Fidelity 500 Index Fund: As ‘Indexed’ As It Gets (MUTF:FXAIX)


In my view, for most people, the best thing to do is owning the S&P 500 index fund. – Warren Buffett

While most shares are still looking to recover from its 52-week low, Fidelity 500 Index Fund (FXAIX) has managed to provide a 1-year return of 6.73%. Clearly showing an uptrend in the last few weeks, there is every possibility that the fund will reclaim its peak of ~$118 if the markets keep their momentum. The fund comprises of large-cap stocks with a blend of value and growth propositions. In terms of volatility, the fund looks to mimic the S&P 500 with a beta close to 1. The ETF’s 52-week range has been 78-118, which suggests that the volatility has been significantly lower than individual equities, but retains plenty of upside in investing. It, therefore, reinforces the need to invest in a fund in times of uncertainty.

Fidelity 500 Index Fund vs S&P 500

In terms of the holdings, the two portfolios of stocks have a very similar composition. The Fidelity 500 is slightly underweight Technology and slightly overweight on Financials when compared to the S&P. The top 10 holdings are the same, with a slight modification in the portfolio weights. One of the reasons is that the fund is not rebalanced frequently, which could translate into a higher turnover with additional costs.

Holdings of Fidelity 500 Index Fund

Source: Seeking Alpha

Holdings of S&P 500

Source: S&P

Top 10 Holdings of Fidelity 500 Index Fund

Source: Seeking Alpha

Top 10 Holdings of S&P 500

Source: S&P

So, why choose Fidelity 500?

While most funds that track the S&P 500 have similar characteristics, there could be minor deviations that could result in better value propositions for investors, or worse. In FXAIX’s case, the tracking error is very low.

Comparing it with another fund should bring about the differentiating factors between two similar funds.

Source: Seeking Alpha

FXAIX

VFIAX

1-year return

4.41%

4.65%

P/E

17.90

19.68

P/B

2.67

3.02

P/S

1.76

1.98

Standard deviation (5 years)

14.70%

14.70%

Dividend Yield (TTM)

2.25%

1.96%

Vanguard 500 Index Fund Admiral Shares Inst (VFIAX) is very similar to Fidelity 500, but there are certain advantages that Fidelity has over Vanguard.

  • Lower Valuation of shares: The most significant difference observed is the level of valuation in the two funds. The Fidelity 500 is undervalued from a price perspective when compared to Vanguard 500. It shows that, even while replicating an Index, there can be slight differences. Given a choice, buy the cheaper holding.
  • Dividend Yield: Fidelity 500 has a slight edge with a 12-month trailing yield of 2.25% compared to 1.96% of Vanguard.
  • Lower Expense Ratio: Despite having Assets Under Management less than 50% when compared to Vanguard 500, Fidelity has an Expense Ratio that is 0.01%. While the expense ratio can be minimal compared to the overall return, it does play a role in selecting funds with little differentiating factors, and you want to buy the cheaper fund when replicating a passive index.

One area in which Vanguard 500 fares better is the return generated over the years. Vanguard 500 has managed to edge out Fidelity 500 in all the tenures considered below except the latest 1-month return. This is due to tracking error and is small enough to be ignored, and even taken advantage of in this case.

Source: Seeking Alpha

What to look out for?

Fidelity 500 does come with its share of risks, which is similar to the broader market. Some of the risks that investors should consider before investing include:

  • Highly concentrated on the US markets: The fund places it bets on the US markets, which can be a risk, given the volatility exhibited in the past few months. Investors with very low-risk tolerance should look to diversify into fixed income, gold, or cash, but use FXAIX as a core holding.
  • Cheaper valuations could be available in other markets: The fund also does not take advantage of opportunities existing in other foreign markets that have experienced steeper falls and less expensive valuations. A preliminary look at Fidelity International Index Fund Inst (FSPSX) reveals that it has cheaper valuations than its peer investing in the US market.

Valuation Indicators for Fidelity International Index Fund Inst

Source: Yahoo Finance

  • Slightly overweight on Financials may backfire in the current scenario: Even though the fund is invested in large-cap financial firms, the performance of Financials could take a hit in this current situation. Overweight on Financials could generate negative returns compared to the S&P 500, especially in times of economic stress like we are in currently.

Conclusion

Fidelity 500 Index Fund is an ETF that lets investors participate in the index passively. While it closely replicates the S&P 500, there are few advantages that the fund holds over its peers. Cheaper valuations, higher dividend yield, and lower expenses differentiate it from among the other funds that closely track the S&P 500. With the current uptrend in the market making steady progress, investors should consider this fund if they are looking to bet on the broader market.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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