U.S. stocks produced solid gains for the quarter, with small-caps outperforming large- and mid-caps. Despite increased volatility, the S&P 500 Index reached new highs shortly before the end of the period. The market was supported by steady U.S. economic growth and new stimulus efforts in the eurozone and Japan. Sharply falling oil prices were a positive factor for U.S. consumers and oil-importing nations, but they contributed to steep declines in energy stocks and currencies and assets of major oil producing and exporting countries.
The Total Equity Market Index Fund returned 5.20% in the quarter compared with 5.21% for the S&P Total Market Index and 4.46% for the Lipper Multi-Cap Core Funds Index. For the 12 months ended December 31, 2014, the fund returned 12.29% versus 12.46% for the S&P Total Market Index and 10.06% for the Lipper Multi-Cap Core Funds Index. The fund's average annual total returns were 12.29%, 15.46%, and 7.93% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.35% as of its fiscal year ended December 31, 2013.
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The Total Equity Market Index Fund charges a 0.5%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
The portfolio provides investors with exposure to the entire U.S. stock market by tracking the Standard & Poor's Total Market Index, which includes large-, mid-, small-, and micro-cap companies. Most sectors in the portfolio produced strong returns and outperformed the wider benchmark. Utilities, one of the smaller allocations, advanced the most, returning more than 13%.Consumer discretionary, health care, and consumer staples sectors all generated strong returns. The financials and industrials and business services sectors also produced good returns, while information was relatively flat. The energy sector led decliners with a loss of more than 13% as oil prices dropped to a five-year low. The materials and telecommunication services sectors posted smaller losses.
While overall inflation has remained tame, T. Rowe Price managers expect that rising wage costs in the U.S. will squeeze record profit margins. Nevertheless, they think the pace of labor cost increases would be manageable, as companies also enjoy modest sales gains. They note that fourth-quarter earnings reports should provide greater clarity on the overall impact on profits of the decline in oil prices, as some firms benefit from increased discretionary spending, particularly on the part of lower-income consumers.