The best Fidelity index funds for your portfolio

While Vanguard pioneered the low-cost, index funds approach to investing, companies such as Fidelity have largely caught up to the offerings of Vanguard and now enable investors to easily build quality portfolios using the best Fidelity index funds. These Fidelity index funds have low fees and provide baskets of diversified holdings within. Portfolios that utilize the best Fidelity index funds can outperform a majority of active investment managers without any of the fees. Simply put, the Fidelity index funds have a lot to offer individual investors.

Why are index funds attractive? There are several reasons. First, index funds such as those from Fidelity provide out-of-the-box diversification. Index funds typically mirror a market index or benchmark (e.g. the S&P 500 index). Rather than attempt to build a diversified group of individual stocks in your portfolio, you can achieve excellent diversification simply by buying and holding an index fund. Investors can typically achieve lower risk by having a diversified portfolio as you reduce your reliance on single stocks and individual company performance.

While Fidelity has a long history of being an investor-friendly company, Fidelity has raised the bar in recent years to compete head-on with companies like Schwab and Vanguard. Probably nothing is more indicative of this renewed competition than Fidelity’s suite of ZERO index funds which have 0% expense ratio. These funds include things like the Fidelity ZERO Large Cap Index Fund (FNILX), the Fidelity ZERO Extended Market Index Fund (FZIPX) and the Fidelity ZERO Total Market Index Fund (FZROX). Never before in the history of investing have investors had so many great options at such a low (or no) cost. These ZERO index funds are surely worth your consideration as you browse the best Fidelity index funds.

Fidelity is considered one of the big three in passive investing in such funds along with Schwab and Vanguard. Any one of these three are good options to consider.

What is index investing?

Index investing refers to mutual funds or ETFs that contain a portfolio of individual positions or securities that track a particular index. Index investing offers investors a super simple yet effective way to gain exposure to investment returns that are quite correlated to the economy or stock market. Since the index itself is not an investable asset, you have to invest in an “index fund” in order to invest in the index. Then the index fund simply tracks the index itself.

Since index funds only change positions when the index it follows change positions, it is not active management. Since it is not active, the fees are typically lower on an index fund as compared to an actively managed fund. In the case of Fidelity, the funds can be zero or near zero.

How are index funds and active funds different?

When you buy an index fund or an actively managed fund, it works the same in terms of buying shares of the fund. When you acquire shares of the fund, you’re basically owning the internal components that make up the fund. How do index funds and actively managed funds differ? The difference mostly comes into focus with how it is decided what individual positions should be inside the fund and when these positions should change.

An index fund follows an index. For example, a Nasdaq 100 index fund owns the companies that makes up the Nasdaq 100. These index funds are usually market-cap weighted index (as opposed to equal weighted, though these kinds of funds exist, too) funds similar to how the S&P 500 index is market-cap weighted.

What does it mean to be market-cap weighted? Let’s consider the S&P 500 and an index fund that tracks the S&P 500. Apple (AAPL) might make up 5% of the S&P 500 while a company like Target (TGT) might make up 1% of the index. If you own the index fund, you would have a similar split in terms of 5% of the money you have invested in the fund would be allocated to Apple shares and 1% of the money invested in Target shares.

What about when positions change? When companies are removed or added to the index, the fund will replicate the same changes. The manager of the fund does not make his or her own decisions on when to add or remove positions. The manager simply follows the index.

Active funds different. These funds do not follow an index. Instead, the investor is relying on the skill and expertise of the fund manager. It is normal for these funds to have a published strategy that will indicate to the investor what kind of investments the fund will typically hold. These actively managed funds usually have higher fees than index funds since the manager is doing much more work.

History has shown that active funds rarely outperform passive, index funds. As such, many in the field recommend investors just stick to passive, index funds like the ones Fidelity has to offer.

How are index mutual funds and index ETFs different?

In terms of performance, if a mutual fund and an ETF both track the same index, the performance should be equal or very close to it. The differences between a mutual fund and ETF come more in some of the structure and how the fund operates.

Mutual funds often have some sort of investment minimum, but again it depends on the provider. ETFs do not have minimums.

Mutual funds are also typically less liquid than an ETF. ETFs will trade on the open market very similar to how you might buy and sell shares of a company like Apple. You can trade shares of an ETF throughout the day when the stock market is open. Mutual funds, however, are traded just once per day. If you place an order for shares of a mutual fund, you won’t see that order be fulfilled until the end of the day.

Is there ever a reason to invest in a mutual fund instead of the ETF? Well, one advantage is that some providers will let you do auto-investing with mutual funds where you cannot do it with ETFs. This means you could set it up to invest a set amount of money every week in the same mutual fund. It’s a great tool for automating your investing.

Best Fidelity Index Funds

Best Fidelity Index Funds: Domestic Stocks

Fidelity 500 Index Fund (FXAIX): The Fidelity 500 Index Fund does not officially track the S&P 500, but it mimics the performance pretty closely. Officially, the fund attempts to replicate the performance of the common US stocks with at least 80% of the funds assets in companies within the S&P 500. The expense ratio is .015%.

Fidelity Total Market Index Fund (FSKAX): This mutual fund follows a broader benchmark than simply the S&P 500 in US stocks. Instead the fund seeks to generate returns that match the total return of a broad range of US based stocks. The expense ratio is .015%

Fidelity Large Cap Growth Index Fund (FSPGX): This mutual fund attempts to track the Russell 1000 Growth Index which is a market weighted index that measures the performance of the large-cap growth segment of the US equity market. The expense ratio is .035%.

Fidelity Large Cap Value Index Fund (FLCOX): This mutual fund attempts to match the performance of the Russell 1000 Value Index which is a market weighted index that measures the performance of the large-cap value segment of the US equity market. The expense ratio is .035%.

Best Fidelity Index Funds: International Stocks

Fidelity International Index Fund (FSPSX): This mutual fund seeks investment returns that match the total return of foreign stock markets. Specifically, the fund invests at least 80% of its assets in stocks that are in the Morgan Stanley Capital International Europe, Australiasia, Far East Index. The expense ratio is .035%.

Fidelity Emerging Markets Index Fund (FPADX): This fund seeks returns that match the total return of emerging stock markets. Specifically, it invests at least 80% of its assets in securities included in the MSCI Emerging Markets Index. The expense ratio is .076%.

Best Fidelity Index Funds: Bonds / Fixed Income

Fidelity US Bond Index Fund (FXNAX): This mutual fund tracks the performance of the Bloomberg Barclays US Aggregate Bond Index. The expense ratio is .025%.

Fidelity Long-Term Treasury Bd Index Fund (FNBGX): This mutual fund tracks the Bloomberg Barclays US Long Treasury Index. The expense ratio is .03%.

Best ZERO Fidelity Funds

Since the ZERO funds are a major promotion of Fidelity in the last year, it’s worth mentioning and listing some of the popular ZERO funds. As a reminder, the ZERO funds are mutual funds with 0% expense ratios. Pretty cool!

Fidelity ZERO Large Cap Index Fund (FNILX): Similar to the Fidelity 500 Index Fund (FXAIX) above, but with zero fees.

Fidelity ZERO Total Market Index Fund (FZROX): Similar to the Fidelity Total Market Index Fund (FSKAX) above, but with zero fees.

Fidelity ZERO Extended Market Index Fund (FZIPX): This fund is a way to gain exposure to small and mid cap companies in the US. Of course, it has zero fees.

Fidelity ZERO International Index Fund (FZILX): Similar to the Fidelity International Index Fund above, but with zero fees.

Where are the low-cost Fidelity index ETFs?

Interestingly, if you’re researching the best Fidelity index funds, you might not find the simple ETFs such as Large Cap, Large Cap Growth, Large Cap Value, etc. The reason for this is that Fidelity partners with iShares for these types of ETFs. Not only are the iShares ETFs very inexpensive, but Fidelity waives commissions on them as well.

Here are some of the iShares index ETFs worth considering that you can trade commission-free on Fidelity.

iShares Core S&P 500 ETF (IVV) – Index ETF that tracks the S&P 500. Expense ratio is .03%.

iShares Russell 1000 Growth ETF (IWF) – Index ETF that tracks the growth companies in the Russell 1000. Expense ratio is .19%.

iShares Russell 1000 Value ETF (IJR) – Index ETF that tracks the value companies in the Russell 1000. Expense ratio is .19%.

iShares Core MSCI EAFE ETF (IEFA) – Index ETF that provides investors international equity exposure. Expense ratio is .07%.

iShares MSCI Emerging Markets ETF (IJR) – Index ETF that provides investors with emerging markets exposure. Expense ratio is .68%.

Building a portfolio with Fidelity index funds

Fidelity seems to be unique among other platforms such as Schwab and Vanguard in that its mutual fund offerings seem to be quite superior to the index funds. Also, Fidelity is unique in that it has the suite of zero expense mutual funds. You can build an excellent portfolio based almost entirely out of the zero expense funds that Fidelity offers. Why not all of it? Well, there is no fixed income or bond fund as part of their ZERO funds. So, to get a balanced portfolio of say, 75% stocks and 25% bonds, you could split the 75% equities section between a few of the ZERO funds and pay zero fees on that chunk of your portfolio. Then, maybe split the 25% between a couple bond funds such as the US Bond Index Fund and the Long-Term Treasury Index Fund. Both of these are fees of .03% or less. Incredible! Here’s what this might look like:

75% Equities:

• 25% Fidelity ZERO Large Cap Index Fund (FNILX) – Zero Fees
• 25% Fidelity ZERO Total Market Index Fund (FZROX) – Zero Fees
• 25% Fidelity ZERO International Index Fund (FZILX) – Zero Fees

What about emerging markets? Shouldn’t you include that? Sure, if you want. Maybe divide the 25% international splice into 12.5% international and 12.5% emerging markets. I’d keep the bulk on the domestic stocks. But that’s my personal preference. Your mileage may vary.

25% Fixed Income / Bonds:

• 12.5% Fidelity US Bond Index Fund (FXNAX) – .025% Fees
• 12.5% Fidelity Long-Term Treasury Bd Index Fund (FNBGX) – .03% Fees

Something as simple as the above would, by and large, be an excellent portfolio for most investors. You’re diversified and balanced, and can take advantage of the power of the markets.

The Three-Fund Portfolio

While the above portfolio is an option for beginner investors, you might also consider the three-fund portfolio which you can easily build using the best Fidelity index funds.

The three-fund portfolio is a popular approach by low-cost, passive investors, most notably Vanguard followers over the years. But whether you are using Vanguard, Fidelity or Schwab funds, it all works the same.

The three-fund portfolio is purposely simple. The goal is for good returns by using low-cost index funds which creates a balanced, diversified portfolio. Active managers will often put investors in dozens of positions in order to give the appearance of a sophisticated portfolio, but the three-fund portfolio is simple and often outperforms these so-called sophisticated approaches.

To build a three-fund portfolio, it is simple. You have three buckets of exposure: domestic equities, international equities and bonds. You can use one fund for each bucket.

Some of the ETFs in our list of best Fidelity index funds make the three-fund portfolio very easy to build. While you can choose which domestic equities ETF you want based on your preferences, typically investors will opt for something more broad than the S&P 500 index (which only measures the 500 largest companies in the US). The Fidelity Total Market Index Fund (FSKAX) is a good candidate.

The three-fund portfolio using the best Fidelity index funds might look as follows:

• Fidelity Total Market Index Fund (FSKAX)
• Fidelity International Index Fund (FSPSX)
• Fidelity US Bond Index Fund (FXNAX)

What are the sizes of each position in this portfolio? How much do you allocate to domestic, international and bonds? The answer is in the allocation model you choose for yourself. A great reference for deciding on an asset allocation is the Vanguard page that shows data on portfolio allocation models. Browse that page and determine if you want to go 80/20, 70/30, etc. Once you know the asset allocation, you can proceed to the next step.

Next, determine how to split up the equities piece of the portfolio between domestic and international equities. A common rule of thumb is where 30% of your equities is international. Based on your preferences, you can adjust this as necessary, but for example purposes, let’s assume 30%.

If you’re building a 70/30 stocks/bonds portfolio and you go with the 30% international rule of thumb, your three-fund portfolio might look like this:

• 70% Equities broken down into 70% Fidelity Total Market Index Fund (FSKAX) and 30% Fidelity International Index Fund (FSPSX)
• 30% Bonds: Fidelity US Bond Index Fund (FXNAX)

If you do a couple calculations to get to specific allocation percentages, you’ll get the following:

• 49% Fidelity Total Market Index Fund (FSKAX)
• 21% Fidelity International Index Fund (FSPSX)
• 30% Fidelity US Bond Index Fund (FXNAX)

And, there you go! A simple three-fund portfolio with these Fidelity index funds is a great starting point for any investor.

Frequently Asked Questions

What is index investing?

Index investing means buying index funds or ETFs that attempt to match the performance and holdings of a benchmark index. A common example is buying an S&P 500 index fund that follows the S&P 500 index. Index investing is popular because it is typically a low-cost way to get a diversified portfolio of investments.

What is the best index fund?

The best index fund will be a combination of long-term performance and low fees. Fidelity, Schwab and Vanguard are known as providers of very inexpensive index funds. At a minimum, a total market US index fund is a great place to start as an anchor of your portfolio.

Can you lose money in an index fund?

Yes, you can absolutely lose money in an index fund. An index fund tracks the index that it follows which is made up of securities (usually stocks). If you own an S&P 500 index fund and the S&P 500 goes down on a given day, your position in that index fund on that day will lose money.