Investing pioneer John Bogle, author of “The Clash of the Cultures: Investment vs. Speculation,” once wrote: “Investors need to understand not only the magic of compounding long-term returns, but the tyranny of compounding costs; costs that ultimately overwhelm that magic.”
What Bogle meant by this was that while the power of compounding returns can significantly grow an investor’s wealth over time, the impact of compounded costs — such as management fees and other expenses associated with investment products — can significantly erode those returns.
If these costs are not kept in check, they can consume a substantial portion of an investor’s potential long-term earnings. Consider the following example: As of Sept. 30, 2023, the Fidelity 500 Index Fund (ticker: FXAIX) returned an annualized 11.9% over the past 10 years, while the similar Rydex S&P 500 Class H (RYSPX) returned 10%.
RYSPX lagged behind FXAIX despite having identical indexes and underlying holdings for one simple reason: high fees. While FXAIX charged a low expense ratio of just 0.015%, RYSPX charged 1.61%, around 107 times as much. This real-life example illustrates Bogle’s warnings about the “tyranny of compounding costs” succinctly.
When it comes to keeping costs low, few fund providers do as well as Fidelity. “Fidelity introduced zero-expense-ratio index mutual funds and also offered zero-minimum-investment mutual funds, no minimums to open an account and no account fees for retail brokerage accounts,” says Wes Moss, managing partner and chief investment strategist at Capital Investment Advisors.
Andrew Latham, a certified financial planner and director of content at SuperMoney.com, agrees with Moss, noting: “Personally, I like Fidelity mutual funds because they offer a variety of investment options, have low fees and are backed by a reputable company with a long history of success in the industry.”
With 330 options in its lineup, investors can easily mix-and-match different Fidelity funds to construct their ideal long-term buy-and-hold portfolio based on their risk tolerance, time horizon and investment objectives. The firm also provides a handy online screening tool for finding the best funds based on multiple metrics, such as expense ratios, historical returns, asset class and volatility.
Here are the six best Fidelity mutual funds to buy and hold:
|Mutual fund||Expense ratio||YTD total return*
as of Oct. 18
|Fidelity 500 Index Fund (FXAIX)||0.015%||13.8%|
|Fidelity Total Market Index Fund (FSKAX)||0.015%||12.8%|
|Fidelity ZERO Total Market Index Fund (FZROX)||0%||12.9%|
|Fidelity ZERO International Index Fund (FZILX)||0%||4%|
|Fidelity U.S. Bond Index Fund (FXNAX)||0.025%||-2.9%|
|Fidelity Freedom Index 2055 Fund Investor Class (FDEWX)||0.12%||7.2%|
*Includes dividends where applicable
Fidelity 500 Index Fund (FXAIX)
One of the longest-standing funds in Fidelity’s lineup is FXAIX, which has been around since Feb. 17, 1988. This passive fund is benchmarked to the popular S&P 500 index, which tracks 500 large-cap U.S. companies selected by the S&P committee to be representative of overall U.S. market performance. Many retail and institutional investors alike use it as a benchmark to beat.
Thanks to its passive indexing structure, FXAIX is extremely cost-effective, with a low portfolio turnover rate of just 2% alongside a 0.015% expense ratio. This means that for every $10,000 invested in FXAIX, investors can expect to pay $1.50 in annual fees. In addition, FXAIX requires no minimum investments and charges no transaction fees, which makes it extremely accessible.
Fidelity Total Market Index Fund (FSKAX)
“Savvy investors understand the importance of keeping your costs low and your options open, and Fidelity funds have become popular because they offer just that,” Latham says. “With no sales loads, low fees and no minimum investment requirements, it’s easier to start investing without breaking the bank.” A great example of a fund that ticks all these boxes is FSKAX.
This fund tracks the Dow Jones U.S. Total Stock Market Index, which combines the large-cap stocks of the S&P 500 with thousands of other mid- and small-cap stocks. This allows the fund to reflect the overall performance of the broad U.S. market and not just a certain segment. The fund has a low 1% turnover rate and also charges a 0.015% expense ratio like FXAIX does.
Fidelity ZERO Total Market Index Fund (FZROX)
“While it truly depends on each individual investor’s specific goals and objectives, I typically advocate for the index funds in the accumulation phase, as these give great broad market exposure with lower fees than actively managed funds,” Moss says. For investors who prioritize low fees above all, Fidelity offers FZROX, one of its many zero-expense-ratio index funds.
This fund is effectively free to invest in, with no minimum investment amounts and zero transaction fees on Fidelity’s platform. It tracks the Fidelity U.S. Total Investable Market Index, which provides broad diversification across thousands of large-, mid- and small-cap stocks from all 11 stock market sectors, all the while keeping portfolio turnover low at just 2%.
[READ: 10 Best Vanguard ETFs to Buy.]
Fidelity ZERO International Index Fund (FZILX)
To complement FZROX, investors can also diversify internationally with FZILX. This fund passively tracks the Fidelity Global ex U.S. Index, which holds stocks from international developed and emerging markets. For the former, countries include the likes of Japan, the U.K., Canada, France, Australia and Germany. For the latter, countries like China, India and Brazil make an appearance.
As a Fidelity ZERO fund, FZILX charges no expense ratio, requires no minimum investment and has no transaction fees when purchased on Fidelity’s brokerage platform. This makes it an ideal low-cost option for quickly diversifying a U.S.-only portfolio. By pairing FZILX with FZROX in various proportions, investors can obtain exposure to a globally diversified portfolio of stocks with zero fees.
Fidelity U.S. Bond Index Fund (FXNAX)
A portfolio consisting of just FZROX and FZILX is still considered fairly aggressive in terms of potential volatility. While such a portfolio is diversified globally and across sectors, it can still be subject to high drawdowns during a market crash or recession. To lower risk, investors can dampen volatility by adding an allocation of high-quality bonds. For this role, a bond index fund like FXNAX could be ideal.
This fund tracks the Bloomberg U.S. Aggregate Bond Index, a popular benchmark for overall U.S. fixed-income performance. It holds U.S. government Treasurys, agency bonds, mortgage-backed securities and investment-grade corporate bonds. The fund is diversified across bonds of multiple maturities and credit qualities. FXNAX charges a 0.025% expense ratio.
Fidelity Freedom Index 2055 Fund Investor Class (FDEWX)
Buy-and-hold investors who want to “set and forget” their portfolio can consider an automated solution like FDEWX. As a target-date fund, FDEWX holds a globally diversified portfolio of stocks and bonds that automatically adjusts over time to match an investor’s changing risk tolerance and time horizon. As its target retirement date of 2055 nears, FDEWX will gradually adjust its strategy and asset allocation.
Currently, FDEWX holds about 90% in stocks and 10% in bonds, which makes it suitable for young investors planning for retirement and focusing on growth. Over time, FDEWX will likely increase its bond allocation significantly and decrease its stock allocation to focus on capital preservation and income. The fund currently charges a 0.12% expense ratio.
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6 of the Best Fidelity Mutual Funds to Buy and Hold originally appeared on usnews.com
Update 10/19/23: This story was previously published at an earlier date and has been updated with new information.