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Why Fidelity 500 Index is a Top Choice for Investors

This low-cost portfolio of large company stocks makes an excellent core holding.

Fidelity 500 Index FXAIX is one of the cheapest options for well-diversified, low-turnover, low-cost exposure to U.S. large-cap stocks. These considerations earn it a Morningstar Analyst Rating of Gold. The fund tracks the S&P 500, which represents the U.S. large-cap opportunity set in a cost-efficient way. S&P’s eligibility criteria require index constituents to be profitable and highly liquid. While most large-cap names are financially viable, the requirement ensures that occasional exceptions are kept out of the index, improving the portfolio’s risk profile. An index committee selects the stocks of 500 companies that meet these criteria, which represents approximately 80% of total U.S. market capitalization. While a committee-based approach lacks transparency, it provides more flexibility around reconstitution and can reduce unnecessary index changes. This cuts back on transaction costs compared with more-rigid rule-based indexes. The U.S. large-cap market enjoys a high level of information availability and liquidity, with new information quickly incorporated into prices. Market-cap weighting leverages those prices to determine each stock’s weight in a cost-efficient manner. This approach promotes diversification and lowers unnecessary turnover. However, market-cap weighting may expose the index to significant stock- or sector-level concentration during the market’s intermittent manic episodes. This can tilt the portfolio toward richly valued names or sectors, as was the case during the late-1990s technology bubble. In the long run, the benefits of broad diversification, low turnover, and a low fee outweigh these drawbacks.

Key Proprietary Morningstar Metrics

Morningstar Analyst Rating: Gold Process Pillar: High People Pillar: Above Average Parent Pillar: Above Average

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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