Fidelity Zero or ETF's for Taxable account

[A-Aron1]

Howdy Folks,
Quick question: Outside of my retirement accounts I'm sitting on mostly cash. I'm looking at buying some mutual funds or ETF's in my taxable fidelity account. I'm thinking Fidelitys Zero cost index funds. I've been reading that ETFs are more tax efficient in taxable accounts. I'm planning on buying and holding...is an ETF that much more tax efficient that I should use it over the Fidelity Zero funds? I had pretty much settled on FZROX and FZILX. Now second guessing myself. What do y'all think, am I good to go ahead with these or should I look at ETF's? As always, I appreciate your advice!!!

[disneysteve]

ETFs are more tax-efficient because they don't have to pay out capital gains every year like mutual funds do. I have a bunch of money in taxable mutual funds accumulated over the years, before ETFs were a thing, and I get hit with 15-20K in taxable gains every year. If I was starting over today, I'd go with ETFs for sure.

One possible downside with ETFs just so you know is that you can't buy fractional shares. So if your plan is to put $100/month into the account, with a mutual fund you can invest it all and get partial funds. With an ETF, you can only buy a whole number of shares and any excess would sit in your settlement account.

[A-Aron1]

Thank you DS for the info. I guess ITOT and IXUS are similar funds but ETF’s. I’m guessing I’d be able to buy them through Fidelity? I’ll look more into it.

[Scallywag]

ETFs are more tax-efficient because they don't have to pay out capital gains every year like mutual funds do. I have a bunch of money in taxable mutual funds accumulated over the years, before ETFs were a thing, and I get hit with 15-20K in taxable gains every year. If I was starting over today, I'd go with ETFs for sure.

Steve, can you explain more about capital gains? Do mutual funds pay out their capital gains as dividends or is there a capital appreciation payout over & above dividends? Thanks.

[Jluke]

Dividends
long term capital gains (LTCG)
short term capital gains (STCG)

those are what I see from the mutual funds I own (fidelity and vanguard funds) in my retirement accounts.

I use VTI (vanguard Total US) for taxable investing. That gives me ordinary dividends which a portion are considered qualified dividends.