There areover 10,000 mutual fundsavailable for purchase at Fidelity. Of these, one of the mutual funds I invest in is theFidelity Total Market Index Fund. Why? Lets take a look.
The biggest benefit of holding an index fund like FSKAX is itslow fees. The average actively managed large-cap mutual fundcharges over 1% in fees annually, and as a group, they have been unable to beat the market.
Another benefit of FSKAX is itsdiversification. It invests in the entire stock market, consisting of large-cap, mid-cap, and small-cap stocks. It invests in the stock market in accordance to its market capitalization. That means that more of the portfolio is allocated to mega-cap companies like Amazon or Walmart, and less of the portfolio is allocated to small-cap stocks. While there are more micro-cap stocks than mega-cap stocks, the bulk of the mutual fund (and the market capitalization of the stock market) is in these mega-cap stocks.
An additional benefits of FSKAX is itssimplicity. You can get exposure to the entire U.S. stock market with a single index fund. It forms the backbone of an index fund portfolio that usually also includes aU.S. bond index fundand aninternational stock fund.
Many investors ask whether it is sufficient toinvest in an S&P 500 fundsuch as FXAIX. All other things being equal, I would prefer to invest in the total stock market, because of its exposure to the entire stock market, including small-cap and mid-cap stocks. However, FXAIX or another S&P 500 index fund is a good option if your 401(k) or other retirement account does not offer a total stock market alternative.
FSKAX, being an index fund, replicates the Dow Jones U.S. Total Stock Market Index, its underlying index. Itowns 3,390 stockswithin its mutual fund in its effort to replicate the return of the Total Stock Market Index.
The asset allocation of FSKAX between large-cap, mid-cap, and small-cap stocks matches that of its underlying index. Therefore,it allocates approximately73% to large-cap stocks, 18% to mid-cap stocks, and 9% to small-cap stocks. It allocates more money to large-cap stocks because large companies compose the majority of the money that is invested in the stock market. It isevenly distributedbetween value and growth stocks.
The fund manages$56.9 billion in assets, making it the second-largest total stock market index fund, behind VTSAX.
Fidelitys site lists 10 years of individual year data, along with a chart of how a hypothetical $10,000 would have grown. From 2008-2017, the fund has risen 8.64% annually, and from 1997-2017, the fund has risen 7.55%.
To illustrate the returns and volatility of a total stock market fund like FSKAX, we plot the graph of the returns of the U.S. Total Stock Market, which FSKAX aims to match. Usingdata from Portfolio Visualizer, we have data from 1972-2017:
Because a linear scale on the vertical axis can accentuate the more recent moves in the stock market, lets use the same plot using a logarithmic scale:
Of course, past market returns are no predictor of future performance, and the stock market is not without significant volatility. But the historical returns of the U.S. stock market make me put the bulk of my money in the U.S. stock market.
Morningstar lists FSKAX in the large-cap blend category, and it hasbeaten the average large-cap fundby over a percentage point over a 3-year, 5-year, or 10-year time frame. This is likely because of FSKAXs significantly lower fees than the average actively-managed mutual fund.
Theturnover ratiofor the Fidelity Total Market Index Fund is very low at only 2%. Turnover ratio represents the amount of stock that is bought and sold in a given year. Because this is an index fund that only needs to buy and sell shares as stocks are added or removed from the index or when investors put money in and out of the fund, the turnover ratio is quite low. An actively managed mutual fund such asFidelity Magellanmight have a turnover ratio of around 50%.
The reason why this is a big deal is that whenever you buy or sell a stock, it is a taxable event. Mutual funds are required to distribute their capital gains to their shareholders. By reducing the turnover ratio, the Fidelity Total Market Index fund reduces the amount of money that is distributed in taxes.
However, one of the weaknesses of the Fidelity Total Market Index Fund is its mutual fund structure. It has to distribute its capital gains taxes to shareholders. Therefore, it is more tax-inefficient than an ETF, so your returns are slightly eroded.
Morningstar has a nice feature where you can see both the historical pre-tax and post-tax returns of a mutual fund or ETF. The numbers arent perfect, because everyones tax situation is a little bit different and Morningstar assumes that the investor is in the highest tax bracket when calculating the after-tax returns. However,for FSKAX, we see that the 10-year pre-tax return is 10.71%, while the 10-year post-tax return is 9.86%. You can potentially lose up to 0.85% in return because of taxes.
Any investment in a taxable account is expected to lose some of its return to taxes, but if you use the same tool to assess the difference between the 10-year pre-tax and post-tax returns for a total stock market ETF such asITOT, it is only 0.47%. While this difference is relatively small and would be less for the typical investor, every little bit helps, and the mutual fund and ETF versions of a share are hoping to track the same index.
Therefore, I personally hold FSKAX in my tax-advantaged accounts such as my Roth IRA, while I hold ITOT in my taxable account.
Fidelity Total Market Index Fund (FSKAX) is a great investment for your 401(k) or Roth IRA. If you invest your IRA with Fidelity, FSKAX is a great option to get exposure to the broad U.S. stock market.
However, in taxable accounts, I would prefer an ETF version of the total stock market index in taxable accounts (such as ITOT, which is commission-free at Fidelity) because of its relative tax efficiency.
What do you think? Do you own FSKAX in your portfolio?
Should You Invest In High-Dividend Stocks Or Index Funds?
How Much Of Your Total Returns Are Lost To Fees?
VTSAX Review: Invest In The Largest Mutual Fund In The World
Freedom, Freedom Index, or Freedom Blend: Understanding Fidelitys Confusing Lineup Of Target-Date Funds
In the newest Warren Buffet letter, he is intent on proofing index fund outperform active managed portfolio funds. He selects 5 active funds which lose against the S+P index unmanaged fund from 2008-2018.
The active funds return varying 2% to 6%. An index returns 10% annually over 10 years from 2018-2008. But what of the prior decades from 2008-1998,1998-1988,1988-1978 and so on?
Its clear he is not picking OchZiff, Soros, Peter Thiels funds any unmanaged index fund. I guess for the sole reason you, me and most cannot buy into it. So the choices we are left with is those many along the lines of the active 5 funds he selects in his annual letter 2018.
How does FSTVX compare to my 401k Total stock market option of Vanguard Institutional Total Stock Market Index Fund Institutional Plus Shares (VITPX) ER 0.02 or an R IRA Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%. Is it simply better to go with the smallest ER in this case?
All of the following show Exp Ratio (Gross) as 0.015% and Minimum to Invest as $0.00
Is this new change, does not mean same ER and no minimum for either class of shares now?
FSKTX Fidelity® Total Market Index Fund Institutional Class
FSKAX Fidelity® Total Market Index Fund Institutional Premium Class
FSTVX Fidelity® Total Market Index Fund Premium Class
Thanks for pointing this out I have updated the article to reflect the recent changes in the Fidelity fee structure for their total stock market index funds.
Subscribe to receive exclusive content and new post notifications.
Before I went to medical school, I worked on Wall Street as a trader at an investment bank. Now I am a physician helping fellow doctors navigate the crazy world of finance.
Personal Capitalenables you to track all of your investment accounts in one place. No more shifting between your Vanguard, Fidelity, and Schwab accounts to calculate your asset allocation or net worth.
They also offer paid wealth management services, but you can decline these and still access their free fee analyzer or net worth calculator tools.
Sign up for a free accountand start tracking your investments today.
If you are a resident, fellow, or doctor fresh out of training, come join theWall Street Resident Physicians Facebook group. I want to make it the best place for physicians-in-training to talk personal finance and investing with other residents and fellows.
I am a doctor, not an accountant or financial advisor. Please consult your tax advisor or financial professional before making any investment or personal finance decisions.
Posts and pages on this website contain affiliate links that help keep the Wall Street Physicians lights on. Thanks for your support of the blog!