Fidelity Total Market Index Fund (FSKAX) Review

There are over 10,000 mutual funds available for purchase at Fidelity. Of these, one of the mutual funds I invest in is the Fidelity Total Market Index Fund. Why? Let’s take a look.

Benefits of Index Funds

The biggest benefit of holding an index fund like FSKAX is its low fees. The average actively managed large-cap mutual fund charges over 1% in fees annually, and as a group, they have been unable to beat the market.

Another benefit of FSKAX is its diversification. It invests in the entire stock market, consisting of large-cap, mid-cap, and small-cap stocks. It invests in the stock market in accordance to its market capitalization. That means that more of the portfolio is allocated to mega-cap companies like Amazon or Walmart, and less of the portfolio is allocated to small-cap stocks. While there are more micro-cap stocks than mega-cap stocks, the bulk of the mutual fund (and the market capitalization of the stock market) is in these mega-cap stocks.

An additional benefits of FSKAX is its simplicity. You can get exposure to the entire U.S. stock market with a single index fund. It forms the backbone of an index fund portfolio that usually also includes a U.S. bond index fund and an international stock fund.

FXAIX vs. FSKAX

Many investors ask whether it is sufficient to invest in an S&P 500 fund such as FXAIX. All other things being equal, I would prefer to invest in the total stock market, because of its exposure to the entire stock market, including small-cap and mid-cap stocks. However, FXAIX or another S&P 500 index fund is a good option if your 401(k) or other retirement account does not offer a total stock market alternative.

FSKAX Holdings

FSKAX, being an index fund, replicates the Dow Jones U.S. Total Stock Market Index, its underlying index. It owns 3,390 stocks within its mutual fund in its effort to replicate the return of the Total Stock Market Index.

The asset allocation of FSKAX between large-cap, mid-cap, and small-cap stocks matches that of its underlying index. Therefore, it allocates approximately 73% to large-cap stocks, 18% to mid-cap stocks, and 9% to small-cap stocks. It allocates more money to large-cap stocks because large companies compose the majority of the money that is invested in the stock market. It is evenly distributed between value and growth stocks.

The fund manages $56.9 billion in assets, making it the second-largest total stock market index fund, behind VTSAX.

Historical Returns of FSKAX

Fidelity’s site lists 10 years of individual year data, along with a chart of how a hypothetical $10,000 would have grown. From 2008-2017, the fund has risen 8.64% annually, and from 1997-2017, the fund has risen 7.55%.

To illustrate the returns and volatility of a total stock market fund like FSKAX, we plot the graph of the returns of the U.S. Total Stock Market, which FSKAX aims to match. Using data from Portfolio Visualizer, we have data from 1972-2017:

Because a linear scale on the vertical axis can accentuate the more recent moves in the stock market, let’s use the same plot using a logarithmic scale:

Of course, past market returns are no predictor of future performance, and the stock market is not without significant volatility. But the historical returns of the U.S. stock market make me put the bulk of my money in the U.S. stock market.

Morningstar lists FSKAX in the large-cap blend category, and it has beaten the average large-cap fund by over a percentage point over a 3-year, 5-year, or 10-year time frame. This is likely because of FSKAX’s significantly lower fees than the average actively-managed mutual fund.

Tax Efficiency

The turnover ratio for the Fidelity Total Market Index Fund is very low at only 2%. Turnover ratio represents the amount of stock that is bought and sold in a given year. Because this is an index fund that only needs to buy and sell shares as stocks are added or removed from the index or when investors put money in and out of the fund, the turnover ratio is quite low. An actively managed mutual fund such as Fidelity Magellan might have a turnover ratio of around 50%.

The reason why this is a big deal is that whenever you buy or sell a stock, it is a taxable event. Mutual funds are required to distribute their capital gains to their shareholders. By reducing the turnover ratio, the Fidelity Total Market Index fund reduces the amount of money that is distributed in taxes.

However, one of the weaknesses of the Fidelity Total Market Index Fund is its mutual fund structure. It has to distribute its capital gains taxes to shareholders. Therefore, it is more tax-inefficient than an ETF, so your returns are slightly eroded.

Morningstar has a nice feature where you can see both the historical pre-tax and post-tax returns of a mutual fund or ETF. The numbers aren’t perfect, because everyone’s tax situation is a little bit different and Morningstar assumes that the investor is in the highest tax bracket when calculating the after-tax returns. However, for FSKAX, we see that the 10-year pre-tax return is 10.71%, while the 10-year post-tax return is 9.86%. You can potentially lose up to 0.85% in return because of taxes.

Any investment in a taxable account is expected to lose some of its return to taxes, but if you use the same tool to assess the difference between the 10-year pre-tax and post-tax returns for a total stock market ETF such as ITOT, it is only 0.47%. While this difference is relatively small and would be less for the typical investor, every little bit helps, and the mutual fund and ETF versions of a share are hoping to track the same index.

Therefore, I personally hold FSKAX in my tax-advantaged accounts such as my Roth IRA, while I hold ITOT in my taxable account.

Conclusion: Should You Invest In FSKAX?

Fidelity Total Market Index Fund (FSKAX) is a great investment for your 401(k) or Roth IRA. If you invest your IRA with Fidelity, FSKAX is a great option to get exposure to the broad U.S. stock market.

However, in taxable accounts, I would prefer an ETF version of the total stock market index in taxable accounts (such as ITOT, which is commission-free at Fidelity) because of its relative tax efficiency.

What do you think? Do you own FSKAX in your portfolio?