Fidelity ZERO Funds Review - What’s the Catch? (FZROX, FNILX, etc.)

[@OptimizedPortfolio]

What do you think of Fidelity ZERO Funds? Let me know in the comments.

[@danumansky6418]

Not open to new investors?

[@OptimizedPortfolio]

@@danumansky6418 What?

[@jasonhobbs2405]

I love your fast pace. Many content creators talk slowly enough that I get bored. Your videos get me the info I want about as fast as I can understand it.

[@OptimizedPortfolio]

Glad to hear it! Early on I got complaints of talking too slowly so I've tried to speed it up a little and eliminate unnecessary info. Adjusting playback speed can also help.

[@topacio9326]

ditto to this guy!!! right to the point!!!

[@TJ-Stackin]

I hold FNILX 👍

[@OptimizedPortfolio]

👍

[@alsamae1]

This was super helpful. Thank you!

[@OptimizedPortfolio]

Glad it was helpful!

[@dandans9060]

Great video short and concise to the point , i did not know I cannot switch zero fidelity funds out to another brokerage, I’ve had 3 brokerages this far so that is a a disadvantage … having said that fidelity is looking the best to me these days with their 4.48 brokerage apy in addition to you can buy bitcoin as well

[@OptimizedPortfolio]

Thanks for watching!

[@Stormnorman15]

Hello, I’m 32 and putting more effort in planning for the future. I had a couple orphan 401k accounts that I transferred over to Merrill Edge Guided Investing IRA and Roth IRA since I wanted to start contributing. The plan is to max out those for the year. Additionally I opted to contributing into my employer sponsored 401k. Even though they don’t match, the benefit of reducing my taxable income is enticing. And I plan to try to contribute to the maximum amount as well. (I still live at home so my expenses are very little). Finally, because I still want to contribute just a little more, I opened a brokerage account through Fidelity and purchased my first share of an ETF: VOO. Now I just learned of FNILX. My question is, does it make sense to start investing into FNILX vs VOO?

[@OptimizedPortfolio]

Thanks for sharing. As I noted, just depends on whether or not Fidelity Zero funds fit what you are or aren't looking for.

[@benjaminguzmanuribe7680]

Hey thank you for the video! Would u mind sharing which brokerage are you currently using and why? Cheers

[@OptimizedPortfolio]

I'm spread across a few due to 401k and previous rollovers, but mainly M1 Finance. I've got a review linked in the description if you're interested.

[@benjaminguzmanuribe7680]

@@OptimizedPortfolio cool! I started investing last year with Fidelity and don't like it much. Have been considering M1 for quite a while. I'll take a look!

[@Magic_beans_]

Thanks for the overview. I'm not invested in any of these yet, but I was looking into VZIPX (side note, clever branding on the symbols). I don't plan to switch brokerages and I'm not sure what would inspire me to, so it's tempting. As you say though, index funds are already pretty cheap. Am I really going to miss that 0.03%?

[@OptimizedPortfolio]

Indeed. The kicker is the 0.03% index fund may still beat the ZERO fund due to different indexes, so they're not really as juicy as they seem. At least it's not cut and dry.

[@jortega61924]

I am 45, and starting out late. What stocks should I put into my Roth IRA?? Large cap, mid cap and small cap.

[@OptimizedPortfolio]

I can't provide personalized advice but you might find the popular 3 Fund Portfolio useful: kzbin.info/www/bejne/rWSZpH2al9h1nqM

[@timewithsopy]

I have 3,600+ of FZROX shares and it goes no where. I'm thinking of trading it in for VOO. Do you think that's smart?

[@OptimizedPortfolio]

FZROX and VOO will have nearly identical returns. They are both proxies for the U.S. stock market.

[@michaelknight8459]

Fidelity Zero funds all pay out dividends only once a year in December, where there fee base ones are pay out quarterly. Are they making money on the dividends since they only pay the lump sum once a year?

[@OptimizedPortfolio]

As far as I can tell, no. There's a lengthy exchange from a year ago in another comment where someone asked the same thing.

[@rickdunn3883]

I concluded the same...Lost Leader...follow the money.

[@OptimizedPortfolio]

Thanks for watching!

[@tomcooper2646]

If you use these in an IRA they can be used with no portability issues. If you want to move out of Fidelity just liquidate and rebuy investments in the new account.

[@OptimizedPortfolio]

Right. That's why I noted I'd only buy them in an IRA.

[@robertwilliam9558]

I also hold FNILX.

[@OptimizedPortfolio]

Thanks for sharing!

[@carlod.7805]

What do you think of this portfolio 80% FZROX 20% FZILX

[@OptimizedPortfolio]

Depends on context, goals, horizon, need for risk, tolerance for risk, capacity for risk, etc. It sounds like a pretty high risk, US-heavy portfolio that may be appropriate for a young investor starting out.

[@korndawggy1801]

​@@OptimizedPortfolio most portfolios are heavier with US. Top US companies have ties outside the US anyways. If the US fails we have bigger problems to worry about than investments. International doesn't have much return.

[@OptimizedPortfolio]

@@korndawggy1801 Yes, most US portfolios massively overweight the US. That certainly doesn't make it right. I've explained elsewhere that revenue source diversification ≠ stock market diversification: kzbin.info/www/bejne/nJ7Li5VmnbR3hNE "International doesn't have much return" - not sure what you're talking about. Emerging Markets just beat the US for the 2 decade period 2000-2019.

[@dr.lefort1596]

Why only hold these in tax advantaged accounts?

[@OptimizedPortfolio]

Mutual funds are less tax efficient than ETFs. Also, if one had to liquidate these in taxable after years of gains, they'd be looking at a big tax bill.

[@CH-ry6od]

these funds track their benchmarks with nearly 100% accuracy, and cost nothing over a lifetime of ownership. the savings add up if you're investing large sums. there's no reason to pay anything for comparable product. I don't understand how this could even be questioned. Fidelity zero funds are a "no brainer." over many years you will build wealth with these.

[@OptimizedPortfolio]

Of course they track their benchmarks; as I noted, they're proprietary ad hoc indexes created by Fidelity themselves. As I explained, certainly not as much of a "no brainer" as they may appear at first glance, especially in taxable space, where the tax savings alone of an ETF over a mutual fund is likely greater than the miniscule difference in fees. That's the whole point of this video.

[@simplefinance]

So, there IS actually a couple hidden fees that I can see, that nobody is talking about: At least with the FNILX fund, the hidden fee(s) is in how they distribute their dividends. Unlike something like VOO, that has the more traditional 4 distributions per year, FNILX has 1 lump sum distribution annually - once every December in this case. Complicated explanation for next couple paragraphs incoming: It may not sound like much, but that means Fidelity holds back 25% of your dividends for 3/4 of a year, 50% of your dividends for half a year, and 75% of your dividends for 1/4 of a year (with equal distributions, this equals an avg of 3/4 of a year 'late' on 50% of your annual dividend yield compared to a traditional quarterly distribution). That's money that you cannot reinvest until you get your dividend with an annual distribution model like FNILX. It may not sound like much, but it happens to cover a 0.03% expense ratio of a VOO for example (which distributes quarterly). How much would this 'cost' us when converted to an expense ratio format? Lets assume a 1.5% yield which is in the ballpark of what an S&P500 ETF yields in recent years. Let's also assume the ETF costs $100 for simplicity, and let's conservatively assume you can earn 6% annually on your money when you invest. As mentioned in the previous paragraph, you are missing out on an average of 50% of your annual dividend for 3/4 of the year. Lets start by taking 50% of $1.50, which is $0.75 that we have for 3/4 of the year. Now lets multiply by 75% since we only have it for an avg of 3/4 a year -> $0.5625. Finally, we take 6% the annual return we conservatively expect to get on that $.05625 and we get $0.03375. TL;DR, at a conservative expected annual return of 6%, that annual dividend distribution on a 1.5% yield is costing us about an expense ratio equivalent of 0.03375% Another thing I've noticed, is that FNILX simply pays a smaller dividend yield, at least according to my math. I have for example calculated the 2022 dividend yield of SPLG, VOO, and FNILX by summing their annual distribution, and dividing by their share close price on December 30, 2022 and got these results for yield: VOO - 1.692% (5.9467 / 351.34) SPLG - 1.692% (0.761 / 44.98) FNILX - 1.53% (0.205 / 13.40) I'm curious if anyone else has tried this, because I get a notable lower yield for FNILX that is beyond the margin of error...but I've only tested this for 2022 with these funds (so far as of writing this comment). But don't take my word for it, look it up yourself, do your own math, and correct me where I may be wrong please. You'll clearly see that they distribute their dividend once annually in December. I hope my explanation makes sense.

[@OptimizedPortfolio]

Thank you for taking the time to write this thoughtful comment about the nuances of the distribution schedule. Unfortunately, even if this is the case, your concern is based entirely on the false premise that dividends are free money. They're not. They would not make the compounding happen any faster if they were paid sooner, as share price compensates. The schedule on which the dividend is paid is immaterial.

[@simplefinance]

@@OptimizedPortfolio I appreciate your response and would like to get to the bottom of this. Yes, when a dividend is paid, the share price immediately adjusts by the amount paid proportionally, but in this case with the 2 funds (lets say FNILX and VOO) they do end up at the same ending price at the end of the year (approximately, there are variances for exact fund performance that are within margin of error...or are they...). Further, remember that in theory, both funds have the same underlying companies earning the same amounts of money and yes...making the same distributions at the same times. Just because the zero fund doesn't pay quarterly doesn't mean the underlying companies still have the cash that was already distributed. I feel like you are treating these funds as the entities making the money and making the distributions? With the quarterly distributions, you get your money sooner, while in the Fidelity Zero fund, they sort of float in the ether (or rather, Fidelity possibly has them). Remember that in both cases, the companies still pay their dividends on time (most pay quarterly) so there is no reason the zero fund couldn't pay them quarterly as well, the companies still have already paid them and cannot be reinvested back into the business, etc. If what you are saying is true, the money not distributed would somehow continue to appreciate within the companies (or within the fund), however I again remind you that the underlying companies have already paid them, and the companies no longer have this money. If what you said is true, the Fidelity Zero fund should in theory very slightly outperform other funds in price because they are able to make use of the unpaid dividends to 'grow' the fund. And to your credit, in the past 5 years, the Zero fund does outperform VOO as an example (~+60% vs ~+57%). Do you think that is what is happening here? Now you might be right in some way, but I apologize as so far I cannot seem to grasp the concept you are trying to explain. No worries if you prefer not to respond. I find your point interesting if I could just wrap my head around it. :) Again, thanks for your take on my point. Also, do you have any thoughts on my calculations yielding a lower overall distribution for FNILX? Did I make an error or calculate it incorrectly in your (or other viewers) opinion? Or is this what you mean by the share price would compensate for the lower yield?

[@OptimizedPortfolio]

​@@simplefinance Assuming all this is true (I haven't looked into it yet so I shouldn't even be speculating), you make a good point about Fidelity possibly "holding" our dividend that the underlying companies have already paid. Perhaps they're able to earn a small yield on that cash for a short period before paying out at the end of the year. Extending that speculation, maybe that's how/why they can offer these without fees. My point remains though that total return would be unaffected and both funds should and would end up at the same place, as total return is just the sum of share appreciation and dividends. Remember too one of the fundamental considerations here is these funds do NOT track the actual famous indexes like the S&P 500 but rather proprietary indexes constructed by Fidelity themselves. The holdings, weights of those holdings, div yields, and total returns are thus slightly different. I'll look into this more and circle back.

[@simplefinance]

@@OptimizedPortfolio I apologize I can be so verbose. I simply disagree with you that if all things the same except the pace of the dividend payout (quarterly vs annually), the faster payments would have a very slight advantage. However, I would agree with your previous wording that they could be considered more or less 'immaterial'. The reason I even bring it up however is in the math I shared earlier. It more or less comes out to the expense ratio of VOO if you assume you could make a ~5.5% annual return rate on the earlier payments by immediately investing them in, say, short term treasury bills or other stocks or what not. As they say, a bird in the hand is worth 2 in the bush. Earlier money is more valuable than later. That's why the DCF method of valuing businesses uses a discount rate, as you probably knew. And if 0.03% was immaterial, why discuss the zero cost fund at all, when it is an immaterial difference from the cost of say VOO at 0.03%. Clearly, by discussing the fund, we care about that cost difference. I'm thinking that by withholding the dividend until the end of the year, we (in theory) miss out on the opportunity cost of having that money earlier which makes up for the lack of fee. Oh and I hope I am coming across as 'polite, respectful disagreement' in this case. I watch and enjoy some of your other videos and learn from you about ETFs such as AVUV and just getting into factor investing. Appreciate your content and apologies if I take up too much of your time with novels as comments LOL. I'm just interested in this subject matter. Have a great day!

[@OptimizedPortfolio]

​@@simplefinance You're overthinking it and missing the forest for the trees, mate. If my 1 share worth $100 in a fund pays me a $1 dividend, I now have a share worth $99 and a $1 cash dividend. If I reinvest it, I'm back to $100. It matters not if that transaction occurs quarterly or once at the end of the year, because the facts that A) total return is simply the sum of capital appreciation and dividend payments, and B) dividends aren't free money created out of thin air, are axiomatic. No, there is no "advantage" to those payments being spread out and occurring on a more frequent schedule. If it were an actual gain - as in actual free money - then yes it would be an advantage to have "earlier money." But that's not the case here. I didn't say a 0.03% fee was immaterial. I said the performance difference between a quarterly dividend and an annual one - if reinvested - is immaterial.

[@JanelleWilliams-i2d]

Lopez Laura Allen Carol Hernandez Joseph

[@sixstringsdaddy2477]

You're "stuck" with them only in taxable account. You say that but you do it poorly, you make an assumption that your listeners understand the subtlety. My son watched the video and took away "he said it's not a good idea unless you're sure you'll never change brokers". He only has tax advantaged accounts.

[@OptimizedPortfolio]

You'd still have to sell to cash. Can't transfer them out. What I said is not untrue. People should always do their own due diligence and are obviously free to make their own decisions. That certainly doesn't mean I said something "poorly." But thanks for watching and commenting.

[@MrJeffgonz]

FZROX 💪

[@OptimizedPortfolio]

👍

[@TommyGun85]

I hold FZROX & FZILX - So far So good 👌🏻