FXAIX vs. VOO: Which Tracking Fund Is Better?

Let’s compare FXAIX and VOO, two popular investments that track the S&P 500. Is there really a difference, and which is better?

FXAIX and VOO are two popular funds that track the performance of the S&P 500. At first glance, there may be no discernable differences, but there’s much more than what’s on the surface.

Quick Comparison

What is FXAIX?

FXAIX is a mutual fund offered by Fidelity Investments. This fund aims to track the performance of the S&P 500, a market-cap-weighted index of the 500 largest publicly traded companies in the U.S.

Since its inception in May 2011, FXAIX has grown to become one of the largest publicly traded mutual funds, boasting approximately $400 billion in assets under management as of this writing.

Unlike stocks and exchange-traded funds, FXAIX is structured as a mutual fund, which means it does not actively trade on the stock market throughout the day. Mutual funds are also priced and traded only once daily after the market closes.

While Fidelity Investments offers the fund, FXAIX’s day-to-day portfolio management responsibilities are outsourced to a reputable 3rd party sub-advisor – Geode Capital Management.

Read more about FXAIX.

What is VOO?

VOO is a popular exchange-traded fund (ETF) marketed and managed by investment management giant The Vanguard Group.

VOO aims to track the performance of the S&P 500, a market-cap-weighted basket of the 500 largest publicly traded stocks.

VOO does not use rigid index-based rules to determine its composition, leading to unnecessary expenses for investors. Instead, the fund uses a committee-based approach based on liquidity and profitability standards.

According to Morningstar, the fund is managed in-house by Donald Butler and Michelle Louie Butler at Vanguard. The duo collectively has over 40 years of experience at Vanguard, thus highlighting the fund’s experience and tenure.

Because VOO is structured as an ETF, investors can trade the fund throughout the day, like any other stock.

In addition, there is an active options market for this ETF that can help you with hedging, directional views, and income generation. As of this writing, approximately 4 million shares are traded daily with a bid/ask spread of 0.24%.

Since its inception in 2010, according to Morningstar, VOO has grown to approximately $322 billion in assets under management and is slated to manage about 50% of the Open-Ended and exchange-traded funds by 2035.

You might also like: Ultimate Guide to Investing in Index Funds.

FXAIX vs. VOO: Investment Type

The most significant difference between FXAIX and VOO is how each investment is structured.

VOO is an Exchange Traded Fund (ETF), which is a basket of securities that trades throughout the day, just like a stock would.

Meanwhile, FXAIX is a mutual fund and is considered a pooled investment vehicle.

The key difference between mutual funds and ETFs is that mutual funds are priced just once daily after the market closes, and its closing price is known as its Net Asset Value (NAV), which is total assets minus total liabilities.

Most mutual funds tend to be actively managed, whereas exchange-traded funds tend to be passively managed.

However, FXAIX and VOO are considered passive funds as they both aim to replicate the performance of the S&P 500.

FXAIX vs. VOO: Portfolio Composition

FXAIX and VOO are both designed to track the performance of the S&P 500, which is a basket of the 500 largest publicly traded companies by market cap.

Both funds have historically engaged in securities lending activity to generate income and reduce fees for their respective funds. In addition, both funds reinvest dividends as they are paid and use derivatives to equitize cash to keep pace with the benchmark. 

FXAIX vs. VOO: Fees

While Mutual Funds are notoriously known to have higher fees than exchange-traded funds, it’s not the case with these two funds.

VOO and FXAIX are low-cost investment options, with Vanguard drawing an annual expense ratio of 0.03% and FXAIX 1bp lower at 0.02%.

While FXAIX has a lower fee at 1bp, the difference is de minimus.

Neither fund charges any sales or ongoing fees, commonly found with mutual funds, as they charge load fees, commonly known as 12b-1 fees.

However, I noticed on the bottom of Fidelity’s website that while there are no transaction fees for FXAIX, I saw a footnote that highlighted the fund may charge a short-term trading fee or redemption fee.

I checked the prospectus and scoured Fidelity’s site but couldn’t find any further details, so I am unclear what that refers to.

FXAIX vs. VOO: Performance

Dividends

As of this writing, FXAIX and VOO pay quarterly dividends to investors. Over the past few years, FXAIX’s average dividend yield of 1.58% has slightly edged out VOO’s dividend yield of 1.57%. Again, 1 basis difference in dividend yield isn’t meaningful for most investors.

The Dividend Yield is calculated as:

Dividend yield = annual dividend per share / current share price

Returns

Over the past 10 years, VOO has had a total return of 11.86%, while FXAIX has returned 11.90%. A .04% difference in returns is not meaningful and shouldn’t sway your decision in picking one option over the other.

Interestingly, you can see that at the 3-year point, VOO returned .01% more than FXAIX, further highlighting the unimportance of this metric when comparing these two options.

Note: If one fund dramatically outperformed the other while they are both attempting to replicate the same index, one would see massive asset outflows and the other massive asset inflows.

FXAIX vs. VOO: Tracking Error

According to the Investment Analysis website Seeking Alpha, VOO’s tracking error is very low. Over the past 5 years, its tracking error has not exceeded 0.02%, while FXAIX’s has been even lower at essentially zero.

I could not find FXAIX’s tracking error published online, so I did a back-of-the-envelope calculation: Expense Ratio + Fund Return = +/- the amount is the tracking error. Thanks to Morningstar for the calculation tip.

Tracking error is simply the volatility in the difference in performance between a fund and its index.

FXAIX vs. VOO: Management

Some people don’t know this, but some mutual funds and ETFs are externally managed by a 3rd party. A fund may outsource the day-to-day management for several reasons, including headcount resources and internal company prioritization.

So, while Fidelity brands FXAIX, the portfolio management responsibilities are handled by a respected third-party advisor called GEOD Capital.

Geod was founded in 2001 and is headquartered in Boston, Massachusetts.

Meanwhile, Vanguard’s VOO is managed in-house by its Equity Index Group.

Whether the fund is managed in-house or externally is irrelevant for most investors.

But as Morningstar Investor points out, because VOO is managed in-house, it enables the portfolio managers to have access to Vanguard’s global trading desk, thus allowing them to make cost-efficient transactions and enabling investors to benefit from lower transaction fees.

FXAIX vs. VOO: Options Trading

Because VOO is structured as an exchange-traded fund, there is an active options market, making it a big plus for options-focused investors.

So, if you’re interested in options trading strategies like selling covered calls for income, VOO is a better option.

Meanwhile, there is no way to sell call, put, or other options with FXAIX.

FXAIX vs. VOO: Tax Treatment

As noted on the Vanguard website, 100% of VOO dividends are considered qualified dividends.

According to the accounting company ACap Advisors, taxes on qualified dividends are more favorable, currently at 0%, 15%, and 20%. Meanwhile, a non-qualified dividend is taxed at the less favorable ordinary income tax rate, which is currently as high as 37%.

Interestingly, according to Dividend.com, FXAIX dividends are treated as ordinary dividends, meaning dividends are taxed at your current income tax rate – this can be considered less ideal for many investors.

According to the Motley Fool, unless you are a single taxpayer who makes less than $44,625, you will pay a higher tax rate on FXAIX than on VOO, highlighting VOO’s advantageous tax treatment.

Which Is Better?

Given the ability to actively trade VOO, dividends distributed as a qualified dividend, and an active options market, makes VOO hands down a better option than FXAIX.

That said, I am personally a VOO holder and sell covered calls to generate income during a sideways market, making it a way better option, in my opinion.