Index Mutual Funds

The list below includes index funds from a variety of companies tracking a broadly diversified index, and it includes some of the lowest-cost funds you can buy and sell on the public markets. When it comes to index funds like these, one of the most important factors in your total return is cost. Included are three mutual funds and seven ETFs:

The Nasdaq-100 Index is another stock market index, but is not as diversified as the S&P 500 because of its large weighting in technology shares. These two funds track the largest non-financial companies in the index.

Index Mutual Funds

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While the S&P 500 and Nasdaq are two of the most popular stock market indexes, there are many others that track different parts of the investment universe. These three index funds are also worth considering for your portfolio.

While some funds such as S&P 500 or Nasdaq-100 index funds allow you to own companies across industries, other funds own only a specific industry, country or even investing style (say, dividend stocks).

Your first step is finding what you want to invest in. While an S&P 500 index fund is the most popular index fund, they also exist for different industries, countries and even investment styles. So you need to consider what exactly you want to invest in and why it might hold opportunity:

ETFs have become more popular recently because they help investors avoid some of the higher fees associated with mutual funds. ETFs are also becoming popular because they offer other key advantages over mutual funds.

Index funds tend to be much cheaper than average funds. Compare the numbers above with the average stock mutual fund (on an asset-weighted basis), which charged 0.44 percent, or the average stock ETF, which charged 0.16 percent. While the ETF expense ratio is the same in each case, the cost for mutual funds generally is higher. Many mutual funds are not index funds, and they charge higher fees to pay the higher expenses of their investment management teams.

So if you...let's say invest in an index fund or some with S&P 500 there'd be 500 companies, they represent about 70% of American's value of stocks, we have a fund called the Schwab 1000, it's 1,000 stocks, represents about 85% of the companies value in the United States. That is, of course, very broad diversification. And so if there's one industry that goes up, oil for instance, and another going down, utilities going down, you have an investment in every major sector of the economy."

One of the easiest and low cost ways to get invested in as many companies as possible is to invest in a mutual fund or an Exchange Traded Fund (an ETF) to own a basket of companies. And a smart approach to that is index investing which provides two important advantages: Diversification and minimizing costs.

You're probably already familiar with indexes such as the S&P 500, the Dow Jones or the NASDAQ. In fact, when people talk about the stock market, they're usually thinking about an index. And while you can't invest directly in an index, many mutual funds and ETFs track these indexes simply holding the same stocks in the same proportion as are in the index.

Voice over: "When it comes to investing, controlling costs is important. In fact, it's one of the few things you can control. Index funds are typically low cost compared to either buying stocks individually, where you pay a commission for each purchase or sale, or investing in managed funds, which pay managers to choose stocks and make trades.

Short for the "Standard & Poor 500," this index contains 500 of the largest U.S. companies, which are selected by a committee. It's generally considered to be a better market indicator than the "Dow" because of its coverage and market-cap methodology.

This index tracks 1,000 of the largest publicly traded U.S. companies, offering investors exposure to 90% of the total U.S. stock market. It's designed to capture the growth of both large and mid-sized companies.

While these funds also track indexes, fundamental index funds track indexes that are not market-cap weighted and, instead, weight holdings based on a variety of economic factors. These factors, called fundamental measures, can include a company's adjusted sales, cash flow, dividends, and stock buybacks.

No control over the holdings

These funds provide access to a wide variety of investable markets; however, an index fund might not include a company you like or believe will perform well as they only track companies in the underlying index.

Which asset class does the fund provide exposure to? Is the index methodology clear and sensible? For example, how does the index select and weight securities? How often does the fund rebalance the securities in its portfolio?

"Standard & Poor's," "S&P," and "S&P 500" are registered trademarks of Standard & Poor's Financial Services LLC ("S&P"), and "Dow Jones " is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones") and have been licensed for use by S&P Dow Jones Indices LLC and its affiliates and sublicensed for certain purposes by Charles Schwab Investment Management ("CSIM"). The "S&P 500 Index" and the "Dow Jones Index" are products of S&P Dow Jones Indices LLC or its affiliates, and have been licensed for use by CSIM. The funds are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, nor their respective affiliates make any representation regarding the advisability of investing in any fund.

Schwab's short-term redemption fee of $49.95 will be charged on redemption of funds purchased through Schwab's Mutual Fund OneSource service (and certain other funds with no transaction fees) and held for 90 days or less. Schwab reserves the right to exempt certain funds from this fee, including Schwab Funds, which may charge a separate redemption fee, and funds that accommodate short-term trading.

Trades in no-load mutual funds available through the Mutual Fund OneSource service (including Schwab Funds), as well as certain other funds, are available without transaction fees when placed through Schwab.com or our automated phone channels. For each of these trade orders placed through a broker, a $25 service charge applies. Schwab reserves the right to change the funds we make available without transaction fees and to reinstate fees on any funds.

Remember, the "best" index fund for an individual depends on personal investment objectives and risk tolerance--and relative performance will vary from period to period. Gather comprehensive details about each fund, including performance history and fund-specific risks to help make an informed decision. Additionally, it's always advisable to consult with a financial advisor before making investment decisions.

Index funds may be structured as exchange-traded funds (index ETFs). These products are portfolios of stocks that are managed by a professional financial firm, in which each share represents a small ownership stake in the entire portfolio. For index funds, the goal of the financial firm is not to outperform the underlying index but to match its performance. If, for example, a particular stock makes up 1% of the index, then the firm managing the index fund will seek to mimic that same composition by making 1% of its portfolio consist of that stock.

Index funds track portfolios composed of many stocks. As a result, investors benefit from the positive effects of diversification, such as increasing the expected return of the portfolio while minimizing the overall risk. While any individual stock may see its price drop steeply, if it is just a relatively small component of a larger index, it would not be as damaging.

Most experts agree that index funds are very good investments for long-term investors. They are low-cost options for obtaining a well-diversified portfolio that passively tracks an index. Be sure to compare different index funds or ETFs to be sure you are tracking the best index for your goals and at the lowest cost.

Index funds generally have low annual fees, and these fees, on average, have been declining over the past several years. As of the latest data (2022), the average fee for an index fund stands at just 0.04%, with several index funds offering even lower expense ratios. All else equal, you may want to choose the lower-cost fund if they both faithfully track the same index. (Actively-managed funds, in contrast, average 0.66%).

Fidelity has been managing index funds for almost 30 years, and we currently offer 28 Fidelity equity, fixed income, and hybrid index mutual funds; 13 Fidelity Freedom Index Funds; and 21 Fidelity passive ETFs.

Index funds may take different approaches to track a market index: some invest in all of the securities included in a market index, while others invest in only a sample of the securities included in a market index.

Index funds have generally followed a passive, rather than active, style of investing. This means they aim to maximize returns over the long run by not buying and selling securities very often. In contrast, an actively managed fund often seeks to outperform a market (usually measured by some kind of index) by doing more frequent purchases and sales.

Because index funds generally use a passive investing strategy, they may be able to save costs. For example, managers of an index fund are not actively picking securities, so they do not need the services of research analysts and others that help pick securities. This reduction in the cost of fund management could mean lower overall costs to shareholders. However, keep in mind that not all index funds have lower costs than actively managed funds. Always be sure you understand the actual cost of any fund before investing.

Like any investment, index funds involve risk. An index fund will be subject to the same general risks as the securities in the index it tracks. The fund may also be subject to certain other risks, such as: ff782bc1db