By Joe Dyton, WCI Contributor
There is no shortage of investment opportunities to choose from today. That’s the good news. The downside to having so many choices, however, is that it can feel overwhelming when it comes time to select where we put our money. Fortunately, index funds exist to help us narrow down the mountain of investing choices that are available.
For example, a pair of Fidelity funds—the Fidelity Total Market Index Fund (FSKAX) and the Fidelity 500 Index Fund (FXAIX)—comprise a variety of securities that you can invest in collectively rather than attempting to actively invest in them individually. These funds share some similarities, but their differences make up the debate for which Fidelity fund would be best for you.
Keep reading for a deep dive into both of the Fidelity funds so you can determine which one’s better suited for you, based on your financial goals and needs.
What Is an Index Fund?
An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio that is designed to monitor or match a financial market index’s components. The Standard & Poor’s 500 Index (S&P 500) is one type of financial market index that an index fund would attempt to match or track. Index funds are desirable to investors because of their low operating expenses and low portfolio turnover and because they offer broad market exposure, which can minimize risk. Index funds are often a significant piece of retirement accounts, like individual retirement accounts (IRA) and 401(k)s.
Working with an index fund is considered passive fund management as opposed to active management. Portfolio managers do not select individual stocks or decide when to buy or sell them. Instead, they create a portfolio with holdings similar to the stocks that are currently in a specific index (such as the S&P 500). The reason for this is that by mirroring an index’s portfolio, the fund will reflect that index's performance. The more securities that are in a fund, the better chance there is that the performance will be positive. Investing in individual stocks, on the other hand, can be riskier because whether money is gained or lost rides solely on that particular stock’s performance.
While index funds may present a lower risk than actively investing in individual stocks, they aren’t without risks themselves. Index funds comprise a lot of stocks, so if the market is performing poorly, chances are that many of the securities in your fund will be performing poorly as well. There’s also usually less flexibility with passive investing—your fund is essentially tied to the securities that are in the financial index it is monitoring. Plus, index funds don’t take big swings in an attempt to beat the market. Your returns may be steady, but they’re also likely to be limited.
Yet for many casual investors, investing in index funds is one of the best investment strategies they can make, and over the long run, studies have shown that index funds beat as many as 80%-90% of their actively managed peers.
What Is FSKAX?
The Fidelity Total Market Index Fund invests in at least 80% of assets in common stocks that are in the Dow Jones US Total Stock Market Index. FSKAX represents a broad range of US stocks’ performance. Fidelity Investments created this mutual fund in 1997, and it’s currently one of the largest funds in the world. As of October 2022, the fund has assets totaling approximately $64.1 billion invested in 4,027 different holdings.
As of this writing, the top 10 FSKAX holdings include Apple, Microsoft, Amazon, Tesla, Alphabet (Google), Berkshire Hathaway, UnitedHealth Group, Johnson & Johnson, and Exxon Mobil.
More information here:
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What Is FXAIX?
Meanwhile, the Fidelity 500 Index Fund tracks the S&P 500 index, which tracks the stock performance of 500 large companies on stock exchanges in the US. The S&P 500 is one of the most followed financial indexes, and it's considered the main benchmark for US stocks. FXAIX covers approximately 80% of the investable market capitalization of the US equity market.
Since FXAIX mirrors the S&P 500, it comprises securities from all different industries, which helps shield it from long bouts of market volatility. The fund’s goal is to deliver results that are similar to a lot of the stocks that are publicly traded in the US. As of October 2022, FXAIX, which was created in 1998, has assets that total $353 billion invested in 506 different holdings.
The top 10 FXAIX holdings are the exact same as the top 10 from FSKAX. The difference is that FXAIX makes that top 10 a larger percentage of the overall portfolio (27.66% compared to the 23.33% of FSKAX).
FSKAX vs. FXAIX: What Should I Choose?
Deciding between FSKAX and FXAIX might not be the easiest thing to do, because the funds share so many similarities. They’re both passively managed index funds, so they aren’t going to be upended by any singular stock or by an aggressive portfolio fund manager who’s trying to beat the market. Additionally, both are under the Fidelity banner, and they have low expense ratios (0.015%), making it hard to differentiate between the two.
To decide between these popular index funds, you have to dig a little deeper into their differences. For example, FSKAX holds A LOT more stocks than FXAIX—more than 4,000 compared to about 500, respectively. The bigger lot of securities makes it a lot less likely that a poor performance from a stock or two is going to negatively impact your entire portfolio. If you’re a long-term investor, this should give you peace of mind. A diverse pool of more than 4,000 stocks and a low expense ratio makes FSKAX feel like a pretty solid choice. Given that it doesn't follow the popular S&P 500 Index like FXAIX, it also gets a little boost to its return since it can't be “front-run” by active managers and hedge funds. The additional small stocks in it should also theoretically provide a higher long term return.
This doesn’t mean you should count out FXAIX, however. It may pull from a shorter list of securities, but those 500 stocks are the top-performing companies in the US. That means each stock in the fund is highly valued, which is good news for your portfolio. Just like with FSKAX, FXAIX comprises so many companies that a downturn from a couple won’t sink the rest of the fund.
If these funds are mostly similar outside of the number of stocks they track (which admittedly is a big difference), the best choice for you comes down to your personal preference. If diversification is a bigger driver in your investment strategy, you might want to lean toward FSKAX (since it has a lot more holdings). If you prefer your investment only go toward large-cap stocks, however, FXAIX might be a better fit (since it only mirrors the S&P 500, which comprises the biggest companies that are currently dominating the market).
For comparison's sake, as of this writing, FSKAX has a 9.59% return in the last three years, 9.73% in the last five years, and 12.37% in the last 10 years. Meanwhile, FXAIX has returns of 10.20%, 10.43%, and 12.77%, respectively.
The positive here is both are great funds, so there’s not really a wrong choice here—just the choice that’s better for you.
More information here:
Happy Anniversary to the Index Fund—Which, by the Way, Was NOT Invented by Jack Bogle
FSKAX vs. FXAIX: Which Is Better?
As we covered in the previous section, which fund is better isn’t necessarily as important as which one is better for you. Since both funds operate similarly and are attempting to minimize risk and volatility, you are not endangering your portfolio by buying into either fund.
If you’re a long-term investor who’s saving for retirement, both FXAIX and FSKAX will likely work well for you. As you do a side-by-side comparison between these funds, think about how they line up with your current personal financial situation as well as your future plans and goals. Still can't decide? Pick FSKAX. It's slightly (but only very slightly) better.
Whichever fund you decide to invest in, you're most likely going to come out ahead of comparable actively managed funds.
Do you prefer FSKAX or FXAIX? Have you tried actively managed funds vs. total stock market index funds? Which has performed better in your portfolio? Comment below!