In fact, when it comes to actively managed mutual funds, Fidelity has many competitors but really no equal save one. Surprisingly, it’s Vanguard! And while index funds in general, and Fidelity’s in particular, aren’t for everyone, sometimes a Fidelity index fund can make sense in actively managed portfolios.

For any investor hell-bent on doing nothing but indexing, Fidelity’s index funds are not the only game in town, they’re the best one.

Now, that latter sentiment may sound as off-key as the above statement about Vanguard being a worthy competitor on the actively managed fund front. After all, Vanguard is to index fund investing what Fidelity is to active fund investing. Right? Right–from a marketing perspective, and right again from a business plan perspective. But the core belief behind Vanguard’s mantra (“Buy index funds because their low costs will help deliver better longer-term performance than three-fourths of the actively managed funds out there”) falls on its own merits on two crucial investment fronts. But before we review the index emperor’s new clothes, let’s look at the fundamental strengths of index funds.

Index Vs. Actively Managed Funds

Of the more than 300 mutual funds run by Fidelity, nearly 20 are passively managed, meaning they are more or less run by a computer programmed to invest exactly as their target indexes.

Over the past five-year period the S&P 500 Index beat more than 60% of actively managed large-cap funds. The S&P MidCap 400 Index and the S&P SmallCap 600 beat more than 70% of all actively managed mid- and small-cap funds.

The Index Emperor’s New Clothes

I’ll get right to the point. First, Vanguard doesn’t offer the lowest-cost index funds. Fidelity does–by a wide enough margin to swing any low-cost aficionado on their index fund hinge. Second, at Fidelity, more than 80% of their active managers do beat their investment benchmarks time and again. Taken together, these two factors make their index funds not only a hidden gem but an outperforming one when compared to higher-priced Vanguard equivalents. In both their passively and actively managed fund lineup, Fidelity’s overall performance advantage is worth mining.

On many of its index funds, Fidelity runs two classes of shares–investor class and advantage class. Those able to invest at least $100,000 in the fund can purchase the advantage class shares, which come with a 0.07% expense ratio on stock funds and a 0.10% expense ratio on bond funds. Investors unable to meet the $100,000 minimum may invest in the investor class shares, which come with an expense ratio of 0.10% for stock funds and 0.20% for bond funds.

Excerpted from the September 2006 issue of Jim Lowell’s Fidelity Investor newsletter. Click here for more commentary and recommendations from Jim Lowell and to check out his model portfolios in Fidelity Investor.

Send comments and questions to newsletters@forbes.com.