When I started investing seriously in index mutual funds, I quickly learned that not all index funds are created equal. Some follow broad benchmarks like the S&P 500, while others mirror narrower indices like the Russell 2000. What helped me separate the top-performing funds from the rest was looking into Morningstar’s 5-star rating system. While I don’t rely on ratings alone, they give a strong starting point to screen for funds with proven historical performance, low volatility, and high risk-adjusted returns.
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What Makes an Index Mutual Fund “5-Star”?
Morningstar rates mutual funds from 1 to 5 stars based on their past performance adjusted for risk and fees. The rating reflects how well the fund has done relative to similar funds. Specifically, it uses a measure called the Morningstar Risk-Adjusted Return over periods of 3, 5, and 10 years.
The core idea is this:
\text{Morningstar Rating} = f(\text{Return}, \text{Volatility}, \text{Fee})But it’s not just about high returns. The fund must also show stability, low downside risk, and a favorable expense ratio. A 5-star fund is in the top 10% of its category.
Why I Focus on Index Mutual Funds
Index mutual funds aim to replicate the performance of a specific index. They’re low-cost, tax-efficient, and eliminate stock-picking risk. Over long periods, most actively managed funds underperform index funds. That’s not just my opinion. Studies like the SPIVA (S&P Indices Versus Active) report show that more than 80% of active U.S. large-cap fund managers underperform the S&P 500 over 10 years.
Here’s why I prefer index mutual funds:
- Lower fees (typically under 0.10%)
- Passive strategy that avoids timing the market
- Strong historical outperformance compared to active funds
Let me now walk you through five 5-star rated index mutual funds I believe stand out.
1. Vanguard 500 Index Fund Admiral Shares (VFIAX)
Overview
- Category: Large Blend
- Benchmark Index: S&P 500
- Expense Ratio: 0.04%
- Minimum Investment: $3,000
- Morningstar Rating: ★★★★★ (5 stars)
This fund tracks the S&P 500, covering the 500 largest publicly traded U.S. companies. I like it for its simplicity, ultra-low fees, and strong correlation with the overall economy.
Historical Returns
| Period | Annualized Return (%) |
|---|---|
| 1-Year | 22.4 |
| 5-Year | 15.1 |
| 10-Year | 12.9 |
Example: Compound Growth Over 10 Years
If I had invested $10,000 in VFIAX ten years ago, assuming a constant annual return of 12.9%:
A = P(1 + r)^t = 10,000(1 + 0.129)^{10} \approx 33,610So, my initial $10,000 would have grown to about $33,610.
2. Fidelity ZERO Total Market Index Fund (FZROX)
Overview
- Category: Large Blend
- Benchmark Index: Proprietary Total Market Index
- Expense Ratio: 0.00%
- Minimum Investment: None
- Morningstar Rating: ★★★★★ (5 stars)
This fund covers the total U.S. stock market, including small, mid, and large caps. I consider this fund when diversifying beyond large caps while keeping fees at zero.
Historical Returns
| Period | Annualized Return (%) |
|---|---|
| 1-Year | 21.3 |
| 5-Year | 14.6 |
Since FZROX is relatively new (launched in 2018), it lacks a 10-year track record.
Comparison: FZROX vs. VFIAX
| Metric | FZROX | VFIAX |
|---|---|---|
| Expense Ratio | 0.00% | 0.04% |
| Coverage | Total | S&P 500 |
| Min Investment | $0 | $3,000 |
| 5-Year Return | 14.6% | 15.1% |
FZROX slightly underperforms VFIAX in return but wins on cost and diversification. I use it for tax-advantaged accounts where I can tolerate slightly higher volatility.
3. Schwab S&P 500 Index Fund (SWPPX)
Overview
- Category: Large Blend
- Benchmark Index: S&P 500
- Expense Ratio: 0.02%
- Minimum Investment: $1
- Morningstar Rating: ★★★★★ (5 stars)
This is one of the cheapest ways to gain exposure to the S&P 500. Schwab clients can invest with as little as $1.
Historical Returns
| Period | Annualized Return (%) |
|---|---|
| 1-Year | 22.3 |
| 5-Year | 15.0 |
| 10-Year | 12.8 |
Cost Advantage
Even small fee differences can compound. Here’s a comparison of a $50,000 investment over 20 years at a 10% annual return:
- SWPPX: A = 50,000(1 + 0.10 - 0.0002)^{20} \approx 323,828
- VFIAX: A = 50,000(1 + 0.10 - 0.0004)^{20} \approx 322,781
That $1,047 gap shows how tiny expense ratios can matter over decades.
4. Fidelity 500 Index Fund (FXAIX)
Overview
- Category: Large Blend
- Benchmark Index: S&P 500
- Expense Ratio: 0.015%
- Minimum Investment: None
- Morningstar Rating: ★★★★★ (5 stars)
FXAIX is another solid S&P 500 tracker. I use this in retirement accounts like IRAs where Fidelity has the custodianship.
Historical Returns
| Period | Annualized Return (%) |
|---|---|
| 1-Year | 22.3 |
| 5-Year | 15.1 |
| 10-Year | 12.9 |
Risk-Adjusted Return
Morningstar’s risk-adjusted rating takes both return and volatility into account. If two funds return the same amount, the one with less volatility scores higher. In this category, FXAIX has shown very low tracking error and tight index correlation, making it a reliable core holding.
5. Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
Overview
- Category: Large Blend
- Benchmark Index: CRSP U.S. Total Market Index
- Expense Ratio: 0.04%
- Minimum Investment: $3,000
- Morningstar Rating: ★★★★★ (5 stars)
VTSAX gives exposure to the entire U.S. equity market. I view this as a broader cousin to VFIAX. It includes over 4,000 stocks, compared to the 500 in the S&P 500.
Historical Returns
| Period | Annualized Return (%) |
|---|---|
| 1-Year | 21.7 |
| 5-Year | 14.8 |
| 10-Year | 12.6 |
Diversification Benefit
The key advantage is reduced sector and size concentration. VTSAX captures more small-cap and mid-cap growth.
Key Metrics Comparison Table
| Fund | Expense Ratio | 10-Year Return | Diversification Level | Minimum Investment | Morningstar Rating |
|---|---|---|---|---|---|
| VFIAX | 0.04% | 12.9% | Large-cap only | $3,000 | ★★★★★ |
| FZROX | 0.00% | N/A | Total market | $0 | ★★★★★ |
| SWPPX | 0.02% | 12.8% | Large-cap only | $1 | ★★★★★ |
| FXAIX | 0.015% | 12.9% | Large-cap only | $0 | ★★★★★ |
| VTSAX | 0.04% | 12.6% | Total market | $3,000 | ★★★★★ |
How I Choose Among 5-Star Index Funds
I look at four dimensions when picking index mutual funds:
- Fee Drag
Even a 0.01% difference in expense ratio affects long-term growth. Mathematically:
Where r is the gross return, and e is the expense ratio.
Tracking Error
This measures how closely a fund mimics its benchmark. A lower tracking error means tighter performance.
Diversification Scope
Funds like VTSAX or FZROX offer broader exposure, which helps reduce volatility due to sector overconcentration.
Liquidity and Fund Size
Larger funds tend to be more stable and less prone to price distortion. VFIAX and FXAIX both manage over $300 billion.
Tax Implications and Fund Type
All the funds discussed are tax-efficient, but they’re best held in:
- Taxable Accounts: VFIAX, SWPPX, or FXAIX due to low turnover
- Tax-Advantaged Accounts (IRAs/401(k)s): FZROX or VTSAX for long-term compounding
For taxable accounts, I focus on funds with low capital gains distributions. Index funds tend to pass through fewer gains due to passive management.
Final Thoughts: My Long-Term Index Strategy
I don’t chase performance. Instead, I anchor my portfolio with 5-star index funds that have shown consistency, low cost, and resilience. These are not speculative plays—they are the bedrock of my retirement plan.
I spread my investments across:
- VFIAX in my Roth IRA
- VTSAX in my taxable brokerage
- FZROX in my HSA
- FXAIX in my 401(k)
By sticking to 5-star rated index funds, I reduce emotional trading, simplify my portfolio, and let compounding do its job.
If you’re trying to build long-term wealth without the stress of stock-picking, I believe these funds provide the clearest path forward. They’re not flashy, but they’re reliable. And when it comes to my money, I prefer reliable.
