For long-term investors, one of the most significant factors that can limit the effectiveness of a buy-and-hold strategy is the continuous burden of high fees, specifically through high expense ratios.
[Sign up for stock news with our Invested newsletter.]
An expense ratio, which is the annual fee charged by mutual funds expressed as a percentage of the fund’s average assets, directly reduces the fund’s gross return each year.
This deduction acts similarly to how dividends can compound positively, whereas expense ratios compound negatively, detracting from the potential growth of an investment over time.
To illustrate, consider the comparison between the Rydex S&P 500 Fund (ticker: RYSPX), which carries a hefty 1.61% expense ratio, and the Fidelity 500 Index Fund (FXAIX) at a much lower 0.015%. Both funds offer identical exposure to the S&P 500 Index, but the difference in fees is substantial. For a $10,000 investment, annually, RYSPX investors pay around $161, while FXAIX investors pay merely about $1.50.
Examining the long-term effects from Dec. 31, 2021, to Jan. 31, 2023, a $10,000 investment in RYSPX, compounding at an annual rate of 12.1%, would grow to $39,696. In contrast, the same investment in FXAIX, compounding at 14% annually, would result in a final balance of $48,582.
The takeaway is clear: Fees matter significantly, and investors should carefully consider and compare fees when selecting mutual funds. Fidelity stands out as a commendable option in this regard, offering a broad spectrum of 324 funds that include both stocks and bonds from around the globe.
“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,” says Andrew Latham, a certified financial planner and director of content at SuperMoney.com.
Many of these are low-cost index funds, featuring no minimum investments or transaction fees on the firm’s brokerage platform, making them excellent candidates for a long-term, buy-and-hold investor seeking both high diversification and low fees.
“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.”
Here are six of the best Fidelity mutual funds to buy and hold today:
— Fidelity 500 Index Fund (FXAIX)
— Fidelity Total Market Index Fund (FSKAX)
— Fidelity Zero Large Cap Index Fund (FNILX)
— Fidelity Zero Total Market Index Fund (FZROX)
— Fidelity Freedom Index 2050 Fund (FIPFX)
— Fidelity Real Estate Index Fund (FSRNX)
Fidelity 500 Index Fund (FXAIX)
FXAIX is not only one of Fidelity’s cheapest funds, with a 0.015% expense ratio, but it is also one of its most long-standing. With an inception date of Feb. 17, 1988, this fund has an extensive track record of delivering good results for long-term, buy-and-hold investors. From inception to Jan. 31, 2024, FXAIX has returned an annualized 10.7% with dividends reinvested.
By tracking the S&P 500 Index, FXAIX provides investors with exposure to 500 of America’s most recognizable large-cap stocks spanning all 11 sectors. Top names in FXAIX that investors may be familiar with include Apple Inc. (AAPL), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), Nvidia Corp. (NVDA), Alphabet Inc. (GOOG, GOOGL), Tesla Inc. (TSLA) and Berkshire Hathaway Inc. (BRK.B).
Fidelity Total Market Index Fund (FSKAX)
“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,” says Wes Moss, managing partner and chief investment strategist at Capital Investment Advisors. For broad market exposure, investors can buy FSKAX instead of FXAIX.
This mutual fund tracks the Dow Jones U.S. Total Stock Market Index, which has over 3,800 holdings. This makes it more diversified than the S&P 500. Whereas the S&P 500 focuses only on 500 large and mid-cap stocks selected by its ruleset and committee, the Dow Jones U.S. Total Stock Market Index broadens the reach to many more mid and small caps, too. FSKAX also charges a low 0.015% expense ratio.
[5 Best Bond Funds for Retirement]
Fidelity Zero Large Cap Index Fund (FNILX)
“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,” Moss says. These attributes make Fidelity funds, especially its lineup of Zero mutual funds, especially accessible and affordable for investors. For example, consider FNILX, which charges a 0% expense ratio.
On Fidelity’s brokerage platform, this fund is effectively free to invest in with no ongoing expense ratios or transaction fees. It tracks the proprietary Fidelity U.S. Large Cap Index, which holds the largest 500 U.S. stocks based on market capitalization, making it similar, but not identical, to the more well-known S&P 500. It also benefits from a low 2% turnover rate, which improves its tax efficiency.
Fidelity Zero Total Market Index Fund (FZROX)
The Fidelity Zero counterpart to FSKAX is FZROX. Whereas FSKAX tracks the Dow Jones U.S. Total Stock Market Index, FZROX tracks the proprietary Fidelity U.S. Total Investable Market Index. This gives FZROX exposure to over 2,600 market-capitalization-weighted large-, small- and mid-cap stocks across all 11 market sectors. Overall, its top holdings are very similar to FSKAX.
The difference, again, is in the fees. While FSKAX is already very cheap, at 0.015%, FZROX comes in even lower with a 0% expense ratio. As a broad market index fund, investors can also expect a low 2% turnover rate, giving this fund great tax efficiency, as it is not constantly buying and selling underlying stocks. Finally, as with most Fidelity funds, FZROX has no minimum investment requirements.
Fidelity Freedom Index 2050 Fund (FIPFX)
While low-cost and broadly diversified, the previous Fidelity funds lack international diversification and fixed-income exposure. This can potentially result in periods of stagnant returns if the U.S. falters, or higher volatility if the market takes a downturn. For broader diversification, buy-and-hold investors can consider adding global ex-U.S. equities and an allocation to high-quality bonds.
A fund that does this automatically is FIPFX. As a target-date fund, FIPFX starts out with a portfolio of 54% U.S. stocks, 36% international stocks and 10% U.S. bonds. As time goes on and the 2050 target date gets closer, the fund will strategically adjust this mixture to decrease stocks and add bonds. By doing so, it adjusts its allocation to become more conservative as investors age. The fund charges a 0.12% expense ratio.
Fidelity Real Estate Index Fund (FSRNX)
Fidelity’s low-cost suite of index mutual funds isn’t just limited to broad market equities and bonds. Buy-and-hold investors looking for exposure to alternative assets like real estate can also obtain indirect exposure via funds like FSRNX. This mutual fund tracks the MSCI US IMI Real Estate 25/25 Index, which holds real estate investment trusts, or REITs, and real estate services and operating companies.
With a 0.07% expense ratio, FSRNX is one of the cheapest ways to obtain indirect real estate exposure in a brokerage account. However, this fund is not the most tax-efficient, primarily because REIT distributions are not taxed as favorably as qualified dividends are. In addition, FSRNX has a higher turnover rate of 13%. Thus, this fund is best held in a tax-advantaged account like a Roth IRA or 401(k).
More from U.S. News
Boeing’s 737 Max Crisis: What Investors Should Know
7 Best Money Market Funds to Buy for Safety
How to Pay Taxes on Investment Income
The 6 Best Fidelity Mutual Funds to Buy and Hold originally appeared on usnews.com
Update 02/13/24: This story was previously published at an earlier date and has been updated with new information.
