Investing In Fidelity 500 Index Fund: Is It Worth It?

Index funds are a type of investment that aims to match the performance of a specific market index, such as the S&P 500. They are passively managed, meaning they aim to replicate the performance of a preset basket of stocks or an index without active management. The Fidelity 500 Index Fund is one such fund, tracking the S&P 500 index, which covers about 80% of the investable market capitalization of the U.S. equity market. With an expense ratio of 0.02%, the fund has returned 10.14% over the past year, 10.35% over three years, and 11.17% over the past decade. As of November 27, 2023, the fund had assets totaling almost $407.60 billion invested in 508 different holdings.

What is the S&P 500?

The S&P 500 Index, or Standard & Poor's 500 Index, is a stock market index that tracks the stock performance of 500 of the largest companies listed on stock exchanges in the United States. It is one of the most widely followed equity indices and includes approximately 80% of the total market capitalization of U.S. public companies, with an aggregate market cap of over $43 trillion as of January 2024. The index was launched in 1957 by the credit rating agency Standard and Poor's and is regarded as one of the best gauges of prominent American equities' performance and the overall stock market.

The S&P 500 Index is a market-capitalization-weighted index, which means it gives a higher percentage allocation to companies with the largest market capitalizations. The market capitalization of a company is calculated by multiplying its current stock price by the number of outstanding shares. The S&P 500 uses a float-weighted approach, where the market capitalizations are adjusted by the number of shares available for public trading.

The index includes a diverse range of companies across all sectors, providing investors with exposure to a wide range of industries. It is maintained by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global, and its components are selected by a committee based on various criteria, including market capitalization, market liquidity, stock exchange listing, and revenue derived in the U.S.

The S&P 500 is widely considered one of the best measures of Wall Street performance and is often used as a benchmark for investing in the U.S. stock market. It provides investors with a way to gain exposure to large-cap stocks and diversify their portfolios across a broad range of companies and sectors.

What are the benefits of investing in an S&P 500 index fund?

The S&P 500 index is a market capitalization-weighted index comprising 500 large US companies selected based on specific criteria, such as market size and liquidity, to represent the domestic market. It covers about 80% of the US equity market and is regarded as one of the best indicators of the health and trends of the US economy.

Broad Diversification

The S&P 500 index fund offers immediate diversification across all sectors, including technology, healthcare, and financials. By investing in the index fund, you gain exposure to a wide range of large US companies in various industries, reducing the risk associated with investing in individual stocks.

Low Costs

S&P 500 index funds are known for their low expense ratios, which represent the fees investors pay for fund maintenance. For example, the Fidelity 500 Index Fund (FXAIX) has an expense ratio of 0.015%, while the Vanguard 500 Index Fund Admiral Shares (VFIAX) has a ratio of 0.04%. These low fees make S&P 500 index funds a cost-effective option for investors.

Strong Historical Performance

The S&P 500 index has delivered robust returns over the years, with an average annual return of about 10%. While past performance doesn't guarantee future results, the index's track record demonstrates its potential for generating solid returns over time.

Simplicity and Accessibility

S&P 500 index funds are straightforward investment options that provide exposure to some of the largest and most successful US companies. They are suitable for beginners, especially those with a long investment horizon, as they offer a simple way to invest in a diverse range of companies. Additionally, S&P 500 index funds can be purchased through various investment accounts, such as brokerage accounts, IRAs, health savings accounts (HSAs), and 401(k) plans.

Tax Efficiency

The broad diversification and low turnover of S&P 500 index funds can make them tax-efficient investment options. For example, the State Street S&P 500 Index Fund Class N (SVSPX) is known for its tax efficiency due to its low turnover and diversification.

In summary, investing in an S&P 500 index fund offers broad market exposure, strong historical performance, low costs, simplicity, and potential tax benefits. It is a popular choice for investors seeking to track the performance of the overall US stock market and build a diversified portfolio.

How does the Fidelity 500 Index Fund compare to other S&P 500 index funds?

The Fidelity 500 Index Fund is one of the most popular S&P 500 index funds in the US. It has a low expense ratio of 0.015% or 0.02% and no minimum investment requirement, making it accessible to investors of all account sizes. The fund has been in operation since 1988 or 2005, offering a long history of competent management.

Compared to other S&P 500 index funds, the Fidelity 500 Index Fund stands out for its low fees and strong performance. Here's how it stacks up against some of the other top S&P 500 index funds in the market:

• Vanguard 500 Index Admiral Shares (VFIAX): This fund has a slightly higher expense ratio of 0.04% and requires a minimum initial investment. However, it also has a long history, dating back to 2000, and is backed by Vanguard, a well-known name in the industry.
• Schwab S&P 500 Index Fund (SWPPX): With an expense ratio of 0.02%, this fund is also competitively priced. It does not have a minimum investment requirement and is backed by Charles Schwab, a respected name in the industry.
• State Street S&P 500 Index Fund Class N (SVSPX): This fund, managed by State Street Global Advisors, has a higher expense ratio of 0.16% and a lower AUM compared to other highly-ranked options. However, it has a long track record of performance, dating back to 1992.
• Fidelity ZERO Large Cap Index (FNILX): This fund, offered by Fidelity, has a unique feature of having a 0% expense ratio, making it extremely cost-effective for investors. While it does not officially track the S&P 500, it follows the Fidelity U.S. Large Cap Index, which is similar.
• Vanguard S&P 500 ETF (VOO): Backed by Vanguard, this ETF has an expense ratio of 0.03% and has been trading since 2010. It is one of the largest funds in the market with hundreds of billions in assets.
• SPDR S&P 500 ETF Trust (SPY): This ETF, sponsored by State Street Global Advisors, is one of the oldest and most popular, having been founded in 1993. It has an expense ratio of 0.095% and hundreds of billions in assets.
• IShares Core S&P 500 ETF (IVV): Sponsored by BlackRock, this ETF has an expense ratio of 0.03% and has been tracking the S&P 500 closely since its inception in 2000.

When comparing the Fidelity 500 Index Fund to other S&P 500 index funds, it is important to consider factors such as expense ratios, investment minimums, fund performance, and the reputation of the fund provider. The Fidelity 500 Index Fund compares favourably in terms of its low expense ratio and lack of minimum investment requirements. However, it is important to note that other funds may offer different features or benefits that could make them more suitable for specific investment goals or preferences.

What are the risks of investing in the Fidelity 500 Index Fund?

Investing in the Fidelity 500 Index Fund comes with a few risks that you should be aware of. Here are some of the key risks to consider:

• Volatility Risk: Like any investment tied to the stock market, the Fidelity 500 Index Fund is subject to market volatility. The fund tracks the S&P 500 index, which can be significantly impacted by economic and political factors. This means that the value of the fund can rise or decline sharply, and there is no guarantee that it will always perform positively.
• Passive Management: The fund is passively managed, which means it aims to replicate the performance of the S&P 500 index. While this can be a benefit in terms of keeping costs low, it also means that the fund's performance may be lower than that of actively managed funds, which have portfolio managers actively trying to beat the market.
• Tracking Error: The actual performance of the fund may vary from the performance of the S&P 500 index it tracks. This can be due to various factors, including transaction costs, additional fees, and expenses related to the fund. Therefore, there is no assurance that the fund will exactly match the index's performance.
• Investment Risk: As with any investment in the stock market, there is a risk of losing money. While index funds are generally considered lower risk due to their diversification, the Fidelity 500 Index Fund could still underperform and lose value over time, depending on the performance of the underlying stocks in the S&P 500 index.
• Fees and Expenses: While the fund has a relatively low expense ratio of 0.02%, there may be other fees and expenses associated with investing in the fund. Over time, these fees can add up and impact your overall returns.

It is important to remember that investing in the stock market always carries a degree of risk, and there is no such thing as a risk-free investment. However, by understanding and carefully considering the risks associated with the Fidelity 500 Index Fund, you can make a more informed decision about whether it aligns with your investment goals and risk tolerance.

How do I invest in the Fidelity 500 Index Fund?

The Fidelity 500 Index Fund tracks the S&P 500 index, which is one of the main benchmarks for US stocks. The index covers about 80% of the investable market capitalization of the US equity market.

The fund can be purchased directly from the fund company or through most online brokers. Here are the steps to follow to invest in the fund:

• Research and analyze the index fund: Understand what you want to invest in. While the S&P 500 index fund is the most popular, there are also funds for different industries, countries, and investment styles. Consider the geographic location of the investments, the market sector, and the market opportunity.
• Decide on the index fund to buy: Compare the expenses of each fund, the investment minimums, dividend yields, and the inception date.
• Purchase the index fund: Buy the fund directly from the fund company or through a broker. If you are buying an ETF, you will need to go through a broker.

• Long-run performance: Track the long-term performance of the index fund to get an idea of potential future returns.
• Expense ratio: Compare the expense ratios of different funds tracking the same index.
• Trading costs: Some brokers may offer lower prices when buying mutual funds. If buying an ETF, consider that most major online brokers now allow trading without a commission.
• Fund options: Not all brokers will offer all mutual funds, so check if your broker offers the specific fund you are interested in.
• Convenience: It may be easier to go with a mutual fund that your broker offers rather than opening a new brokerage account.

• Research potential investments in index funds using Fidelity's Mutual Funds Research Page. Select "Index" under "Key Criteria" > "Management Approach".
• From the individual security's research page, select "Buy".
• Enter the number of shares you'd like to buy.
• Select "Preview order" and then check that the details are correct.
• Select "Place order".
• Repeat the process if you'd like to buy more index funds.

Frequently asked questions