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Three-Fund Portfolios Using Fidelity Index Funds

One of the most popular posts on the blog so far has been my article describing how you can build simple index fund portfolios, including my favorite three-fund portfolio, using Vanguard index funds. Using the funds from that article, you can build a diversified portfolio of index funds at very low cost using Vanguard funds.

Unfortunately, many of my readers do not have a Vanguard account. Some may choose to have accounts at their largest competitor, Fidelity. I personally do not have a Vanguard account and have all my investments (except my 529 and HSA) at Fidelity. I like their phone customer service, and they have physical branches whenever I want to deposit checks or talk to a customer service representative in-person. In addition, Vanguard and Fidelity have been recently engaged in a competitive price war over index fund expense ratios. In many cases, Fidelity’s index fund is cheaper than Vanguard’s equivalent offering.

Whatever your reason for choosing Fidelity over Vanguard, I wanted to show you how to build three-fund or other simple index fund portfolios with Fidelity.

One Fund: Start with S&P 500 or Total Stock Market

The simplest portfolio consists of just one index fund. You can choose an S&P 500 index fund, which consists of large-cap stocks, or a total stock market index fund, which consists of large-cap, mid-cap, and small-cap stocks.

Fidelity’s S&P 500 index fund is FUSVX (ER 0.035%), and their total stock market index fund is FSTVX (ER 0.035%).

If you use ETFs, Fidelity’s S&P 500 ETF is IVV (ER 0.04%), and its total stock market ETF is ITOT (ER 0.03%).

Two Funds: Add U.S. Bonds

Most investors will want some exposure to U.S. Bonds because a 100% stock portfolio has a lot of volatility. At Fidelity, the index fund of choice to get broad U.S. bond exposure is FSITX (ER 0.045%). If you use ETFs, the commission-free iShares ETF is AGG (ER 0.05%)

Three Funds: Add International Stocks

The third component of the classic three-fund portfolio is international stocks. You have three great international stock index fund options at Fidelity.

The first option is Fidelity International Index Fund – Premium Class (FSIVX, ER 0.06%). This index fund gives broad exposure to foreign stocks in developed markets, such as Europe and Japan. It does not give exposure to emerging markets, like Russia or China. It also has minimal exposure to mid-cap and small-cap stocks.

The second option is Fidelity Global ex U.S. Index Fund – Premium Class (FSGDX, ER 0.1%). This index fund gives exposure to both foreign developed markets and emerging markets. Emerging markets can provide additional diversification, but they are typically more volatile than foreign developed markets. It also has minimal exposure to mid-cap and small-cap stocks.

The third option is Fidelity Total International Index Fund – Premium Class (FTIPX, ER 0.1%). This index fund gives the broadest exposure to the international stock markets, as it includes foreign developed markets and emerging markets as well as large-cap, mid-cap, and small-cap exposure.

I personally prefer FSIVX because of its lower expense ratio, but I know many people like FTIPX because it gives exposure to emerging markets and small-cap international.

If you like ETFs, the commission-free iShares ETF for international stocks is IEFA (ER 0.08%). This ETF tracks foreign developed markets and does not invest in emerging markets.

Four Funds: Add International Bonds

Fidelity currently does not have an international bond index fund. To get exposure to international bonds at Fidelity, you should use the IAGG (ER 0.09%), an iShares ETF that is commission-free at Fidelity.

Five Funds: Add REITs

If you want to add a fifth fund, my preference is to add a real estate index fund. At Fidelity, the best option is the Fidelity Real Estate Index Fund – Premium Class (FSRVX, ER 0.09%). If you use ETFs, the commission-free Fidelity ETF is FREL (ER 0.084%).

Summary

Portfolio Premium Class ETF
One-Fund: S&P 500 FUSVX IVV
One-Fund: Total Stock Market FSTVX ITOT
Two-Fund: Add U.S. Bonds FSITX AGG
Three-Fund: Add International Stocks FSIVX
FSGDX
FTIPX
IEFA
Four-Fund: Add International Bonds N/A IAGG
Five-Fund: Add REITs FSRVX FREL

Remember that you should use ETFs instead of index funds in a Fidelity taxable account because of the more favorable tax treatment of ETFs. In tax-deferred accounts, you can use either index funds or ETFs, and my preference is to use index funds. Also, if you do not have $10,000 to invest in the Fidelity Premium Class index fund, then I would recommend the equivalent commission-free ETF, which has no minimum investment.

What do you think? Do you prefer Fidelity over Vanguard? Do you own any of the Fidelity index funds or ETFs listed in this article?

11 thoughts to “Three-Fund Portfolios Using Fidelity Index Funds”

  1. I have Fidelity for my 401K and invest in the premium classes of the funds. Same with my Vanguard IRA funds. I am a big S & P proponent and believe you get some international exposure through that. I, however, still have a 5% investment in specific international funds and another 5% in Reits for my 401K. My IRA is just straight S & P indexed funds.

    1. Nice. I agree that U.S. companies have business exposure overseas, but I still like actual international companies as well in my portfolio. But its certainly not wrong to have little to no exposure to international stocks; Warren Buffett and John Bogle do not recommend any international stocks.

  2. what do you recommend for dividend reinvestments for taxable accounts using ETFs? Mutual Funds keep track of the taxable things when you sell them. Someone said it is hard to keep track of ETFs with small amounts purchased (ie dividend reinvestment) so when you sell it becomes a bit of a headache. Should folks just take the dividend cash and then buy their own lots every so often or not worry about it? Dividend reinvestment is so convenient.

    1. Thanks for the great question, Ann. I can’t speak for other brokerage houses, but Fidelity keeps track of all of your small lots from dividend reinvestments. You can set dividend reinvestments on or off for ETFs. Since Fidelity keeps track of all of your odd lots when you sell your ETFs, you can easily import your tax returns from Fidelity into most tax software (I have personal experience with TurboTax and H&R Block). If you like the convenience of dividend reinvestments with mutual funds, then you should turn dividend reinvestments on for your ETFs as well. I hope this helps!

      -WSP

  3. I have a ~$9k car loan at a low interest rate that I’m currently paying off (1.65%). I had enough in savings to not need the loan but I figured it would be better to invest the principal in an index fund with a (historically) higher return. Should I switch that out to an ETF since it’s being held in a taxable account to save on the taxes? Is the activity assessment fee ($0.01-$0.03 per $1,000 principal, otherwise known as the SEC fee) from selling ETFs going to affect that in any way since I may need to sell once or twice a year? Thanks!

    1. Hi Jeff,

      It makes financial sense to keep the car loan and invest it in the market, which has a higher expected (but not guaranteed) return than 1.65%. Switching it out to an ETF is a no-brainer if you are currently in the 10% or 15% tax brackets, since you pay no long-term capital gains. If you’re in a higher tax bracket, you’d have to run the numbers to see whether its worth switching over. E-mail me via the contact page and I can try to run the numbers for you.

      The activity assessment fees is 0.001%-0.003%, and really shouldn’t affect your investment decisions.

  4. Great post – most folks think of only Vanguard with the 3-fund portfolio, but have a Fidelity 401K at work and sometimes get stuck. I have used both Fidelity and Vanguard and they’re both pretty good!

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