Investing

I’ve been investing for over 30 years. I’ve been writing about investing for the past 15 years. One of the questions I get the most is whether you should invest in an S&P 500 Index fund or a total stock market index fund–VOO vs VTI (ETFs) or VTSAX vs VFIAX (mutual funds).

It’s an important question that torments a lot of investors. It shouldn’t. The answer answer is really, really simple. It doesn’t matter. But the explanation takes a little bit of explanation. We’re going to walk through that today using Vanguard ETFs (VOO and VTI), although the same rationale applies to any fund family.

First we’ll compare the portfolios of the S&P 500 index with the total stock market index. We’ll look at both the differences and the similarities. Second, we’ll look at the historical returns and volatility of both indexes. Finally, I’ll offer a simple approach to deciding whether VOO or VTI is best for you.

VTI vs VOO

Both VTI and VOO are lost cost index funds. Vanguard currently charges just 3 basis points (0.03%) in fees for both funds. As ETFs, they don’t have minimum purchase requirements (Vanguard mutual funds do, typically $1,000 or $3,000). They are also both very large funds, each with more than $250 billion in total assets.

Portfolios

The investing style of both an S&P 500 and total stock market index fund are similar. They both portfolios heavily weighted to large U.S. companies. Using Morningstar’s style box, we can see that both funds are classified as large-cap blend (i.e., core) funds.

If you’re new to Morningstar’s tools, check out my Guide to Morningstar.

What these charts tell us is that both VOO and VTI are large cap funds (see the blue dots in the top row). They also tell us that both funds’ investment style is a blend of value and growth companies (blue dot is in the middle column).

Now they are not identical. The S&P 500’s Style Box shows that the average company’s market capitalization (market cap) is a bit larger (the blue dot is a bit higher). We can see this more clearly by looking at what Morningstar calls the “Weight” style box.

The weight style box shows us the percentage in each fund invested in small, medium and large companies, organized by value, blend or growth. As you can see, the S&P 500 is predominately large companies, with 14% in medium size companies and nothing allocated to small cap. In contrast, VTI has more allocated to medium companies and 7% allocated to small cap companies.

The big question for us is whether these differences should matter. Before we answer that question, let’s take a deeper dive into the actual companies these funds hold.

Holdings

If we go to the actual holdings, this is where things get interesting. Using Morningstar, we can see the top 10 holdings in each fund.

Here are the top 10 holdings for VOO, followed by the top 10 for VTI:

As you’ll see, the top 10 holdings are identical for both funds. Apple is the current #1 holding (this may change to Microsoft soon) with Berkshire Hathaway holding the #10 spot. What is different is the percentage that each fund holds of each of these stocks.

You can see that for the total stock market index, Apple comprises about five percent of the fund, whereas for the S&P 500 index, it’s just over six percent (these percentages can change daily as the price of each stock changes).

To understand why there’s a difference, we need to understand cap weighted versus equal weighted indexes.

Cap Weighted vs Equal Weighted

Most index funds are market cap weighted. That means that the more valuable a company is the more it represents in the particular index. Since Apple is the most valuable company in the world at the moment (actually, Microsoft took the lead, but the change hasn’t been reflected yet in the Morningstar data), an index fund allocates more of each investment in Apple than it does smaller companies.

There are equal weighted index funds, too. These finds divide investors’ money equally among all of the companies in the index. This type of index fund is much less common. Both VOO and VTI are cap weighted index funds.

Thus, if we add up the top 10 companies that you see for each fund, we’ll see similar but not identical results. With VOO, the top 10 companies represent about 26% of the fund. For VTI, the top 10 comprise about 21%. Again, these percentages do change as company market caps change.

VTI’s percentage allocated to the top 10 is less than VOO because it must allocate its assets among all publicly traded companies headquartered in the U.S. (about 3,700). VOO only allocates its capital among 500 companies.

Dividend Yield

It’s worth noting that the dividend yield is different for these funds as well. VOO has a trailing twelve month (TTM) yield of about 1.25%. In contrast, VTI’s yield is 1.20%. The difference isn’t significant in my view, but for some it’s a critical factor.

VOO vs VTI Performance

Now we move to what really matters, performance. Using Portfolio Visualizer, we can see how the S&P 500 has compared to a total stock market index over several decades.

First, let’s see how a $10,000 investment in each of these asset classes beginning in 1972 (that’s as far back as Portfolio Visualizer goes) would have performed:

Note that I’m comparing asset classes, not VOO and VTI. I’m doing that because we get more data. As you can tell, the performance has been almost identical. The Compound Annual Growth Rate (CAGR) was just 8 basis points higher for total stock market. The S&P 500 had slightly less volatility as measured by standard deviation. For all practical purposes, the investments were identical.

If instead of investing one lump sum, we start with $100 and add $100 every month, the results continue to be nearly identical:

During shorter periods of time, VOO or VTI might outperform the other by small margins. Over the long term, however, they’ve performed very similarly.

VOO vs VTI–How to Choose

Given the nearly identical performance and volatility, how do we decide between VOO and VTI? I’m going to suggest three factors to consider.

First, in a 401(k) or 403(b), you may not have a choice. The 401(k) I currently have offers an S&P 500 index fund, but doesn’t offer a total stock market index fund. In this situation, take whichever one your workplace retirement account offers. It doesn’t really matter and you shouldn’t view that as a problem or something to worry about.

Now, if you do have a choice or you’re investing in an IRA or a taxable account where you absolutely do have a choice, then I’d suggest one of two approaches.

If simplicity is your goal and you want all of your U.S. stocks in a single fund, go with VTI or another total stock market index fund. For example, if you invest in a three fund portfolio, I prefer a total stock market index fund. It’s not because I think it’ll outperform the S&P 500. We just saw that the performance numbers are pretty much identical. What VTI does give you, however, is added diversity. If the volatility or risk is effectively the same, and the performance is effectively the same, why not get greater exposure to the equities market.

On the other hand, if you want to slice and dice your portfolio into several U.S. asset classes, as I tend to do, I prefer the S&P 500. Why? It gives me more control over the specific asset allocation I’m trying to achieve.

Final Thoughts

So there you go. There are some of the key differences between an S&P 500 index fund and a total stock market index fund. We specifically looked at VOO versus VTI, but these considerations apply to similar funds from Fidelity, Schwab or other investment companies. The good news is that while there are differences between the two types of investments, both are excellent options for U.S. equity exposure.

Saving and investing money is a lot like eating broccoli. We know we should do it, but it’s not so easy. One easy way to save money is with an automatic savings app. To help you get started, here are the best round-up apps for both savings and investing.

How Round-Ups Work

Round-up apps bring the concept of a change jar into the digital world. When cash was king, it was common to have a change jar in the house. Each day when you got home, you took the change out of your pocket and put it in the jar. It wasn’t a lot of money, so it didn’t crush the budget. And while each deposit into the jar didn’t amount to much, over time it grew into some serious cash.

Round-up apps take the same concept and apply it in the world of electronic payments. You connect your checking account and credit cards to the round-up app. The app then keeps track of your transactions and the round-up amount. For example, if you spend $3.74 at a coffee shop, the app adds $0.26 to your round-up balance.

Once your round-ups reach a threshold (typically $10), the app transfers the amount from your checking account to either a savings or investment account. As such, round-ups are one form of microinvesting.

The Psychology Behind Automatic Savings

There are several psychological “tricks” that make round-up apps so effective. First, they require just one easy decision. Once you turn on the round-up feature, it continues to work without any additional effort on your part. This simple decision makes it easy to overcome the status quo bias. And once overcome, the round-ups become the status quo.

Second, they are automatic. The round-ups don’t require us to make decisions each day, week or month. They happen behind the scenes, even if we forgot all about them.

Finally, round-ups involve relatively small amounts of money. Trying to save hundreds of dollars a month might feel daunting. Saving our spare change every day, on the other hand, is less intimidating even if it adds up over time.

Best Overall Round-Up App for Investing–Acorns

Acorns is my pick for the best overall round-up app for investing. Acorns is one of the first round-up apps with over 9 million clients. It offers both low cost investing, free checking and a free debit card. As such, it works for savings, investing or both.

After creating an account, you link the credit and debit cards you use for spending. Acorns tracks your round-ups and transfers them from your linked checking account once they reach $5.

You choose how you want Acorns to invest your round-ups. Users can select from several pre-configured portfolios, ranging from conservative (100% bonds) to aggressive (100% stocks). You can also chose among socially responsible portfolios. Acorns does the rest, making the investments for you in low cost, diversified ETFs (Exchange Traded Funds).

For savers, Acorns offers a checking account and debit card. The FDIC-insured account offers direct deposit, mobile check deposit and free nationwide ATMs. It does not, however, pay interest on its checking account.

Acorns costs just $3 a month for a personal account. The fee covers investing and checking accounts. For $5 a month, get the family plan that enables kids to start investing early.

Best Overall Round-Up App for Savings–Chime

For those focused on building an emergency fund or other savings, Chime is my top pick for round-up apps. Why? Unlike most round-up apps, Chime pays interest on your savings.

Chime comes with a long list of features:

• Get paid up to 2 days early with direct deposit
• Fee-free overdraft protection of up to $200 if you qualify
• More than 60,000 free ATMs
• Savings earn interest (currently 0.50% APR)

It’s key feature for our purposes is automated savings. Chime automates savings in several ways.

First, it does off a round-up feature. Called “Save When You Spend,” Chime will round up to the nearest dollar purchases made with its free Visa debit card. Chime then transfers the round up from your Spending Account to your Savings Account.

Second, Chime enables customers to setup automatic savings. After each paycheck, you can have an amount of your choice automatically moved from your Spending Account to your Savings Account.

There are other things I like about Chime. It has arguably one of the best secured credit cards to help customers build their credit. It’s called the Chime Credit Builder Secured Visa® Credit Card, charges no annual fee and has no required minimum security deposit.

Full List of Round-Up Apps

In addition to Acorns and Chime, here are several other round-up apps worth considering.

Greenlight

Best for kids and teens

Greenlight is perhaps best known for offering a debit card for kids and teens. It also offers an investing platform to teach young people the importance and power of saving and investing. With Greenlight Max, kids can invest in their favorite companies or ETFs. There are no trading fees and parents must approve all trades.

Greenlight offers several ways to encourage savings through what it calls Savings Boosts. One Savings Boost is round-ups. Transactions are rounded up to the nearest dollar and transferred to savings. Other Savings Boosts include earning 1% cash back on all purchases and up to 2% interest on their savings.

In addition to investing, Greenlight can serve as a child’s bank and budgeting app. Monthly costs range from $4.99 to $9.98 a month for up to five children.

Stash

Best for investing in individual stocks

Stash is similar to Acorns. You connect debit and credit cards to a Stash account. Stash monitors transactions and rounds them up to the nearest dollar. Each time round-ups total $5, Stash transfers this amount from your linked checking account to your Stash investment account.

There are several important differences between Stash and Acorns. Where Acorns uses diversified portfolios of ETFs, Stash enables users to invest in fractional shares of individuals stocks. It has over 3,900 companies on its platform, in addition to EFTs and bonds.

For those who prefer a portfolio of ETFs, Stash offers what it calls a Smart Portfolio. Introduced in March 2021, Smart Portfolios use stock and bond ETFs to create a diversified portfolio. These portfolios are automatically rebalanced for hands-off investing.

The cost of Stash ranges from $1 to $9 a month depending on the plan. These fees are in addition to the cost of any underling ETFs.

Qapital

Best for microinvesting

While all round-up apps are a form of microinvesting, Qapital takes it to another level. In addition to round-ups, Qapital offers a number of Rules that will trigger automatic saving and investing:

• Payday Divvy: This feature enables you to automate how much of your paycheck goes to spending, savings and investing.
• Set and Forget: Set up automatic transfers to savings or investing every week.
• Guilty Pleasure: Enjoy your morning coffee at Starbucks, but save some money at the same time. You can designate the merchants and how much you save each time you shop there.
• Spend Less Rule: Set a spending limit at the grocery store and automatically save the difference between the set amount and what you typically spend.
• Freelancer Rule: For 1099 workers, you can set a percentage of all deposits of $100 or more to be transferred to Qapital’s FDIC-insured account for estimated taxes.
• 52 Week Rule: Save $1 in week one, $2 in week two, and so on, for a total of $1,378 over the course of a year.
• Apple Health: Set automatic transfers to savings each time you walk, bike or run.

Money saved can be invested in one of several portfolios using low-cost ETFs:

Qapital offers three plans ranging from $3 to $12 a month.

Qoins

Best for paying down debt

With Qoins, you create either a debt or savings goal. You can also create what Qoins calls a Bundle, with both a debt payoff and savings goal. With goals set, you pick how you want money transferred toward your goal. There are several options:

• Round-ups
• Weekly transfers
• Payday transfers
• Smart Savings

Smart Savings is a feature unique to Qoins. You set how aggressively you wan to save, and Qoins’ algorithm determines how much to put toward your goal. Unlike round-ups, Smart Savings doesn’t require you to link a debit or credit card.

Qoins offers two plans costing $2.99 or $4.99 a month.

Other Round-Up Apps

I continue to evaluate round-up apps and will update this article based on new research. Here are other apps I’m evaluating:

• Digit
• Empower
• MoneyLion
• N26
• Betterment
• Worthy Bonds
• Current

It’s worth noting that some banks offer round-up features. Bank of America is one example. The problem is that its interest rates on savings accounts are terrible.

Can Round-Ups Really Make a Difference?

In fact, one study found that saving even $100 had a profound effect on financial well-being. And with the power of compounding, even small amounts of money saved over time can grow into significant wealth. For example, investing just $50 a month over a working career can grow into more than $400,000 at a 10% return.

Of course, returns aren’t guaranteed and a working career can last 40 or 50 years. At the same time, $50 a month is not exactly a flood of money. It’s a start. Continue to increase your savings and your wealth will continue to compound over time. In the end, compounding will generate for more wealth than the amounts you actually save.

---

What to learn more about money and investing? Signup for me free weekly newsletter.

Series I Savings Bonds rates are set to rise to historic levels. The Labor Department released Consumer Price Index (CPI-U) data this week that showed prices rising by 5.4% for the 12 months ending September 2021 and 3.56% over the past six months. As a result, the Inflation Rate on I Bonds has risen to 3.56% (7.12% annualized) through April 2022. That represents the highest Inflation Rate on I Bonds since they were first introduced in 1998.

How I Bond Rates Are Set

Two factors determine the interest rate on an I bond: A Fixed Rate and an Inflation Rate. Combining these two rates gives us what is known as the Composite Rate.

Fixed Rate

The Fixed Rate is set based on the date of purchase. Today the Fixed Rate is 0%. The Fixed Rate was above 3% in the late 1990s and early 2000s. It’s been at 0% for much of the past decade.

The Treasury announces the Fixed Rate on I bonds every six months, on the first business day of March and November. The Fixed Rate is an annual rate that compounds every six months. Given the current yields on 10-Year TIPS (currently negative–see chart below), I think it’s unlikely that the Fixed Rate will move about 0% this year.

It’s important to understand that the Fixed Rate at the time of purchase applies for the duration of the bond (30 years).

Inflation Rate

Unlike the Fixed Rate, the Inflation Rate is set every six months. The rate is set based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy. As with the Fixed Rate, the Inflation Rate is set on the first business day in May and November.

Keep in mind that the date new rates apply to a specific I bond depends on the month in which you bought it. Here’s a table of when new rates will take effect:

Issue month of your bond	New rates take effect
January	January 1 and July 1
February	February 1 and August 1
March	March 1 and September 1
April	April 1 and October 1
May	May 1 and November 1
June	June 1 and December 1
July	July 1 and January 1
August	August 1 and February 1
September	September 1 and March 1
October	October 1 and April 1
November	November 1 and May 1
December	December 1 and June 1

Composite Rate

The Composite Rate is the annualized rate based on adding the Fixed Rate to the Inflation Rate. Through October 2021, the Composite Rate is 3.54%. Beginning in November 2021 for the following six months, the Composite Rate will jump to 7.12% thanks to rising inflation.

How I Bonds Work

There are several features of I bonds to keep in mind before investing.

First, you can only buy I bonds directly from the Treasury. They are not bought and sold on the secondary market. This means, among other things, that you won’t find I bonds in an ETF or mutual fund portfolio.

Second, the government imposes a limit on the amount of money that you can invest in I bonds each year. You can invest $10,000 a year per social security number through Treasury Direct. You can also purchase up to $5,000 through your federal tax refund.

Third, you must keep your investment in an I bond for at least one year. You can’t sell the bond back to the government during this time. If you sell before holding the bond for five years, you also lose three months of interest.

Finally, you can defer paying income tax on interest until you sell the bond. In addition, you’ll owe no state income tax.

When Should You Buy I Bonds

When you should buy I bonds turns on whether you plan to be a long-term or short-term investor.

Long-Term Investor

For long-term investors, I would buy at the end of October. As the chart above shows, you’ll earn the current Inflation Rate from October 2021 through March 2022. Beginning in April 2022, you’ll then earn the new rate of 7.12% for six months.

The key point is that for long-term investors, it’s likely that the Inflation Rate will fall below its current level at some point. As a result, it makes sense to take advantage of the current rate. Of course, there’s no guarantee, but it seems like a reasonable bet in my view.

Short-Term Investor

For investors who plan to sell after one year, I’d wait until November. I think it’s likely that the Inflation Rate in May 2022 will be higher than the current 3.56%. By waiting until November, investors will receive the 7.12% for six months, followed by the new rate set in May of next year. While it’s certainly possible that the Inflation Rate next year could fall below the current 3.56%, I view that as unlikely given the current trends in the CPI.

Keep in mind that if you sell after one year, you’ll lose 3 months of interest. Even so, the return will far exceed what savers can earn on a deposit account.

I Bonds vs CDs

Given the current and upcoming yields on I bonds, they are significantly better than even the best CD rates. That’s true even if one plans to sell the I bond after one year and incur the 3-month interest penalty. The key difference is that with I bonds, you cannot liquidate for the first year. With a CD, you can always withdraw your money, subject to an interest penalty.

I Bond Resources

• Treasury Direct: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm
• TIPS Watch: https://tipswatch.com/tracking-inflation-and-i-bonds/
• Deposit Accounts: https://www.depositaccounts.com/blog/inflation-treasury-series-i-savings-bonds/

Dividend investing has become an obsession. Books have been written about. YouTube channels have been dedicated to it. Some have an almost cult-like attachment to the Dividend Aristocrats.

Many investors flock to dividend ETFs because of their higher yields. In contrast, I like dividend ETFs for their lower valuation metrics. Given the high valuations in the S&P 500, an argument can be made to add a dividend ETF or mutual fund as a way to bring down the P/E ratio of a portfolio.

In that light, we’ll look at 5 excellent dividend ETFs to consider. We dive into each to understand how the portfolio is constructed and how each has performed over the past decade. We also look at three dividend ETFs we should avoid.

What is a Dividend ETF

Virtually all stock ETFs generate dividends. Even an S&P 500 index fund has a yield (about 1.2% for those keeping score at home). The payment of a dividend, by itself, does not qualify a fund as a dividend ETF. Rather, a dividend ETF is a fund that invests in companies that pay a higher than average dividend yield.

Such a broad definition leaves room for a wide variety of investment strategies. Some funds focus on companies with high yields, while others focus on companies that are growing their dividends at a high rate. Still other ETFs limit their portfolios to companies that have increased their dividends each year for a set number of years (typically 5 to 20).

While each of these funds are rightly described as dividend funds, they couldn’t be more different.

How to Compare Dividend ETFs

To compare one dividend ETF with another, here are the factors I consider:

Dividend Yield: As I’ve stated repeatedly on my YouTube channel, total return should be an investor’s north star. That said, in evaluating a dividend ETF, the yield is an important factor. Here I’m more concerned with yields that are too high than too low. I’ve yet to find a dividend fund with yields 3x or more the market’s average that have performed well over long periods of time.

Dividend Growth: Beyond yield, look at how quickly the companies in a fund grow their dividends. Such companies often offer the best combination of returns–a dividend along with excellent growth prospects.

Dividend Stability: A high yield doesn’t help an investor if the company paying it is on shaky ground. Here I want to understand what percentage of a companies profits go to paying the dividend (i.e., Payout Ratio). A red flag would be a company who is borrowing money to meet the dividend expected by investors.

Fundamental Factors: One of the benefits of a dividend ETF is that a value approach to investing. Many dividend ETFs have P/E and P/B ratios well below the market average.

Expense Ratio: As with any investment, we need to understand the costs. An expense ratio above about 15 basis points requires scrutiny.

5 Best Dividend ETFs

1. Schwab US Dividend Equity ETF (SCHD)

The Schwab U.S. Dividend Equity ETF (SCHD) easily takes the #1 spot on my list. It has a yield about 2x the market’s average. It requires companies to have 10 consecutive years of dividend payments to make the cut. And most importantly, it has relatively low valuations. It’s P/E ratio is about 19. While that’s still high based on historical standards, it’s well below the valuations of the S&P 500 (currently more than 30).

The fund tracks the Dow Jones U.S. Dividend 100 index. The index screens companies based on the following criteria:

• Minimum 10 consecutive years of dividend payments
• Minimum float-adjusted market capitalization of US $500 million
• Minimum three-month ADVT of US $2 million

What makes SCHD a winner, however, is the fundamental analysis used in stock selection. Factors include return on equity, free cash flow to debt and the five-year dividend growth rate. The result is a fund that has performed well over the years.

Tracking Index: Dow Jones U.S. Dividend 100 Index
TTM Yield: 2.82%
Dividend History: 10 consecutive years of dividends
Expense Ratio: 0.060%
AUM: $27.8 billion

2. Vanguard Dividend Appreciation ETF (VIG)

The Vanguard Dividend Appreciation ETF (VIG) tracks the S&P U.S. Dividend Growers Index. Unlike SCHD and the Dow Jones U.S. Dividend 100 Index, this index requires companies to have increased their dividend in each of the last 10 years. It then excludes the top 25% based on yield.

The result is a fund that’s closer to a blend fund than value. It valuation metrics are higher (it’s P/E ratio is about 25) and its dividend yield is lower. In addition, it has underperformed SCHD by about 1% over the past 10 years. Of course, who will win the next 10 years is anybody’s guess.

Still, it’s a sold choice for those who want a dividend focused ETF that slightly tilts toward growth.

Tracking Index: S&P U.S. Dividend Growers Index
TTM Yield: 1.48%
Dividend History: 10 consecutive years of dividend growth
Expense Ratio: 0.060%
AUM: $61.3 billion

3. Vanguard High Dividend Yield ETF (VYM)

The Vanguard High Dividend Yield ETF (VYM) tracks the FTSE High Dividend Yield Index. Good luck finding details on this index. The best I could find comes from Morningstar:

The fund tracks the FTSE High Dividend Yield Index, which captures the highest-yielding half of the universe of dividend-paying stocks in the large- to mid-cap U.S. equity market. The index starts with the FTSE USA Index and ranks its constituents by their projected 12-month yield. It then adds stocks by descending rank until 50% market-cap coverage of the universe of dividend payers is reached. As it aims for 50% market-cap coverage of this cohort, the fund tends to sweep in 400 to 450 stocks. Companies that have not paid dividends in the past 12 months or are not expected to pay one in the next 12 months are not eligible. REITs are also left out.

It’s noteworthy that the index doesn’t apply qualitative factors to its stock selection. Companies in the top 50% based on yield make the cut.

While the fund has trailed others on this list over the past decade, its portfolio could do well as we rotate from growth to value.

Tracking Index: FTSE High Dividend Yield Index
TTM Yield: 2.72%
Dividend History: 12 months
Expense Ratio: 0.060%
AUM: $38.0 billion

4. iShares Core Dividend Growth ETF

iShares Core Dividend Growth ETF (DGRO) tracks the Morningstar U.S. Dividend Growth Index. The index screens for companies that–

• pay qualified dividends
• have a minimum of five years of uninterrupted annual dividend growth.
• have a significant margin to continue growing dividends.

It excludes the top 10% of qualifying companies.

Tracking Index: Morningstar US Dividend Growth Index
TTM Yield: 2.00%
Dividend History: 5 years of uninterrupted dividend growth
Expense Ratio: 0.080%
AUM: $20.1 billion

5. SPDR S&P Dividend ETF

SPDR S&P Dividend ETF (SDY) tracks the S&P High Yield Dividend Aristocrats Index. While the Dividend Aristicrats include companies that have increased their dividends for the last 25 years, this index limits the screen to 20 years. With this adjustment, it adds about 50 companies to its portfolio.

SDY has been the worst performing ETF in our list over the past 10 years. Its dividend has also been inconsistent. It dropped significantly in 2016 and again in 2018. Keep in mind that companies get cut from the index if their dividend payments can’t keep up, while new companies join who meet the criteria. One does wonder, however, if the fund is poised for a turn around as interest rates rise.

Time will tell.

Tracking Index: S&P High Yield Dividend Aristocrats Index
TTM Yield: 2.60%
Dividend History: 20 consecutive year history of increasing dividends
Expense Ratio: 0.35%
AUM: $19.0 billion

3 Dividend ETFs to Avoid

Just because an ETF pays a high dividend doesn’t mean it’s a good investment. In fact, a yield significantly above the market’s average should serve as a warning to stay away. Here are three dividend ETFs I wouldn’t recommend.

1. SuperDividend ETF (SDIV)

The SuperDividend ETF (SDIV) invests in the 100 companies that pay the highest dividend yield. The result is a portfolio consisting of 30% U.S. companies and 70% international companies. While its current yield is above 7%, its annual returns over the past decade barely exceed 3%.

Beyond performance, the fund has a turnover ratio of more than 124% according to Stock Rover. This increases costs. And its standard deviation is near 30 according to Morningstar.

In short, to sacrifices total return for yield, has high turnover and is volatile, resulting in a very poor investment.

Tracking Index: Solactive Global SuperDividend Index
TTM Yield: 7.19%
Dividend History: Top 100 global dividend yield companies
Excluded: Companies excluded based on certain qualitative screens
Expense Ratio: 0.590%
AUM: $948.9 million

2. SuperDividend U.S. ETF

The SuperDividend® U.S. ETF (DIV) is the U.S. only version of the above fund. While its yield is lower, it still comes in above 5.5%. And like SDIV, its total returns were just about 3% over the past decade. Not only does the fund suffer from poor returns, its volatility is significantly higher than an S&P 500 fund.

As with SDIV, DIV has a turnover percentage of near 100% and a standard deviation of 28. In short, investors are paying 45 basis points for an underperforming fund that comes with more risk.

Tracking Index:  Indxx SuperDividend U.S. Low Volatility Index
TTM Yield: 5.61%
Dividend History: 12 month
Excluded: Dividend yields below 1% or above 20%
Expense Ratio: 0.450%
AUM: $655.8 million

3. Invesco High Yield Equity Dividend Achiever ETF

The Invesco High Yield Equity Dividend Achiever ETF (PEY) tracks the NASDAQ US Dividend Achievers 50 Index. The index in turn is comprised of the top 50 securities by dividend yield from the NASDAQ US Broad Dividend Achievers Index. The result is a focused fund that has significantly underperformed the S&P 500 while exposing investors to greater risk.

Tracking Index: NASDAQ US Dividend Achievers 50 Index
TTM Yield: 3.77%
Dividend History:
Expense Ratio: 0.520%
AUM: $936.7 million

Final Thoughts

Dividend investing can be a part of a reasonable investment plan. Dividend ETFs give investors exposure to value funds. Taken to extremes, however, a dividend focused investment strategy can result in lower total returns. As a result, care must be taken not to reach for yield, even in retirement.

Fidelity launched its ZERO index funds in 2018 to much fanfare. As their names suggest, these funds carry no expense ratios, a first in the industry.

As great as a “free” mutual fund may sound, however, many wonder whether there is a catch. Recently a subscribe to my YouTube channel asked the following questions:

Could you please share your thoughts on Fidelity ZERO funds vs their fee based funds?Fidelity ZERO International Index Fund (FZILX)Fidelity ZERO Total Market Index Fund (FZROX)Fidelity ZERO Large Cap Index Fund (FNILX)Fidelity ZERO Extended Market Index Fund (FZIPX)

Is FNILX + FZIPX = FZROX ?

ZERO funds have no fees, but other than cost, do you see any reason why one should invest in fee based instead of zero funds?

If you could please create video and share your thoughts, that would be very helpful.

Let’s dive into the details to get a better understanding of the Fidelity ZERO funds.

4 Fidelity Zero Funds

The ZERO funds consist of four index funds. These funds charge no fees in the form of an Expense Ratio, although they do pass on transaction costs to investors. There are also no minimum investment requirements.

The catch, if you want to call it that, is that the funds track proprietary indexes Fidelity created. That means, for example, that the Fidelity ZERO Large Cap index fund does NOT track the S&P 500, as one might expect.

Here are the details on each fund’s tracking index. (Note that Fidelity does not offer a ZERO fund for bonds.)

Fidelity ZERO Large Cap Index Fund (FNILX)

The Fidelity ZERO Large Cap Index Fund tracks the Fidelity U.S. Large Cap Index. The index is a float-adjusted market capitalization-weighted index. That simply means it tracks companies based on the number and value of shares outstanding in the market. Its focus is on the U.S. large capitalization equity market.

The index tracks the top 500 companies. It can, however, have fewer companies based on liquidity and investing screens that Fidelity uses. For example, the index (and the other two U.S. indexes discussed below) exclude companies with capitalizations under $75 million or with limited trading volume.

It can also have more than 500 stocks if some companies have multiple share classes. Fidelity rebalances the index annually on the third Friday in February (so mark your calendars!).

The index is similar to the S&P 500 index, but there are some differences, as we’ll see below.

Fidelity ZERO Extended Market Index Fund (FZIPX)

The Fidelity ZERO Extended Market Index Fund (FZIPX) tracks the Fidelity U.S. Extended Investable Market Index. Its designed to track U.S. mid- and small-cap stocks. It is a subset of the Fidelity U.S. Total Investable Market Index (see below), excluding the 500 largest companies.

Perhaps the closest comparison of this index is the the Dow Jones U.S. Completion Total Stock Market Index. The primary difference is that the Fidelity index is limited to 2,500 companies, whereas the Dow Jones index has just under 3,500 companies.

Fidelity ZERO Total Market Index Fund (FZROX)

The Fidelity ZERO Total Market Index Fund (FZROX) tracks the Fidelity U.S. Total Investable Market Index. This index is effectively a combination of the Large Cap and Extended Market indexes described above. As such, it is limited to 3,000 companies.

Its closest comparison is the Dow Jones U.S. Total Stock Market Index. It’s not an exact match, however, as the Down Jones index tracks nearly 4,000 companies.

Fidelity ZERO International Index Fund (FZILX)

Finally, the Fidelity ZERO International Index Fund (FZILX) tracks the Fidelity Global ex. U.S. Index. Fidelity designed this index to track mid- and large-cap companies headquartered outside the U.S. The index is created by selecting the top 90% of stocks as measured by market cap in each country.

This index is similar to the MSCI ACWI Ex USA Index. This index, however, holds about 4,700 companies, while the free version holds about 2,300 companies.

How Fidelity ZERO Funds Compare

While free funds offer an initial appeal, one wonders if investors are getting what they paid for. Are the Fidelity indexes used by the ZERO funds generating the same or better returns as the more widely used indexes? This is particularly important given that other Fidelity index funds, while they charge a fee, are still very close to $0 in cost (generally 6 basis points or less).

To getting a better understanding, I compared each of Fidelity’s ZERO funds with a close counterpart offered by Fidelity.

FNILX vs FXAIX

Fidelity’s Large Cap ZERO fund is arguably the closest to its most comparable index, the S&P 500. A comparison of the fund to Fidelity’s S&P 500 index fund (FXAIX) in Morningstar shows very similar style boxes and the same top 10 holdings. The notable difference is in the percentage held of each of the top 10 companies (the ZERO fund is on the left in each snapshot).

Performance data on the ZERO funds is limited as the funds were launched in 2018. Nevertheless, since then the ZERO Large Cap fund has outperformed Fidelity’s S&P 500 index fund by substantially more than its 1.5 basis point fee:

Whether the ZERO fund will continue to outperform the S&P 500 index only time can tell. As you’ll see below, however, the other ZERO funds have performed as well.

https://fundresearch.fidelity.com/mutual-funds/summary/315911750 (FXAIX)

FZIPX vs FSMAX

Fidelity’s Extended Market Index fund (FSMAX) tracks the Dow Jones U.S. Completion Total Stock Market index. Think of it as everything except the companies in the S&P 500. As such, it covers about 1,000 more companies the Fidelity’s proprietary completion index used for the ZERO extended fund. Its cost is just 3.5 basis points.

In the short time FZIPX as been available, it has significantly underperformed FSMAX even with the same volatility. Here are the comparisons:

FZROX vs FSKAX

Fidelity’s Total Market Index fund (FSKAX) is the closest comparable to its ZERO Total Market fund. FSKAX charges just 1.5 basis points and gives investors exposure to over 3,700 stocks. The ZERO fund, in contrast, holds about 2,600 equity holdings.

While returns thus far have been nearly identical, FSKAX has managed to edge out the ZERO fund by 2 basis points. The comparable performance is likely driven by the similar returns amongst the larges U.S. companies in these cap-weighted funds.

https://fundresearch.fidelity.com/mutual-funds/summary/315911693 (FSKAX)

FZILX vs FTIHX

Fidelity’s Total International Index (FTIHX) charges 6 basis points and tracks the MSCI ACWI ex USA Investable Market index. The style box for this and the ZERO International Index are nearly identical. The free fund, however, hold just under 2,400 stocks while FTIHX holds over 4,700 stocks. And FTIHX has edged out the ZERO fund in performance thus far.

Final Thoughts

The cost of most index funds have fallen dramatically over the last few decades. Today one can invest in an index fund for 10 basis points or less. In many cases, a fund costs less than 5 basis points. For that reason, Fidelity ZERO funds seem more like a marketing strategy than a product that meets investors’ needs.

Certainly free beats even a very small cost. The problem is that fidelity achieves a 0% Expense Ratio by tracking its own proprietary indexes. I’m not sure that’s worth saving a few basis points each year. And thus far, with perhaps the exception of the Large Cap ZERO fund, these funds have trailed their Fidelity counterparts by more that the cost savings.

That said, I would have no reservations investing in one of these funds in a 401k if it were my best option.

Resources

• https://www.fidelity.com/mutual-funds/investing-ideas/index-funds
• https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/mutual-funds/Fidelity_mkt_cap_weighted_methodology.pdf