and VTSAX?

What Is Fidelity Investments?

Fidelity Investments is one of the largest brokers in the U.S. Founded in 1946, it counts on 75 years of experience and has a great presence online. It offers many different services useful for all types of customers.

Although it lacks crypto, futures, and commodities trading, Fidelity has more than enough for most users’ needs. If you want to buy and keep securities, its web platform is perfect.

Active Trader Pro (ATP) is an alternative to the web platform, which you can download and customize as needed. It is great for active traders and provides lots of information and options.

Fidelity also features a well-done app supporting Android and iOS and Amazon and Google Assistant devices. The only limitation this app has is a lack of support for bond trading. All other assets supported on Fidelity.com are available, making for a great tool.

This company has a long list of supported assets; available options include but are not limited to:

• Stocks, both long and short
• Over The Counter Bulletin Board 
• Mutual funds
• Bonds, including corporate, municipal, and CDs
• Single-leg, multi-leg options
• Forex
• Fractional shares
• IPOs
• Preferred shares
• Rights
• Precious metals

What Is Vanguard Group?

Positioning itself as the second-largest investment firm globally, Vanguard Group manages over $7.5 trillion in assets. It is the largest issuer of mutual funds, so it probably does something right in that regard.

Vanguard launched its first fund in 1975 and has become one of the best expense ratios. It averages expenses for 0.09% against 0.54% when considering all mutual funds.

This huge company offers many different mutual funds, IRAs, 401(k) plans, and several other options. It runs over 209 funds and serves 30 million investors in 170 countries. This huge structure allows for efficient workings, and Vanguard’s management seems to be doing great at maintaining it.

What Strategies Do These Funds Use?

We got to know part of the history of these businesses. Now, let’s see how FZROX and VTSAX attempt to generate profits. Knowing which indexes they follow and how they structure holdings is key in understanding what these funds propose.

FZROX Strategies

FZROX invests in many different assets. This smoothes fluctuations and causes the fund to represent the equity market’s state better. It is based on the Fidelity U.S. Total Investable Market Index.

However, it does not hold all assets in the same proportion. Complicated methods are used by Fidelity to establish which holdings should represent a higher part of the fund. Factors like capitalization, industry exposures, dividend yield, price/earnings ratio, price/book ratio, and earnings growth are considered.

VTSAX Strategies

This fund uses an indexing investment method to follow the CRSP US Total Market Index. This index represents approximately all of the securities available in the investable U.S. stock market.

While it is not an exact copy of that index, VTSAX should be a good representation. Additional considerations are taken to determine the overall composition. These considerations include industry weightings, market capitalization, and financial measures like price/earnings ratio.

What Are the Fees Associated to FZROX and VTSAX?

Fees are the main selling point of these assets. After all, many funds charge huge fees that can eat away your earnings. We will compare FZROX vs. VTSAX in terms of costs so you know what to expect when putting money there. The products FZROX and VTSAX offer will profit if the indexes do well.

While both are low-cost, some fees may apply, so pay attention to this section before you make plans!

FZROX Fees

Fidelity took a no-fees policy with this fund, which means that. You will pay no shareholder fees and no annual operating expenses. That means no management fees, no 12b-1 fees, and other expenses.

The portfolio turnover rate is something to consider too. This rate represents the average time particular securities remain in the fund. A higher portfolio turnover rate means higher transaction costs as more transactions are made each year.

This will result in more taxes for shareholders as well. During the last year, this rate stood at 8% in the case of FZROX, the same.

VTSAX Fees

The VTSAX fund does not charge purchase, redemption, or 12b-1 fees.

If you have a Vanguard Brokerage account, you can be charged a $20 annual account service fee. Individual Vanguard mutual fund holdings also have to pay this fee unless it balances over $10,000.

There are other ways of avoiding these fees. If you sign up on vanguard.com, it will not be charged, and you choose to receive electronic statements, confirmations, reports, and prospectuses. Owning more than $50,000 in qualifying Vanguard assets can also result in having your fees waived.

You will have to pay management fees according to the value of your investment. These stand at 0.04%, low enough that they will not make a big impact on your budget.

The portfolio turnover rate can also impact costs. During the last year, VTSAX had a turnover equal to that of FZROX’s, at 8%. Of course, the Vanguard will try to keep this rate low, so fund performance is optimal. But its ability to do so will partly depend on how the market behaves.

What Kind of Results Did FZROX and VTSAX Have in the Past?

While fees are very important, knowing actual returns is paramount in knowing what to expect. Returns have been very good in the last year, reflecting the status of the market in general. While VTSAX did better in this regard, it’s important to keep in mind past performance does not assure future returns. But it does prove the fund did more than one thing right. Let’s see how they did last year and historically and know these results better.

FZROX Returns

Returns for the FZROX fund have been good, at 9.92% during the last year. You would normally want to see 5 or 10 year averages for these funds. However, this one has only been running since 2018. Since it started, it averaged an 8.18% return, which is not bad at all.

Fidelity has delivered and seems to have a great product going. Hopefully, we will continue to see results this good.

However, these earnings fall behind when comparing FZRIX vs. VTSAX, above 20%. It is a bit worse than the Dow Jones U.S. Total Stock Market Float Adjusted Index. To compare, the Dow Jones returned 15.36% and 13.74% during the last 5 and 10 years ending.

VTSAX Returns

Up to the end of 2020, the return before taxes was 20.99% for VTSAX. It is a great result compared to historical averages. However, these averages still look better than FZROX’s.

Averages for the last 5 and 10 years were 15.42% and 13.78%, respectively. That puts VTSAX in a slightly worse position than the Spliced Total Stock Market Index, at 15.44% and 13.80%.

If you see the highest and lowest returns in individual quarters from 2020, the variance is quite large. Best returns were around 22%, while worse returns almost reached -21%. This proves the point we made earlier about market fluctuations and the benefit of waiting for those to pass.

When analyzing these numbers, consider these are pre-taxes and sale of fund shares, which can cut back profits significantly.

Conclusion on FZROX and VTSAX

Before getting into these investment options or any other, talking to your accountant or financial advisor is best. He may encourage you to hold fund shares in a tax-deferred account to improve performance. For example, this can be an individual retirement account or a 401(k) plan. He may also know which of these apply best to your particular situation and expectations.

Other than that, while both of these provide sound investment plans, VTSAX has produced better results in general. With over a decade in service, it is a well-proven option for all sorts of investors. Vanguard’s focus on transparency and diverse product options also incline us on this fund’s proposition.

However, remember that results can vary a lot, and investment funds carry risks and tempting rewards. To learn how to invest safely and other investment methods, make sure to check our investing section! https://turbowallet.com/investing/