What the Fidelity 500 Index Fund is

The Fidelity 500 Index Fund is a mutual fund that tracks the S&P 500, a list of 500 large U.S. companies. When you own shares in this fund, you own a tiny piece of all 500 companies at once. The fund's value moves up and down with the S&P 500 itself — if those 500 companies gain value overall, your fund gains value.

Fidelity is the company that runs the fund. They collect money from many investors, buy shares in those 500 companies in the same proportions as the S&P 500 index, and hold them for you. You do not pick individual stocks; the fund does that work automatically by following the index.

This is different from an actively managed fund, where a manager tries to beat the index by picking stocks they think will outperform. The 500 Index Fund simply mirrors what the index does — no manager trying to outsmart the market, no frequent trading.

Key Takeaways

  • The Fidelity 500 Index Fund owns shares in 500 large U.S. companies and moves in line with the S&P 500 index.
  • You own a proportional slice of all 500 companies, so your risk is spread across many businesses rather than concentrated in a few.
  • The fund charges a fee (called an expense ratio) to cover the cost of running it; Fidelity's version has a low fee compared to many other funds.
  • You can buy shares through a Fidelity brokerage account, a 401(k) plan, or an IRA if your plan offers this fund as an option.
  • The fund pays dividends — money that the 500 companies distribute to shareholders — which you can reinvest or take as cash.

How the fund's holdings work

The S&P 500 includes companies like Apple, Microsoft, Coca-Cola, and JPMorgan Chase, but also hundreds of others across every major industry. When you own the Fidelity 500 Index Fund, you own a share of all of them in the same weight as the index itself. If Apple makes up 7% of the S&P 500, then roughly 7% of your fund is in Apple stock.

Fidelity rebalances the fund automatically when the index changes. When a company is added to or removed from the S&P 500, Fidelity buys or sells shares to keep the fund aligned with the index. You do not have to do anything — the fund handles it behind the scenes.

This broad ownership means your money is not riding on the success or failure of any single company. If one of the 500 stumbles, the other 499 cushion the blow. That spread of risk is one reason index funds appeal to many investors.

Fees and costs

The fund charges an expense ratio — an annual percentage fee taken from your account to cover the cost of running the fund. Fidelity's 500 Index Fund expense ratio is typically around 0.03% per year, meaning if you have $10,000 invested, you pay about $3 annually. This is one of the lowest fees in the industry.

You may also pay a transaction fee when you buy or sell shares, depending on which Fidelity account you use. Some accounts charge nothing for Fidelity mutual funds; others charge a small fee per trade. Check your account type or ask Fidelity directly about transaction costs.

Dividends paid by the 500 companies are reinvested into the fund by default, meaning you buy more shares with that money. You can change this setting to receive dividends as cash instead, but reinvestment is usually the default.

How to buy shares

You need a Fidelity brokerage account to buy the 500 Index Fund directly. You can open one online in a few minutes by providing your name, address, and Social Security number. Fidelity will ask how much money you want to invest and how you want to fund the account — by bank transfer, check, or wire.

If your employer offers a 401(k) plan through Fidelity, the 500 Index Fund may be one of the investment options available. You can direct a portion of your paycheck into it. The same applies if you have a Fidelity IRA — you can choose this fund as one of your investments within that account.

Once your account is set up and funded, you place an order to buy shares just as you would buy any stock. You can buy a whole number of shares or, with some Fidelity accounts, fractional shares (a portion of one share). The order executes at the fund's closing price that day.

Performance and what to expect

The Fidelity 500 Index Fund's performance mirrors the S&P 500's performance, minus the small expense ratio. If the S&P 500 gains 10% in a year, the fund will gain roughly 9.97% (the 0.03% fee subtracted). If the index falls 5%, the fund falls approximately 5.03%.

Past performance does not predict future results. The S&P 500 has historically returned an average of around 10% per year over very long periods (decades), but returns vary widely year to year. Some years are up 20% or more; other years are down 10% or more. You should only invest money you will not need for at least five to ten years.

Because the fund holds 500 companies, it is less volatile than owning a single stock, but it still moves with the overall U.S. stock market. If you are uncomfortable with the idea of your account value dropping by 20% or 30% in a bad year, this fund may not match your comfort level with risk.

Tax considerations

If you hold the fund in a regular taxable brokerage account, you owe taxes on dividends and on any gains when you sell shares. The fund itself is tax-efficient because it does not trade frequently — index funds buy and hold, so they generate fewer taxable events than actively managed funds.

If you hold the fund inside a 401(k) or traditional IRA, you do not pay taxes on dividends or gains while the money sits in the account. You pay taxes only when you withdraw money in retirement. A Roth IRA works differently: you pay taxes going in, but withdrawals in retirement are tax-free.

Consult a tax professional if you are unsure how your specific account type affects your tax bill. The type of account matters more than the fund itself for taxes.

Frequently Asked Questions

Is the Fidelity 500 Index Fund the same as the S&P 500?

No. The S&P 500 is the index itself — a list of 500 companies and their prices. The Fidelity 500 Index Fund is a mutual fund that owns shares in those same 500 companies. The fund's value tracks the index very closely, but they are not the same thing.

Can I lose money in this fund?

Yes. If the S&P 500 drops in value, your fund drops too. The stock market can fall 20%, 30%, or more in a single year. You should only invest money you will not need for several years.

What is the difference between this fund and a target-date fund?

A target-date fund automatically shifts from stocks to bonds as you approach retirement, reducing risk over time. The 500 Index Fund stays 100% in stocks. Target-date funds are more hands-off; the 500 Index Fund requires you to decide when to shift your own money.

Do I have to reinvest the dividends?

By default, yes — dividends buy more shares automatically. You can change this in your account settings to receive dividends as cash instead. Reinvestment usually builds wealth faster over time because you earn returns on the reinvested dividends too.

What happens if a company in the S&P 500 goes bankrupt?

The S&P 500 removes it from the index, and Fidelity sells those shares. Your fund value drops by the amount of that company's weight in the index, but the other 499 companies cushion the loss. This is why owning 500 companies instead of one matters.