Enhanced Index Funds

A better way to index?

An index fund is designed to track the performance of a specific stock or bond index. The best index fund managers are focused on only two things for their funds—tracking the index as closely as possible and keeping expenses as low as possible.

Now Fidelity is introducing three enhanced index funds which use an investment approach that builds upon the basic principles of index investing by adding the opportunity for better performance.

The funds' managers use computer-aided, quantitative analysis of historical valuation, growth, profitability, and other factors to select a broadly diversified group of stocks that may have the potential to provide a higher total return than that of the benchmark index. The portfolio managers use a proprietary program to construct optimal portfolio holdings utilizing these quantitative analyses. In addition, they consider the fund's security, industry, and market capitalization weightings relative to the index to further manage benchmark relative risks. The portfolio managers will generally attempt to overweight securities with positive characteristics identified in the evaluation process and underweight securities with negative characteristics. What you are left with is a fund that seeks to provide a higher total return than that of the benchmark index while managing benchmark relative risks.

Fidelity's enhanced index funds

Click on the fund name to view quarter-end returns, risk, and fee information.

More about Fidelity enhanced index funds and multi-factor models

Fidelity's unique investment approach to enhanced index fund management involves using computer models in a two-step process.

Step 1: Rank Stocks based on Factors
The computer models look at multiple factors to forecast the relative performance of stocks. Some factors emphasized may include:

• Valuation—attractively valued relative to peers
• Growth—exhibit persistence in sales and earnings growth
• Quality—derive net income primarily from core operations
• Sentiment—positive expectations on future earnings
• Technical—positive momentum in share prices

The models then rank the stocks from best to worst, generally seeking to own stocks which possess these attributes.

Step 2: Optimize to Control Risk
The computer models next employ optimization techniques to determine which stocks are to be purchased and in what quantity. These techniques are designed to minimize transaction costs and overall portfolio risks.