Stocks Fools Love: Fidelity Spartan Total Market Index Fund

This article is part of our annual Stocks Fools Love Valentine's Day special.

If you're a regular visitor to Fool.com, you already know that we're big fans of index funds. With their broad diversification and winning track record compared with many actively managed funds, we think they earn a place in every investor's portfolio. You've probably heard us sing the praises of Vanguard 500 Index Fund (FUND:VFINX) and Fidelity Spartan Index 500 (FUND:FSMKX), two of the most popular funds that shadow the S&P 500. There's a lot to like about the world's most widely known index: It contains large, well-established companies such as 3M (NYSE:MMM), Alcoa (NYSE:AA), and Aetna (NYSE:AET) and changes its composition infrequently. As a result, funds that track it have low turnover and low transaction fees, helping to make the group tax-efficient and cheap.

The S&P 500 isn't the only index worthy of admiration, however, which brings us to our Valentine's Day sweetheart pick, FidelitySpartan Total Market Index Fund. This fund shadows the Dow Jones Wilshire 5000, and as you might guess from its name, the Wilshire 5000 boasts a broader scope than the S&P 500, encompassing a wider swath of the market's small- and mid-cap fries alongside the big fish.

We like this greater level of diversification because much of the data on historical fund returns shows that small-cap stocks tend to outperform their larger counterparts over the long term. This has certainly been true in recent years; thanks largely to its smaller-cap holdings, Spartan Total Market's annualized three-year trailing return of 6.4% bests the S&P's mark by more than 1.5% per year. What's more, the Wilshire 5000's more diverse mix means funds that track it are likely to be less volatile over the long haul than those that follow narrower benchmarks. What's not to like?

Priced at just 0.10%, Fidelity's offering is our favorite of the Wilshire 5000 trackers, though Vanguard's Total Stock Market (FUND:VISMX), with a 0.18% price tag, is also a fine option. Competition between Fidelity and Vanguard has heated up over the past half year as the former has made a move to grab the low-fee crown the latter has long worn, trimming fees on a slew of its index funds. Fortunately for investors, index offerings will likely continue to grow cheaper in coming years, thanks to such keen competition among fund shops, as well as greater investor awareness about the impact of fund fees on returns.

While an index fund would be among our valentines any day of the year, the most effective portfolio is one that marries the best of both the passively and actively managed fund universes. Interested in a great marriage of your own? Take a free spin with Motley Fool Champion Funds, the Fool newsletter service designed to home in on the very best active and passive picks the fund industry has to offer. The latest issue hits the streets today, in fact, and it comes complete with a review of each recommendation analyst Shannon Zimmerman has made over the last year.

Fool contributorJosie Raneyis a newlywed. She and her hubby own shares of Vanguard 500, which they complement in part with an actively managed small-cap fund. The Motley Fool has a disclosure policy.