Which Fund Is The Better Investment? #NewsETFs

When it comes to investing in broad market indices, choosing the right fund can be a crucial decision. Among the most popular options are the Vanguard S&P 500 ETF (FLIGHT
FLIGHT
) and the Fidelity 500 Index Fund (FXAIX). Both funds aim to deliver returns that mirror the performance of the S&P 500, providing investors with exposure to a diverse range of large-cap U.S. stocks. There are many factors to consider with each of these index funds. Let’s take a look at the similarities and differences and find out which may suit you better.

FXAIX Explained

Fidelity 500 Index Fund is an open-end equity indexed mutual fund launched and managed by Fidelity Management & Research Company LLC. The fund was formed in 1988 and is considered one of the cheapest ways to hold the 500 stocks in the S&P 500 index, with its 0.015% expense ratio. FXAIX is a mutual fund, which means it doesn’t trade throughout the day like an ETF. Instead, investors purchase shares of FXAIX at the end of each trading day, at net asset value (NAV).

Touching on all the main sectors and industries, FXAIX is about as diversified as you can find. The fund does not have a minimum investment requirement, making it accessible to a broad audience, including novice investors, seasoned professionals, and major U.S. corporations. Fidelity services is a giant in the financial industry, and FXAIX is one of their most reliable mutual funds.

Understanding The VOO ETF

Vanguard S&P 500 ETF is an exchange-traded fund launched and managed by the Vanguard Group. It invests in public equity markets of the U.S. and was public in 2010. VOO is an ETF, meaning it offers the flexibility of being traded like a stock, providing investors with the ability to buy and sell shares throughout the trading day at market prices.

The fund is committed to tracking the S&P 500, across all sectors and has an expense ratio of 0.030%. Vanguard was a pioneer in low fee index fund investing, and VOO historically has outperformed other category peers.

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How FXAIX And VOO Are Similar

VOO and FXAIX have near-identical exposure. They’re both trying to track the S&P 500, meaning they look to hold the same companies. The S&P 500 is a large-cap-weighted index, meaning the holdings with the largest market capitalizations will have the biggest weight in the index and, consequently, in both VOO and FXAIX. They hold 507 and 508 holdings, respectively, and have essentially identical breakdowns of weight per sector. Due to the similarities, each of these funds carry about the same market risk and have basically matching betas, right near 1.0.

Key Differences Between FXAIX And VOO

ETFs can be more tax efficient compared to traditional mutual funds. Both are subject to capital gains tax and taxation of dividend income. However, ETFs are structured in such a manner that taxes are minimized for the holder of the ETF because they typically have fewer capital gains distributions. FXAIX is a passively managed fund, so it does not have as much portfolio turnover as a normal actively managed mutual fund. This creates less taxable events and closes the tax implication gap between these two.

Taxation on similar funds can still vary due to the variance of high dividend yielding stocks within a fund. But VOO and FXAIX hold almost the exact same portfolio so these will not contrast between these two. In terms of the exposure an investor is getting to the market, there really are not any big differences between these two funds.

Trading flexibility and tax implications are the two deferring factors that stand out. VOO trades throughout the trading day on stock exchanges, just like individual stocks. This allows for immediate buying and selling of shares and the ability to react quickly to market movement. As a mutual fund, FXAIX can only be traded at the end of day. There is no trading intraday which can be challenging feeling like you are on the sidelines as the market swings from major news.

ETFs typically have fewer taxable events than mutual funds, which can lead to a slight edge in overall tax benefits. Sometimes, a mutual fund manager must constantly rebalance the fund by selling securities, which creates taxable capital gains for shareholders. But FXAIX, is an index mutual fund and has much less turnover, so the total tax difference between VOO and FXAIX should be fairly minimal.

Data source: YCharts

Performance Comparison

Performance over FXAIX and VOO is unsurprisingly eerily similar. The year-to-date returns for both stocks are quite close, with FXAIX having a 19.12% return and VOO slightly lower at 19.06%. Both investments have delivered almost identical results over the past 10 years, with FXAIX having a 13.04% annualized return and VOO not far behind at 12.95%. Looking at a long-term chart there is really no discrepancy at any point between the two.

FXAIX Vs. VOO Expense Ratios & Fees

FXAIX and VOO have expense ratios of 0.015% and 0.030%, respectively. So for VOO, this translates to a $3 annual fee for every $10,000 invested. With how low these expenses are it’s almost hardly even worth noting. Vanguard Brokerage Accounts do not charge a commission for buying or selling Vanguard ETFs and mutual funds online. FXAIX is a no-load fund and is considered one of the cheapest mutual funds available. Both are very low-cost investments from the investor’s perspective.

Liquidity And Trading Flexibility

Oftentimes investors of ETFs and mutual funds are bought and held, as they are in it for the long run. Trading flexibility and liquidity aren’t as important for this type of investment but trading these index funds can still be done short term. As mentioned earlier, VOO, and all ETFs, can be bought or sold at any moment during the trading day, giving them an advantage to liquidity needs over FXAIX and other mutual funds. The flexibility for trading FXAIX is limited and may not be suitable for investors tracking their funds throughout the day actively deciding to buy or sell. However, the daily trading volume for FXAIX is still very high, so if you can wait until the end of the trading day, liquidating your asset shouldn’t be a problem.

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Dividend Reinvestment Options

Reinvesting dividends is another way to make investing automatic and add to your investment’s growth. Both VOO and FXAIX offer dividend reinvestment with no additional fee or commissions. At the purchase of the fund, both provide an option to select “reinvest” to buy additional shares. This is done automatically and helps compound an investment’s growth continually, with virtually no extra effort.

Tax Efficiency And Implications

Every investor is under a different circumstance, and not all asset classes are fitting for everyone. Although VOO and FXAIX have many similarities they still each standout as to what type of investor fits the mold best.

If you prefer trading flexibility, have a brokerage account, or are looking to capitalize on market movements throughout the trading day, VOO may be most suitable. If you are a long-term investor who values simplicity and convenience in managing investments, and know well that daily trading is unneeded, look further at FXAIX.

Pros And Cons

With any investment it’s important to weigh and consider both sides to make the most informed decision you can. Here are the major pros and cons for each of these funds.

FXAIX

Pros:

1. Diversification: the fund offers exposure to a wide range of sectors and industries, as it tracks the S&P 500.
2. Low cost: an extremely low expense ratio, which only leads to more capital invested and better long-term gains.
3. Track Record: Consistent and reliable performance over its entire history as an index mutual fund.

Cons:

1. Trading Flexibility: due to the nature of mutual funds, the inability to trade during normal market hours gives investors less flexibility.
2. Tax Implications: mutual funds usually have slightly more turnover than other index funds, resulting in more capital gains tax scenarios.

FLIGHT

Pros:

1. Diversification: the fund offers exposure to a wide range of sectors and industries, as it tracks the S&P 500.
2. Liquidity/Flexibility: highly liquid trading like a stock, giving investors ability to buy and sell at any moment.
3. Tax Efficient: fewer capital gains distributions, resulting in less taxable events and overall tax savings to the investor.

Cons:

1. High price per share (above $500): some investors would prefer finding an ETF that does not already have a high share price.
2. Expense ratio: it is definitely not fair to list this as a con as it is still very low, but technically it is double that of FXAIX.

Investor Suitability

Both funds have demonstrated robust performance over the years, closely tracking the S&P 500 and providing investors with solid returns. Their diversification helps reduce risk while allowing investors to benefit from the growth of the U.S. economy’s most significant and influential companies.

Which Fund Is The Better Investment?

FXAIX is slightly more cost effective with lower expenses but restricts trading action until end of day. If you know you will be passive and wouldn’t even, consider touching it for years this could be your best bet. For a more active investor, VOO is a step above with high flexibility but will cost marginally more in expenses. I think the ability to trade intraday with VOO stands out the most and is why I’m giving VOO a slight edge between these two reliable funds.

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