Fidelity 500 index fund

What Is Fidelity 500 Index Fund?

The Fidelity 500 Index Fund is a prominent type of index fund, designed to mirror the performance of a specific financial benchmark, the S&P 500 Index. As a mutual fund, it pools money from numerous investors to invest in a diversified portfolio of securities, specifically the common stocks of 500 large U.S. companies chosen by S&P Dow Jones Indices. The fund's primary objective is to achieve investment results that correspond to the total return performance of the common stocks publicly traded in the United States, as represented by the S&P 500 Index. This makes it a vehicle for passive investing within the broader category of investment funds. The Fidelity 500 Index Fund, often identified by its ticker symbol FXAIX, aims to replicate the index's composition and returns, rather than attempting to outperform the market through active stock picking.

History and Origin

The concept of index funds emerged from academic research in the 1960s, notably with ideas for "Unmanaged Investment Companies." The first institutional index funds tracking the S&P 500 for institutional clients were established in 1973 by Wells Fargo and American National Bank in Chicago. John C. Bogle then founded The Vanguard Group in 1974 and launched the First Index Investment Trust in 1975, often considered the first index fund available to individual investors. Initially, these funds faced skepticism, with Fidelity Investments Chairman Edward Johnson famously stating that he "couldn't believe that the great mass of investors are going to be satisfied with receiving just average returns".

Despite early resistance, index funds gained traction due to their low costs and consistent performance relative to their benchmarks. Fidelity Investments, a major player in the financial industry since its inception in 1946, eventually embraced the index fund philosophy³⁰. The Fidelity 500 Index Fund (FXAIX) was officially launched on February 17, 1988, offering individual investors an accessible way to gain exposure to the broader U.S. large-cap stock market through a single investment²⁸, ²⁹. This launch marked a significant moment in the widespread adoption of passive investment strategies by major financial institutions.

Key Takeaways

• The Fidelity 500 Index Fund (FXAIX) is a passively managed mutual fund designed to track the performance of the S&P 500 Index.
• It provides broad diversification across 500 large U.S. companies, representing approximately 80% of the U.S. equity market²⁶, ²⁷.
• The fund is known for its remarkably low expense ratio, making it one of the most cost-effective ways to invest in the S&P 500²⁴, ²⁵.
• Investors purchase shares of the Fidelity 500 Index Fund at its Net Asset Value (NAV) at the close of each trading day²², ²³.
• It is considered a suitable core holding for long-term investment portfolios due to its market-matching performance and cost efficiency.

Formula and Calculation

The Fidelity 500 Index Fund seeks to replicate the performance of the S&P 500 Index. The S&P 500 Index itself is a market-capitalization-weighted index, meaning that companies with larger market capitalizations have a greater influence on the index's value and, consequently, on the fund's portfolio. The weighting of each company within the S&P 500 is determined by its float-adjusted market capitalization.

The market capitalization of a company is calculated by:
$\text{Market Capitalization} = \text{Current Stock Price} \times \text{Number of Outstanding Shares}$

The weighting of an individual company within the S&P 500 Index is then derived as:
\text{Company Weighting in S&P} = \frac{\text{Company Market Capitalization}}{\text{Total Market Capitalization of all S&P 500 Companies}}

The Fidelity 500 Index Fund holds constituent securities in approximately the same weight as the S&P 500 Index, aiming to minimize tracking error and provide returns closely aligned with the index²⁰, ²¹.

Interpreting the Fidelity 500 Index Fund

Interpreting the Fidelity 500 Index Fund largely involves understanding its relationship with the S&P 500 Index. Since the fund's goal is to track the S&P 500, its performance serves as a direct reflection of the large-cap U.S. equity market. A rising Fidelity 500 Index Fund value indicates a generally healthy U.S. stock market, particularly among its largest companies. Conversely, a decline in the fund's value signals a downturn in this segment of the market.

One crucial aspect of interpreting this fund, and index funds in general, is its very low expense ratio. This minimal fee structure means that more of an investor's returns are retained, compounding over time. For example, the Fidelity 500 Index Fund has an expense ratio as low as 0.015% or 0.02%, significantly lower than many actively managed alternatives¹⁷, ¹⁸, ¹⁹. This cost efficiency is a core reason for the appeal of such passively managed funds in long-term portfolio management.

Hypothetical Example

Consider an investor, Sarah, who wishes to gain broad exposure to the U.S. stock market without actively researching individual companies. She decides to invest $10,000 in the Fidelity 500 Index Fund.

• Initial Investment: $10,000
• Hypothetical Annual Return (matching S&P 500 average): 10%
• Expense Ratio (annual): 0.015%

At the end of the first year, assuming a 10% return on the underlying index, Sarah's investment would hypothetically grow to:
$\$10,000 \times (1 + 0.10) = \$11,000$

After accounting for the low expense ratio:
$\$11,000 \times (1 - 0.00015) \approx \$10,998.35$

Over time, this disciplined approach allows Sarah to participate in the growth of the overall U.S. economy, benefiting from the long-term trend of the stock market while minimizing costs. Any appreciation in her shares would be considered unrealized capital gains until she sells her shares. This scenario highlights how the Fidelity 500 Index Fund offers a straightforward and cost-effective way to achieve broad market exposure and long-term wealth accumulation.

Practical Applications

The Fidelity 500 Index Fund is a highly versatile investment vehicle with several practical applications in various financial strategies:

• Core Portfolio Holding: Due to its broad diversification and low costs, it is often used as a foundational component of a long-term investment portfolio, providing exposure to the large-cap segment of the U.S. equity market.
• Retirement Planning: The Fidelity 500 Index Fund is a popular choice for retirement accounts like 401(k)s and IRAs, where its long-term growth potential and minimal fees can significantly benefit compounding returns over decades. Many retirement planning strategies recommend such broad-market index funds.
• Simple Diversification: For investors seeking immediate and broad diversification without the complexity of selecting individual stocks or sector-specific funds, the Fidelity 500 Index Fund offers a one-stop solution.
• Passive Investment Strategy: It aligns perfectly with a passive investment strategy, allowing investors to match market returns without the need for constant monitoring or active trading. Research, such as Morningstar's Active/Passive Barometer, frequently indicates that most actively managed funds fail to outperform their passive counterparts over longer time horizons, particularly in the U.S. large-cap equity market¹⁵, ¹⁶.

Limitations and Criticisms

While the Fidelity 500 Index Fund offers numerous advantages, it also has certain limitations and faces criticisms inherent to its design:

• Market Concentration Risk: The S&P 500, being a market-capitalization-weighted index, means that its performance can be heavily influenced by a few very large companies. This can lead to significant concentration in certain sectors, such as technology, which might expose the fund to stock- or sector-level concentration risk¹⁴. While reflecting the market's composition, this means the fund's returns are heavily tied to the fortunes of its largest constituents.
• No Outperformance of the Index: By design, the Fidelity 500 Index Fund aims to replicate the S&P 500's performance, not exceed it. Investors seeking to "beat the market" will not find that outcome with an index fund; their returns will largely mirror the index, minus the very small expense ratio. This is a fundamental difference from active management.
• Susceptibility to Market Downturns: As the fund tracks a broad market index, it is fully exposed to market-wide downturns. During bear markets, the value of the Fidelity 500 Index Fund will decline in line with the S&P 500, offering no downside protection beyond the inherent diversification of the index itself. Investors should understand the risk of capital loss during adverse market conditions.
• Regulatory Compliance: Like all registered investment companies, the Fidelity 500 Index Fund operates under the regulations set forth by the Investment Company Act of 1940. This act mandates disclosure requirements and operational standards designed to protect investors, though it does not prevent investment losses¹³.

Fidelity 500 Index Fund vs. S&P 500 ETF

The Fidelity 500 Index Fund (FXAIX) and an S&P 500 Exchange-Traded Fund (ETF), such as SPDR S&P 500 ETF (SPY) or Vanguard S&P 500 ETF (VOO), both aim to track the S&P 500 Index and hold largely the same underlying securities¹¹, ¹². However, their structural differences lead to distinct trading characteristics:

The primary difference lies in their trading mechanism. As a mutual fund, FXAIX is bought and sold at its Net Asset Value (NAV) calculated at the end of the trading day⁶. An S&P 500 ETF, conversely, trades on an exchange throughout the day like individual stocks, and its market price can fluctuate based on supply and demand, potentially differing slightly from its NAV⁵. For long-term investors, both vehicles offer similar exposure and low costs, making the choice often a matter of trading preference or account type.

FAQs

What is the ticker symbol for the Fidelity 500 Index Fund?

The primary ticker symbol for the Fidelity 500 Index Fund is FXAIX. Fidelity offers several share classes for this fund, but FXAIX is widely recognized as the main offering for individual investors.

What is the expense ratio of the Fidelity 500 Index Fund?

The Fidelity 500 Index Fund (FXAIX) is known for its extremely low expense ratio, which has been as low as 0.015% or 0.02% annually³, ⁴. This low cost is a significant advantage for long-term investors, as it allows more of their investment returns to compound over time.

Is the Fidelity 500 Index Fund a diversified investment?

Yes, the Fidelity 500 Index Fund is considered highly diversified. It invests in 500 of the largest publicly traded U.S. companies across various sectors, broadly representing the U.S. economy¹, ². This broad exposure helps mitigate the risk associated with investing in individual securities.

Can I lose money investing in the Fidelity 500 Index Fund?

Yes, while the Fidelity 500 Index Fund is designed for long-term growth and tracks a broad market index, it is not without risk. Its value will fluctuate with the performance of the underlying S&P 500 Index. If the stock market experiences a downturn, the value of your investment in the Fidelity 500 Index Fund will decrease. Investors should consider their personal risk tolerance and investment horizon before investing.

How does the Fidelity 500 Index Fund generate returns?

The Fidelity 500 Index Fund generates returns primarily through two components: capital appreciation and dividends. Capital appreciation occurs when the market value of the underlying stocks in the S&P 500 Index increases. Dividends are payments made by the companies within the index to their shareholders, which the fund typically reinvests.