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How Our Fidelity Tax-Efficient Retirement Saver Portfolios Have Performed

With hefty weightings in low-cost equity ETFs, these portfolios have notched strong gains.

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Note: Christine Benz's Portfolio Makeover Week is coming this fall. To learn more about having your portfolio considered for a makeover, click here.

All of my model portfolios are designed to be low-turnover; my aim is to make changes only when there's been a significant fundamental development at one of the holdings.

That's especially true with my tax-efficient portfolios, because too-frequent trading has the potential to jack up tax costs, particularly in the kind of rising market we've experienced over the past decade.

Thus, despite Fidelity's recent launch of two new zero-cost index funds that are rivals to existing holdings in the tax-efficient portfolios, my review of my Fidelity Tax-Efficient Retirement Saver Portfolios didn't result in any changes. Even though lowering a portfolio's costs is always a worthy goal, chasing the lowest-cost products has the potential to trigger capital gains if the account is taxable and the holdings had appreciated since purchase. 

Yet even though I didn't make any changes to the Tax-Efficient portfolios, the fact that they've now been around for three years makes it a good time to review their performance.

Thanks to terrific gains from total U.S. stock market trackers like  Fidelity Total Market Index (FSTVX) well as the fact that the taxable portfolios contain slightly more equity exposure than the tax-deferred portfolios, the tax-efficient portfolios all gained more than the analogous tax-deferred Fidelity Retirement Saver portfolios. The tax-efficient portfolios also limited the drag of taxes, albeit not to the same extent that some of my other tax-efficient portfolios did. Even the least tax-efficient of the three portfolios ceded 75 basis points or less to taxes on an annualized basis over the past three years. (The tax-cost ratio assumes that an investor pays the highest tax rates for income and capital gains; your own situation may vary.)

Using the Portfolios
The Tax-Efficient Retirement Saver portfolios are designed for retirement savers who are holding assets in taxable accounts--in other words, accounts other than IRAs, 401(k)s, and other tax-sheltered wrappers. Because limiting the drag of taxes is a key goal, they're populated with index funds to provide equity exposure and municipal bond funds for their fixed-income exposure. (Only the Conservative portfolio has a meaningful weighting in bonds.) I skipped tax-inefficient categories like Treasury Inflation-Protected Securities for these portfolios.

I used Morningstar's Lifetime Allocation Indexes to guide the asset-class exposures for these portfolios, and relied on Morningstar Medalist ratings and input from our analyst team to guide the holdings. As with all of the portfolios, investors should use their proximity to retirement to help determine which portfolio is the best fit for them, while also taking into consideration their risk tolerance and the presence of other income sources they'll be able to rely on during retirement. A 50-something who's not flustered by volatility and will be able to on a pension for much of his living expenses in retirement needn't reflexively use the Conservative portfolio, for example. And while younger accumulators should aim to hold as much in equities as they can tolerate, they shouldn't hold an all-equity portfolio if they have near-term spending goals (a new home purchase) or if there's a risk they could dump stocks in a market sell-off.

Aggressive Tax-Efficient Fidelity Retirement Saver Portfolio 
60%: Fidelity Total Market Index (FSTVX)
30%: Fidelity Global ex-US Index (FSGDX)  
10%: Fidelity Intermediate Municipal Income (FLTMX)

Performance
3-Year Annualized Return: 12.54%
3-Year Tax-Cost Ratio (Portfolio): 0.75%

The Aggressive Tax-Efficient Fidelity Retirement Saver Portfolio as it stands today returned nearly 13% on an annualized basis over the past three years. Its biggest gains came from Fidelity Total Market Index, which returned more than 16% on an annualized basis over the trailing three-year period. Like all index products that are weighted by stocks' market value, the ETF has sizable positions in some of the best-performing stocks in the U.S. market, including  Amazon (AMZN),  Apple (AAPL), and  Microsoft (MSFT). Those heavy weightings have the potential to work against it and other similarly positioned index funds in a market sell-off led by technology-related names.

This portfolio's tax efficiency was the worst of the three portfolios, in part because it has the highest stake in equities, which generate dividends and also delivered the highest returns over the past three years. (It's a fact of life that the higher your returns, the more taxes you're likely to owe.) Investors seeking an even better defense against taxes might consider a total market exchange-traded fund, as equity ETFs will tend to have lower tax-cost ratios than plain-vanilla index mutual funds.

Changes
None. While Fidelity made a splash with its launch of two zero-cost index funds in August 2018, Fidelity Total Market Index charges 0.02% and Fidelity Global ex-US Index charges 0.06%. Swapping into the new funds would entail selling out of those positions and realizing capital gains, so I decided to stand pat with the existing holdings.

Moderate Retirement Saver Portfolio for Fidelity Investors
55%: Fidelity Total Market Index
25%: Fidelity Global ex-US Index
20%: Fidelity Intermediate Municipal Income

Performance
3-Year Annualized Return: 11.51%
3-Year Tax-Cost Ratio (Portfolio): 0.68%

With an 80% equity position, the bulk of it in Fidelity Total Market Index, this portfolio's performance nearly kept pace with that of its Aggressive counterpart. Fidelity Intermediate Municipal Income posted muted gains over the trailing three-year period, like most high-quality bond funds. Fidelity's muni team has experienced some management changes recently, as discussed here, but Morningstar's analysts remain comfortable with the team in charge and its rating remained Gold.

Changes
None.

Conservative Retirement Saver Portfolio for Fidelity Investors
15%:   Fidelity Limited Term Municipal Income (FSTFX)
20%: Fidelity Intermediate Municipal Income
15%: Fidelity Global ex-US Index
50%: Fidelity Total Market Index

Performance
3-Year Annualized Return: 9.86%
3-Year Tax-Cost Ratio (Portfolio): 0.57%

With just 65% of its assets in equities, this portfolio's returns were meaningfully below those of its Aggressive and Moderate counterparts. It was the most tax-efficient of the three portfolios, however, as its bond holdings' tax-cost ratios were at or near 0%.

Changes
None. 

Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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