FZROX vs ITOT

The Fidelity ZERO Total Market Index Fund (FZROX) and the iShares Core S&P Total US Stock Market ETF (ITOT) are two of the largest “total market” index funds in existence and easily two of the most popular among individual investors. ITOT and FZROX are the core of many investor portfolios and many investors compare FZROX vs ITOT in order to decide which should be the foundation of their portfolio.

A quick reminder that this site does NOT provide investment recommendations. Fund comparisons (such as this one) are not conducted to identify the “best” fund (since that will vary from investor to investor based on investor-specific factors). Rather, these fund comparison posts are designed to identify and distinguish between the fund details that matter versus the ones that don’t.

The Short Answer

FZROX and ITOT are extremely similar, except for two major differences. In my view, the major difference is that FZROX can only be bought and/or owned at Fidelity (which is a non-starter for many investors, including myself even if my accounts were at Fidelity). Secondly, FZROX is a mutual fund and ITOT is an ETF. This difference in structure leads to differences in taxes, tradability, etc.

The underlying benchmark indices that these funds track are technically different (S&P Total Market Index vs Fidelity US Total Investable Market Index), but they are identical is most respects. Consequently, the risk and return of FZROX and ITOT is nearly identical and I consider these two funds equivalent and interchangeable.

The Longer Answer

Historical Performance: FZROX vs ITOT

ITOT was launched in 2004, while FZROX was launched on August 2, 2018. Since that time, the two funds have had identical performance: 8.23% vs 12.68% on an annualized basis. Over those 11 years, the cumulative performance differential has been only been about 1%!

Differences Between FZROX and ITOT

Geography

Both the ITOT and FZROX only include stocks of US-domiciled companies.

Market Capitalization

The two funds have a similar number of holdings (as of 11/30/2022); ITOT holds 3,362 stocks versus FZROX’s 2,822 stocks. Perhaps not surprisingly, the market cap weighting of the funds are essentially identical.

ITOTFZROX
Large Cap72%73%
Mid Cap20%19%
Small Cap9%9%
Source: ThoughtfulFinance.com, Morningstar.com (as of 11/30/2022)

Sector Weights

The sector weights of each fund are nearly identical, with many sector weights within .10% of each other!

ITOTFZROX
Basic Materials2.74%2.67%
Consumer Cyclical10.21%10.47%
Financial Services14.25%14.01%
Real Estate3.58%3.46%
Communication Services6.93%6.90%
Energy5.04%5.14%
Industrials9.86%9.59%
Technology23.57%23.15%
Consumer Defensive6.77%6.79%
Healthcare15.07%14.95%
Utilities3.00%2.87%
Source: ThoughtfulFinance.com, Morningstar.com (as of 1/6/23 for ITOT and 11/30/2022 for FZROX)

Factors to Consider

Expenses

FZROX grabbed headlines when Fidelity announced it, due to the 0% expense ratio. While zero expenses is great, it is only .03% less than ITOT. So even though the difference in expenses is infinite in relative terms, its only three basis points. At a certain level (such as this one), differences in expense ratios do not matter. Since these portfolios are essentially identical, I would most likely lean towards ITOT.

Tradability

In my view, the most important factor to consider when evaluating ITOT vs FZROX is the fact that FZROX cannot be bought or owned outside of Fidelity. Personally, this is a non-starter for me as there are reasons to transfer assets to other custodians, such as transferring one’s accounts or making a donation. Some investors may not value flexibility as much, but they should be aware of this limitation.

Transaction Costs

ETFs are free to trade at many brokers and custodians, although many still charge commissions and/or transaction fees to buy/sell mutual funds. As mentioned, FZROX can only be bought and/or held at Fidelity. So if an investor account is at Fidelity, it is free to trade FZROX or ITOT. However, only ITOT is free to trade in non-Fidelity accounts (or even traded at all!).

There is a bid-ask spread when trading ETFs, but this spread is typically less than .01% for ITOT and individual investor trades will not generally be large enough to “move” the market. In the case of ITOT, individual investors should not have a problem trading.

Tax Efficiency & Capital Gain Distributions

ETFs are typically more tax-efficient than mutual funds, due to their ability to avoid realizing capital gains through like-kind redemptions (a process that is beyond the scope of this post).

FZROX routinely makes capital gains distributions, while ITOT does not make capital gains distributions nor do I expect it to (since it is an ETF). FZROX is relatively tax-efficient since it is an index fund, but ITOT is even more tax-efficient.

Tax Loss Harvesting

My personal preference is to keep a portfolio entirely mutual funds or entirely ETFs, due to the mechanics of settlement during tax loss harvesting. If an ETF has declined in value and an investor sells it, the trade and cash proceeds will not settle for two business days (T+2). That investor may want to “replace” the sold ETF immediately and attempt to buy another ETF or mutual fund simultaneously.

However, mutual funds settle on T+1 basis, so cash for the mutual purchase would be due in one business day (which is one day earlier than the cash from the ETF sale is received). This can obviously cause problems and (even though this issue can be addressed with careful planning) I find it easier to keep accounts invested in similar vehicles. In this case, if a portfolio is all mutual funds, I might consider FZROX. If all ETFs, I might lean more towards ITOT.

Final Thoughts on FZROX & ITOT

FZROX and ITOT are nearly identical in most respects. Personally, I would not spend too much time trying to divine which is “better” and would just choose whether a mutual fund or ETF makes more sense for my portfolio based on the above factors.

That being said, investors should not consider FZROX unless their account is at Fidelity. If my accounts were at Fidelity, I might consider FZROX in a tax-exempt or tax-deferred account. However, I would never buy FZROX in a taxable account due to the inability to transfer the assets (without realizing a potential gain) out of Fidelity if I wanted to move my accounts, donate the shares, etc. Therefore, I believe ITOT is the better choice for most situations.

Posted by Matt

Matt is an investor and investment adviser. He is a CFA charterholder and a CAIA charterholder. His writing on this site is purely educational; he will not make recommendations on this site since he does not know individual readers' situations.