5 Best Fidelity Funds
In this post we are going to review the 5 best Fidelity funds to buy & hold forever. In order to guide our conversation, I’m going to use the 3-fund portfolio strategy to frame the Fidelity funds that I am going to recommend.
In case you aren’t aware, the 3-Fund portfolio is one of the most popular do it yourself investment strategies, and as its name implies, it is made of three simple funds; most often an equities fund, an international fund, and a bond fund. So all the funds I’m going to recommend today will fit into at least one of these slots.
Fidelity US Bond Index Fund (FXNAX )
The first Fidelity fund you want to buy and hold forever is Fidelity US Bond Index Fund, FXNAX. Here are some facts:
Index - It tracks the Bloomberg Barclays U.S. Aggregate Bond Index which is composed of investment-grade government bonds, corporate bonds and mortgage backed securities.
Composition - It holds 8,430 bonds. The top issuers are the US Treasury or issuers of Mortgage Backed securities like Fannie Mae and Freddie Mac.
Expense Ratio - It has an expense ratio of 0.025%. Which means if you have $10,000 invested in Fidelity U.S. Bond Index Fund, you are essentially paying $2.50 for Fidelity to manage this fund for you.
Performance - The fund started in 1990 and since then, its average annual total returns has been 5.33%.
So what are bonds and why do you need them? In the simplest term, bonds are loans. When you buy bonds, you are essentially loaning money to someone. In this case to a company or a government agency. And they are a very important addition to a well constructed investment portfolio because of how different they are from stocks.
A good analogy I like to use to frame stocks versus bonds is this. Think of stocks as your core wealth building engine. Without it, you aren’t really going anywhere. And bonds are like your breaks. Without it, you could drive yourself off the road. When you have bonds in your portfolio, it helps to smooth out your investment ride because though they have lower returns, they have less volatility.
Durings times of market crash, where your stock investments can dip by 20-30%, your bond investments will hold steady and ensure your ride isn’t so rocky. So in order to help smooth out your investment ride, you want to start adding them to your portfolio as you get closer to your retirement age. And if you are invested in Fidelity, consider Fidelity US Bond Index Fund as your core bond holding in your portfolio.
Fidelity Total International Index Fund (FTIHX)
The second Fidelity fund you want to buy and hold forever is Fidelity Total International Index Fund, FTIHX. Here are some facts:
Index - The fund tracks the MSCI All Country World Index excluding the United States.
Composition - It represents approximately 5,042 international companies. The top holdings in this fund are made up of companies like Taiwan Semiconductor, Nestle and ASML holdings.
Expense Ratio - It has an expense ratio of 0.06%. Which means if you have $10,000 invested in FTIHX, you are essentially paying $6.00 for Fidelity to manage this fund for you.
Performance - The fund started in 2016 and since then, its average annual total returns has been 5.99%.
What the Fidelity Total International Index Fund will do is provide you exposure to the international market outside the United States. Exposure to different countries, sectors and even currencies.
And we can look at what happened to the Japanese stock market as a lesson on why we might want to hold an international fund. At the end of 1989, the Japanese stock market’s capitalized value was considered the largest in the world. The Nikkei 225 Index, the index of 225 largest publicly owned companies in Japan, reached an all-time high of close to 40,000. Sadly 22 years later, the Nikkei was under 8,500 and to this day has yet to reach its all time high again. But sadder is the Japanese investor who failed to invest in international stocks outside Japan.
Nikkei 225 Performance (Data: Source)
The US based companies are currently the world leaders in market capitalization and revenue, but who can confidently say it will stay like that in the future? It would be unfortunate, but the same thing could happen to the US stock investors. I personally still have strong confidence in the US economy and US based companies as a whole, but I also have to continuously check my assumptions.
“Never treat the highly likely as certain and the highly unlikely as impossible.” - Larry Swedroe
As you get more comfortable with the international market, you can start adding them to your portfolio. And the Fidelity Total International Index Fund is a great option to represent your international holdings.
Fidelity Zero Total Market Index Fund (FZROX)
The third Fidelity fund you want to buy and hold forever is Fidelity Zero Total Market Index Fund, FZROX. Here are some facts:
Index - The fund tracks Fidelity’s in-house, Fidelity U.S. Total Investable Market Index.
Composition - It represents 2,661 US based companies. The top holdings in this fund are Apple, Microsoft and Amazon.
Expense Ratio - It has an expense ratio of 0.00%. Yes you heard me right. $0 dollars to invest in Fidelity Zero Total Market Index Fund. Thus the zero in its name.
Performance - The fund started in 2018 and since then, its average annual total returns has been 11.82%.
The Fidelity Zero Total Market Index Fund is a total market index fund, which means it tracks the Total US stock market. So this would be a great option as your core equities holding in your 3-fund portfolio. However, there are a couple things I do want to note with this fund. Especially in comparison to two other equities options I’ll cover here in a bit. One is the fact that the index it is tracking is Fidelity’s inhouse index, Fidelity U.S. Total Investable Market Index. This isn't necessarily a bad thing, but there are actually more than 2,661 publicly traded companies in the United States than what this fund represents.
What this fund has done is exclude really small companies from its index. In a big scheme of things, it doesn’t make much of a difference in performance since the representation is based on market capitalization. So the excluded companies would only represent maybe 1%, or even less than that of the total fund. But it is something to note. The total market here isn’t quite the total market.
A second item to note with the Fidelity Zero Total Market Index Fund is the fact that you can’t transfer your shares of FZROX to another firm without selling your holding. And when you sell your holdings, you have to pay taxes on your capital gains. The Fidelity Zero Total Market Index Fund was designed with a 0% expense ratio in order to gain more customers. So Fidelity doesn’t want you to move your money to a different firm and this limitation creates that barrier. Paying 0% is nice. But you want to understand that free, comes with some strings attached. But if you are planning to stay with Fidelity for life, Fidelity Zero Total Market Index Fund is a great equities fund to hold.
Fidelity Total Market Index Fund (FSKAX)
The fourth Fidelity fund you want to buy and hold forever is Fidelity Total Market Index Fund, FSKAX. Here are some facts:
Index - The fund tracks the Dow Jones U.S. Total Stock Market Index.
Composition - It represents 4,009 US based companies. The top holdings in this fund are Apple, Microsoft and Amazon. Essentially the same as the Fidelity Zero Total Market Index Fund.
Expense Ratio - It has an expense ratio of 0.015%. Which means if you have $10,000 invested in Fidelity Total Market Index Fund, you are essentially paying $1.50 for Fidelity to manage this fund for you.
Performance - The fund started in 1997 and since then, its average annual total returns has been 8.29%.
It is Fidelity’s original total market index fund prior to the introduction of Fidelity Zero Total Market Index Fund. And Fidelity Total Market Index Fund does exactly what the name implies. Invest in the total US stock market. Essentially every US based stock out there.
When it comes to investing in the stock market, the key principle you want to abide by is diversification. Many people tend to think the only way to make money in the market is to “beat the market.” By either selecting good stocks or good actively managed mutual funds.
Unless you are a professional investor with hundreds of analysts working for you around the clock. Analysts who are constantly interviewing and researching companies and industries, we can’t win in the stock picking or fund picking game. The odds are just stacked too high against the individual investor. So the best strategy to beat wall street, is to just track the market. And at the lowest cost. And Fidelity Total Market Index Fund is a great fund to hold as your core equities holding in your portfolio if you want more flexibility from the Fidelity Zero Total Market Index Fund.
Fidelity 500 Index Fund (FXAIX)
The fifth Fidelity fund you want to buy and hold forever is Fidelity 500 Index Fund, FXAIX. Here are some facts:
Index - The fund tracks the S&P 500 Index which represents the 500 largest publicly traded companies in the United States.
Composition - It represents the 500 publicly traded US based companies. 508 to be exact at the time of this post. The top holdings in this fund are Apple, Microsoft and Amazon. Essentially the same as Fidelity Zero Total Market Index Fund and Fidelity Total Market Index Fund. Not a surprise given the company representation is based on market capitalization and these big companies represent a good percentage of the market as a whole.
Expense Ratio - It has an expense ratio of 0.015%. Same as Fidelity Total Market Index Fund. So, if you have $10,000 invested in Fidelity 500 Index Fund, you are essentially paying $1.50 for Fidelity to manage this fund for you.
Performance - This fund is the oldest of the bunch. It started in 1988 and since then, its average annual total returns has been 10.66%.
When most people talk about "the stock market" they are most often referring to the Standard & Poor's 500, not the total market index. And the reason is because it is so much older. It was created in 1926 when it began tracking 90 stocks and in 1957, the list expanded to 500. And for the past century, it has been the go to index to represent the stock market.
When you turn on any financial news, reporters are always discussing how the S&P 500 is up 50 points or down 100 points. It essentially represents the 500 largest US corporations, weighted by the value of their market capitalization. Because it’s weighted by market cap, though there are approximately 4,000 publicly traded companies in the United States total, these 500 stocks represent about 80 to 85% of the market value of all US stocks. And weight within the index automatically adjusts based on the changing stock prices.
To this day, the S&P 500 remains the standard to which professional mutual fund managers and investment firms compare their returns against. So if you want your equities holding to match the performance of the largest US stocks since they are essentially what moves the market, hold Fidelity 500 Index Fund as your core equities holding.
But I do want to say this. Whether you choose the Fidelity 500 Index Fund, the Fidelity Total Market Index Fund or the Fidelity Zero Total Market Index Fund as your core equities holding. You really can’t go wrong with any of them. They are all great funds. You just want to understand exactly what you are buying.
I know I normally advocate for Vanguard funds, but sometimes you may not be able to choose the investment firm you want because your employer doesn’t offer it. That was the case for me and therefore most of my 401K is actually invested with Fidelity. Fidelity is a great investment firm and if you are looking to invest with them, pick any of the 5 I mentioned here and you can’t go wrong.
If you would like to learn more about the 3-fund portfolio and why you might want to consider it as your strategy, check out my post here.
