Fidelity Investments is one of the top companies where you can build a low cost ETF or index fund portfolio. The other two big players are Vanguard and Charles Schwab.
They all have low fees for many of their investment choices. That being said, why limit yourself to just Fidelity funds? This article focuses on Fidelity Funds but be sure to check out Vanguard and Schwab ETF and Index Funds. Use all the tools at your disposal!
Exchange Traded Funds vs Index Funds
The main difference is that ETFs trade throughout the day (just like stocks) and Index funds (which are mutual funds) only trade at the closing market price each day. If you are a long term investor (not doing intra-day trading), it probably won’t make a big difference to you either way.
All things being equal, if both an ETF and index fund have similar or identical composition, the ETF would typically be preferred. ETFs generally have lower minimum investments and are slightly more tax efficient.
Fidelity does not have a very robust ETF offering in my opinion. In writing this article it was a struggle to find ETFs offered by Fidelity that matched up with the index funds mentioned here. However, since ETFs trade like stocks, you can buy other ETFs with your Fidelity brokerage account. Fidelity promotes the IShares ETFs, but you can also buy Vanguard ETFs too.
For more information on ETFs vs Index Funds, see this Investopedia article.
Retirement Fund or Standard Taxable account
Before you invest, you need to create an account. You will be asked if it is a retirement account or a standard brokerage account. If a retirement account, you’ll need to choose between a Roth IRA or traditional IRA. There are many other account types (such as inherited IRAs, trust accounts, etc) as well.
Retirement accounts have their advantages, but only if you follow the rules. Be sure to consult with a tax or financial advisor regarding your retirement plans to make the right choices on the type of account to place your investments in based on your income, tax situation and investment goals.
Active Management vs Index Funds
If you want active managers you can invest in most mutual funds. If you want passive management you would invest in index funds.
Index funds are going to be a lower cost because you are buying a defined index of stocks or other asset classes. For example, if you are invested in an S&P 500 index fund, the fund just has to make sure it has the correct weighting of investments in the fund that match the S&P 500. There are no strategic buy and sell decisions that need to be made by an active investment manager. As a result, the fees should be very low for most index funds as they only need passive management.
If you invest in an actively management fund, you will be paying for a fund manager to make strategic buy and sell decisions. As a result, the fees are much higher. These fees could be 0.5% – 1% or even more.
In addition, the vast majority of actively management funds under-perform compared to index funds over time. So, based on that, the odds are that if you pick an actively managed fund over time you will do worse than it’s index fund or ETF equivalent due to lower performance and higher fees. Lower performance with more management time invested. Go figure!
Don’t just take my word for it. Check out this Investopedia article on the pros and cons as well as performance over time.
Fidelity Fund Choices
Once you have the account type determined, you next need to decide what investments to select within the account. This is a big deal. Don’t take this choice lightly!
If you are comfortable making your own investment decisions, you are in good shape. If not please consult an advisor before putting your money at risk. Just make sure the advisor provides you with a written Fiduciary statement that confirms they are obligated to do what is in your best interest, not theirs! Don’t let them just tell you verbally they are a fiduciary. Get it in writing.
Also don’t fall for the “fee based” vs “fee only” planner. It is preferred to hire a “fee only” planner to make sure you are just paying for the advice you need, and not paying more than that.
Low expense ratios
It has been proven that lower costs make a HUGE difference in your investment returns over time. It might not sounds like a lot, but 0.5% or more is a high fee! Many people pay even more than that.
Over a lifetime of investing in funds with higher expense ratios will cost you tens, if not hundreds of thousands of dollars in lost compounding. See this Investopedia article regarding the impact of fees on returns.
There are so many ETFs and Index funds that have low expense ratios that there is no reason to overpay for your investments! There may be some investments that cost a bit more but that should be the exception and not the rule. You can build a very good portfolio on low fee investments.
One of the reasons ETFs are more attractive than ever is commission fee trading. Since ETFs trade like stocks, in the past you would have to pay a commission to buy and sell these securities. The intense competition over your investment dollars has now resulted in commission free trading, making ETFs even more attractive.
Fidelity has some low-cost index funds that are the lowest in the industry (no fees). However, they have some funds that can be quite expensive. They have a lot of funds that have expense ratios of 0.5% and higher. Some even at 1%. Yikes – that is expensive!
Investment returns are always uncertain. One thing that is always certain is that your investment fund will be taking their fees! Be careful in investing in higher fee funds. There are so many good investment options at low fees, it’s hard to justify paying a lot to invest your money.
Fidelity ETFs & Index Funds
Trying to pick ETFs or Index Funds can be overwhelming. There are literally hundreds of different ETFs and index funds to choose from. The goal of this article is to give you some reasonable funds to consider in many of the common asset classes.
For beginner investors, one fund choice to consider is the FIDELITY ZERO TOTAL MARKET INDEX FUND (FZROX). With no minimum investment requirement and no annual fee, this fund is a great place for a new investor to get into the equity market. You get equity diversification across the broader market all in one place. A young person with earned income could open up a Roth IRA with $10 in this fund and get started on retirement savings early. What a great way to get started!
If you want to buy a total market ETF consider the Vanguard Total Stock Market ETF (VTI), which you can buy via your Fidelity brokerage account. With an expense ratio of 0.03% you get a superior ETF product at about the same fee.
Market Capitalization choices
The market capitalization of a public company is the total number of shares outstanding times the price per share in the stock market. When you do this math for all public companies, you can group them into large companies (large cap), medium size companies (mid cap) and small size companies (small cap).
For those wanting to invest in large-cap stocks, there is also the Fidelity Zero Large Cap Index Fund (FNILX). This is also one of the few zero fee funds offered by Fidelity. You get exposure to the largest companies fee free. With a large-cap fund, as of this writing, some of the top holdings include companies such as Microsoft, Apple, Tesla, Amazon and Johnson & Johnson. As an alternative, you can also buy the Vanguard Large Cap ETF (VV) with a very low expense ratio of 0.04%. Within these funds you own lots of individual stocks which gives you good diversification across the market.
If you want to invest in the small-cap stocks you could go with the Fidelity Small Cap Value Index Fund (FISVX). It’s expense ratio is just .05%. Also consider the Vanguard Small Cap Value ETF (VBR) with an expense ratio of just 0.07%.
For those wanting to get some exposure to foreign stocks, you can invest in an international stock index fund.
The Fidelity International Index Fund (FSPSX) would give you exposure to equities in a number of different countries primarily concentrated in Europe, the United Kingdom and Japan.. The expense ratio is just 0.035%
Fidelity also has a zero cost option fund called Fidelity ZERO International Index Fund (FZILX). Since 0% and 0.035% are so similar, fees should probably not be a difference maker. Instead you should look at the concentration of countries and industries to decide which one makes the best sense for your portfolio. Just search for the ticker and look for holdings to understand the differences.
For a higher degree of risk and potential reward there would be the Fidelity Emerging Markets Index Fund (FPADX). These are countries that have not fully developed economically, which means the potential returns could be high but so could the losses!
Many investors will limit their loss exposure by intelligently determining the investment mix of funds in their portfolio. Higher risk funds such as this one would tend to account for a relatively low percentage of the overall portfolio.
If you want bonds in your portfolio, you would likely be looking for a commercial or US Treasury bond index fund.
Owning a U.S. Treasury bond fund has the advantage of eliminating the credit risk component of investing in bonds. This is because you are investing in government bonds backed by the U.S. government. A common choice would be an intermediate term US Treasury bond fund such as the Fidelity Intermediate Trs Bd Index Fund (FUAMX). Fidelity also offers short term (FUMBX) and long term (FNBGX) US Bond Funds.
If you want a total bond index fund that contains some Corporate bonds in addition to US Treasuries, the Fidelity US Bond Index Fund (FXNAX) might be a good selection. It contains a mix of both types of bonds.
You can increase the asset allocation of your portfolio by investing in real estate via the public markets. These are companies whose main business is owning and renting out real estate. These could be apartment buildings, commercial buildings, storage units, cellular towers, etc.
The Fidelity Real Estate Index Fund (FSRNX) mimics would you would get if you owned an equity Real Estate Investment Trust (REIT).
With an expense ratio of .07%, its is a very low cost way to get into real estate. Since this is typically uncorrelated to the overall stock market, it may be a good balance to help reduce overall equity portfolio volatility
One simple way to invest
Many people invest in target date funds as a simple way to automatically adjust their portfolio to reduce equity exposure and increase bond exposure over time. If that is something you and your advisor believe makes sense for your retirement plan, Fidelity has target date funds that you can choose.
You pick the fund with the year closest to your expected financial independence date. The fund then gets more conservative with each passing year by reducing the equity exposure and increasing the bond exposure as you get closer to and after reaching the fund date.
The Fidelity Freedom Funds would be the fund selections for these target date funds.
I do have concerns that these target date funds might get too conservative by cutting back too far the equity exposure, as well as relying on just a stock and bond mix. There are much better ways to reduce volatility and increase the safe withdrawal rates by including other non-correlated investments in a portfolio.
Ultimately, in any portfolio, you typically have equities to do the heavy lifting, and then use bonds and other assets to help reduce volatility. If you get too conservative and hold too many bonds, you will likely need a lot more dollars saved as your returns suffer if you get too conservative.
Also what I don’t like about these funds is the high expense ratio. For example, the Fidelity Freedom Fund 2030 has an expense ratio of 0.66%. That is too high in my opinion for a basic stock and bond mix. I would rather do my own re-balancing each year than paying that high of a fee for someone else to do it. But to each his own!
If you are comfortable making your own investments decisions – great. Either way, it makes sense to work with independent financial advisors to give you unbiased advice to either confirm your approach or to suggest other alternatives.
This only works if the advisor is a Fiduciary which means they will do what is in your best interest, rather than trying to sell you investments with big commissions that are in their best interest!
A fee only planner that has signed the fiduciary oath is a good choice. Make sure you ask the question and be sure that they provide you a copy of their written oath.
Summary: Best Fidelity Index Funds for a low cost portfolio
- Fidelity is one of the top companies offering a large selection of index funds
- ETFs are slightly more tax efficient than index funds but for most investors the difference will be negligible
- Index funds are mutual funds that are passive in nature. Because of that they have low fees.
- Fees make a HUGE difference in investment returns over time due to the compounding effect. 0.5% or more is a high fee!
- Fidelity has index funds for all common asset classes including equities (domestic & international), bonds, real estate and many more
- For some the Target date funds make it easy to adjust your stock and bond exposure over time, depending on your retirement date, but have higher fees
- Make sure anyone you are paying for investment advice is a Fiduciary. Get it in writing!
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- Age 30 – Time to get serious about your finances
DISCLAIMER: Investing in ETF and stock index funds and related investments have a risk of loss. Past performance is no guarantee of future results. Please consult with your financial advisor to understand your investment plan before you put real money at risk. And always make sure you get the fiduciary oath in writing. The fiduciary oath means your advisor will provide advice with your best interest in mind and not theirs!