By Jamie Johnson, WCI Contributor
Total stock market index funds are a great option if you're looking for new investment opportunities, and they're a great way to diversify your investment portfolio and improve your tax efficiency. Plus, you’ll gain access to the entire US stock market in one low-cost fund. VTSAX and FSKAX are often touted as two of the best total stock market index funds available, and even though they're similar on the surface, there are a few differences between the two.
Today, we’ll take a deep dive into both funds so you can decide which is the right investment vehicle for you and determine if a passively managed fund, like VTSAX or FSKAX, is a better fit for you than one that's actively managed.
What Is a Total Stock Market Index Fund?
A total stock market index fund is a mutual fund or an exchange-traded fund (ETF) that tracks the entire stock market across a country or region. The advantage of using these funds is that you gain exposure to companies of all sizes—not just companies with large market capitalizations—and you can take a more passive approach to investing.
Total stock market index funds usually come with low fees, so investors keep more of their returns. Plus, they are an excellent option for new investors with minimal financial knowledge or experience with picking stocks. However, your growth will be limited to the overall stock market, and it won’t vary much by picking different funds.
On the other hand, buying individual stocks introduces uncompensated risk, i.e., a risk that you are not compensated adequately for taking. This is the risk of a company going bankrupt or a borrower defaulting or being downgraded. This is when an individual security goes down in value when the overall market is going up, and it happens all the time to people who buy individual securities. Meanwhile, index funds give you broad diversification, pooled costs, daily liquidity, and professional management—all for a very low cost.
The data on active management vs. passive management is clear, too. Time and time again it has been shown that active management doesn't work well enoughto overcome its additional costs, particularly over the long term and even more so in a taxable account. At 10 years, an index fund is outperforming 80%+ of its peers. By the time you get out to your 30-60 year investing horizon and consider all of the asset classes in your portfolio, an index fund portfolio is going to outperform 99% of similar actively managed portfolios.
So when you invest in index funds, you can expect higher returns over the long run than those who pick individual stocks or mutual funds.
An index fund portfolio is also generally more tax-efficient than an actively managed portfolio. The turnover is lower, so there are fewer capital gains distributions. The only time these funds have turnover is when there is an Initial Public Offering (no capital gain distribution) or when a company gets delisted from the exchange (again, no capital gain distribution). Theoretically, the turnover ought to be 0%. In actuality, it's about 4% for various technical reasons. That means the average stock is held for 25 years. Considering the average mutual fund turnover is 85%, holding their average stock for just a little over a year, 4% is basically 0%.
Capital gains are also minimized by the fact that you don't have to change funds every few years when a fund manager retires or loses their touch.
What Is VTSAX?
VTSAX stands for the Vanguard Total Stock Market Index Fund Admiral Shares. Created in 1992, it’s a mutual fund that tracks the performance of the CRSP US Total Market Index. It’s also available as an ETF. VTSAX is one of the largest funds in the world, and it’s a good option for investors of all skill levels. As of march 2023, the fund holds 3,945 stocks with total net assets of $1.2 trillion.
The fund’s top 10 stocks account for more than 24.7% of its total net assets. The price per share will vary, but at the time of this writing [2023], it was $97.86.
The VTSAX offers a diversified portfolio, but some industries are more heavily represented than others. For instance, the technology sector accounts for 25.1%, consumer discretionary accounts for 14.2%, and healthcare and industrials each make up a little less than 14%.
Here are the fund’s top 10 holdings:
- Apple Inc.
- Microsoft Inc.
- Amazon.com Inc.
- Tesla Inc.
- NVIDIA Corp.
- Alphabet Inc. Class A
- Berkshire Hathaway Inc.
- Alphabet Inc. Class C
- Exxon Mobil Corp.
- UnitedHealth Group Inc.
The VTSAX performs consistently well, and it returned 11.67 over the past 3 years [as of March 2023]. The fund has returned 11.82% over the last decade. If you decide to invest in the VTSAX, Vanguard requires a minimum starting investment of $3,000. The expense ratio is 0.04%.
What Is FSKAX?
FSKAX stands for the Fidelity Total Market Index Fund, and it’s basically Fidelity’s equivalent of VTSAX. Fidelity Investments created the mutual fund in 2011, and it’s also one of the largest funds in the world.
The FSKAX tracks the Dow Jones US Total Stock Market Index, and it currently holds 3,974 stocks with assets totaling more than $66 billion. Again, the price per share will vary depending on the market, but at the time of this writing in March 2023, it was $110.75.
The fund has returned 11.66% over the past three years and 11.79% over the last decade [2023]. Unlike VTSAX, there is no minimum initial investment, and its expense ratio is 0.015%.
You’ll notice that the fund’s top 10 performing stocks closely mirror VTSAX:
- Apple Inc.
- Microsoft Inc.
- Amazon.com Inc.
- NVIDIA Corp.
- Tesla Inc.
- Berkshire Hathaway Inc.
- Alphabet Inc. (Cl A)
- Alphabet Inc. (Cl C)
- Exxon Mobil Corp.
- UnitedHealth Group Inc.
The fund invests in a wide variety of markets, but its primary sectors are:
- Information technology — 25.88%
- Healthcare — 14.009%
- Financials — 12.41%
- Consumer discretionary — 10.8%
FSKAX vs. VTSAX: Which Should I Choose?
The following chart highlights some of the main differences between FSKAX and VTSAX, as of March 2023.
As you can see, FSKAX and VTSAX are nearly identical on the surface—their returns over the past 10 years and their risk assessment are very similar. Their top 10 holdings are virtually identical as well.
Both funds come with low expense ratios, which means you’ll pay minimal fees (though FSKAX is slightly cheaper). Both funds are managed with a passive investment strategy, which means they aren’t trying to copy an index but are trying to match their performance.
The most significant difference between the funds is that they track different indexes—FSKAX tracks the Dow Jones, and VTSAX tracks the CRSP Index. FSKAX is offered by Fidelity, while VTSAX is offered by Vanguard.
The bottom line is that you really can’t lose by investing in FSKAX or VTSAX—both are low-cost index funds that have grown to be stable investments, and they're two of the oldest and best-known investment firms around.
FSKAX vs. VTSAX: Which Is Better?
Total stock market index funds are an excellent investment strategy, and FSKAX and VTSAX are two of the best options available. Both funds use similar strategies and have delivered similar returns over the past 10 years.
Both stocks are winners in their own ways, though FSKAX may be the better option if you don’t want a minimum investment amount (although you can just use the ETF version at Vanguard that has no minimum). At the end of the day, it really comes down to your investing plan and the investment brokerage you prefer. If you like Fidelity and its slightly smaller expense ratio, go with FSKAX. If you're a big Vanguard fan and you like slightly higher returns on a more established fund, go with VTSAX. If you are investing in a taxable account, the Vanguard fund is likely slightly more tax-efficient due to its unique ETF share class and its ability to “flush capital gains out of the portfolio.”
Either way, if you invest with FSKAX or VTSAX, you're most likely going to come out ahead of comparable actively managed funds.
Do you prefer FSKAX or VTSAX? Have you tried actively managed funds vs. total stock market index funds? Which has performed better in your portfolio? Comment below!
