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I am shocked. When sifting through Morningstar for an international index mutual fund, I naturally turned to Vanguard’s popular Total International Stock (VTIAX). I noticcd its expense ratio is .12, uncharacteristically high for the definitive purveyor of low-cost funds.
My eyebrows raised, I thought I should take a peek at a comparable Fidelity offering. I discovered the behemoth fund group sponsored a contraption named the Zero International Index fund (FTIHX). Incredibly, that zero refers to the expense ratio. Hey, folks, there isn’t one—your investment is absolutely free!
What’s the story? Is Fidelity into self-destruction? Hardly. The company wants a loss-leader to lure you into its financial services empire, just like an office supply store might advertise computer paper at 50% off. Need an annuity? No problem. Want to bask on the beach in Maui? We’ll manage that portfolio for you.
What’s with me? Did I flunk high school math? Did I miss the college course on basic logic? I’ll forgive those indiscretions, but I will say I was a financial advisor with another discount broker and have invested my own money at Fidelity for over 50 years. Trust me, I know this stuff.
Rather than try to decipher my analysis in a longwinded narrative, I’ve elected to provide the pertinent numbers in a table. I don’t want to lose anyone, so I’ve made a few comments along the way.
VTIAX FTHIX
Expense ratio .12 0
Minimum investment 3,000 0
Morningstar style large blend for both
Number of holdings 8,500 5,000
Top 10 holdings 10% 12%
(Both funds are highly diversified.)
Largest sector financials 20% for both
Tech sector 13% for both
Highest country % Japan 17, UK 9 for both
Risk
standard deviation (low=less risk) 17 for both
beta (S&P=1.00, low=less risk) 1.03 1.04
(Risk of both funds is very similar to the broad market.)
Performance
2022 loss -16% -16%
2023 gain +15% +16%
2024 through June 21 +4.9% 5.0%
The verdict is clear: These two funds are virtually identical in holdings, risk and short-term performance. But what about that .12 difference in cost? Is it too small to substantially matter?
To address this singularly important question, I plugged some numbers into the investors.gov compound return calculator. Let’s say you’re 25 (ha, ha) and just starting out. You’ve got, say, 40 years to go to reach the promised land. Let’s use the market’s historical average annual 10% return for Fidelity Zero International but reduce that number by .12 for its Vanguard counterpart. Then, to keep the playing field level, let’s assume no monthly contributions after the initial lump sum of $3,000, Vanguard’s minimum.
I am stunned by the result. At 65, the Vanguard investor has accumulated $156,000, a fancy bit of compounding. But the Fidelity account has amassed $163,700, a difference of approximately $7,600!
What’s more, the effect of compounding on any monthly contributions would only magnify the size of the discrepancy. To appease readers partial to the very popular ETF alternative offered by Vanguard (VT), its expense ratio is .07.
Mr. Abramowitz, thank you for this article. In your final paragraph, you mention VT as an ETF alternative, although I think you probably should have inserted VXUS instead. VT is “Total World”, whereas VXUS is the ETF alternative to VTIAX (Total International). Its expense ratio is 0.08%.
I own Fidelity ZERO International (FZILX) through my health savings account — the only account I have at Fidelity. It’s a fine fund, and — as you suggest, Steve — it should outperform the Vanguard equivalent fund over time. But Fidelity is not a charity. This is an asset-gathering strategy — again, as you suggest, Steve — and investors need to remain alert to the price they could end up paying. That price is most likely to be paid in the form of lower yields on cash investments. If folks can navigate their way around that, great. If not, they may end up worse off, despite owning an international fund with zero annual expenses.
Exactly. Holding assets at Fidelity, you will eventually pay the Johnson family tax one way or another. I also have my HSA there, because it was a better option than Optum, my employer’s original home for it. If Vanguard starts an HSA program that’s decent, I’ll move this there too further simplifying our financial lives.