5 Best Charles Schwab Funds
Before we begin, I want to highlight the fact that all the funds I’m going to cover in this post are all index funds. Not actively managed mutual funds. Charles Schwab offers many different products including many actively managed funds. They actually have more actively managed funds than passively managed funds, so when you go to their website after this post, don’t get confused. Make sure to select the funds with the words “index” in them or follow the ones I specifically call out in this post.
Schwab Target Index Funds
The first Charles Schwab fund I want to talk about in this post is Charles Schwab’s Target Index Funds. Target date funds are not just one fund, but a collection of funds. Therefore, oftentimes called “funds of funds.” If you are just getting started in investing and not sure where to start, I believe these are excellent choices for beginners.
I get more into the details of Target Date Fund and Target Retirement Funds in this post, but in a nutshell target retirement funds are simple funds that automatically diversify and allocate your investments for you based on when you plan to retire.
In the world of investing, you hear these terms often - diversification and asset allocation. They essentially refer to the importance of spreading your money around as much as possible so you are managing your risks effectively. Ever heard of the quote:
“Money is like manure; it's not worth a thing unless it's spread around encouraging young things to grow?”
Well, maybe manure isn’t the most appealing analogy so let’s talk about food. Think of diversification and asset allocation like a healthy well balanced diet. You don’t want to just eat only protein for your meals. Or only carbs. Your diet would be completely unbalanced.
In a similar way, by well diversifying your investments within an asset class and across different asset classes, you are ensuring your money doesn't depend on one company or one type of investment to grow.
Many people who enjoy learning about the stock market and investments like to manage their own risk by constructing their own portfolio. But if you are looking for a simple, 85% solution to your investment, Schwab Target Index Funds are an excellent option.
One thing I do want to call out is that Schwab offers both regular Target Funds that include actively managed funds and the Target Index Funds that only includes passively managed index funds. Avoid the regular target date funds because the expense ratios are multiple times higher than the index option. Make sure to select the one with the name “index” on it.
When you goto Charles Schwab’s asset management website, you’ll find all of their investment products listed there. You just need to select the target index fund based on your estimated retirement year; let’s say age 65. For me that would be Schwab Target 2045 Index Fund, SWYHX.
The expense ratio for a standard Schwab Target Index Fund is 0.08%. Compared to a basic index fund like we will talk about later in this post, it is slightly higher. But you are getting additional services for that additional expense ratio which many people find well worth the money. To put that to scale, if you have $10,000 invested in this fund, we are talking about an expense of $8 annually.
Also when compared to actively managed equivalent target date funds which have an expense ratio 0.6%, 0.08% is a fraction of the cost. If you want to make good investment decisions but want to spend the least amount of time as possible on it, I highly recommend Schwab Target Index Funds. You can literally set it up once in your life and check it when you are ready to retire.
Schwab U.S. Aggregate Bond Index Fund (SWAGX)
The second Charles Schwab fund you want to buy and hold forever is Schwab U.S. Aggregate Bond Index Fund, also known as SWAGX. It tracks the Bloomberg US Aggregate Bond Index. A broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities and mortgage backed securities.
Schwab U.S. Aggregate Bond Index Fund holds approximately 8,090 bonds. The top issuers are the US Treasury or issuers of Mortgage Backed securities like Fannie Mae and Freddie Mac. It has an expense ratio of 0.04%. Which means if you have $10,000 invested in Schwab U.S. Aggregate Bond Index Fund, you are essentially paying $4.00 for Charles Schwab to manage this fund for you.
So what are bonds and do you need them in your portfolio? In the simplest term, bonds are loans. When you buy bonds, you are essentially loaning money to someone. In this case to a company or a government agency. And they are a very important addition to a well constructed investment portfolio because of how different they are from stocks.
A good analogy I like to use to frame stocks versus bonds is to think of them like engine vs. the break. Think of stocks as your core wealth building engine. Without it, you aren’t really going anywhere. And think of bonds as your breaks. Without it, you could drive yourself off the road. When you have bonds in your portfolio, it helps to smooth out your investment ride because though they have lower returns, they have less volatility.
Durings times of market crash, where your stock investments can dip by 20-30%, your bond investments will hold steady and ensure your ride isn’t so rocky. So in order to help smooth out your investment ride, you want to start adding them to your portfolio as you get closer to your retirement age.
While we are on the topic of investment portfolio, let me talk briefly about one of the most popular portfolio strategies. The 3-Fund portfolio is one of the most popular do it yourself investment strategies. And as its name implies, it is made of three simple funds:
An Equities Fund
An International Fund
A Bond Fund
The Schwab U.S. Aggregate Bond Index Fund would fit perfectly into the bond fund slot in this portfolio. And if you are already invested in Charles Schwab, consider Schwab U.S. Aggregate Bond Index Fund as your core bond holding in your portfolio.
Schwab International Index Fund (SWISX)
The third fund on our list is Schwab International Index Fund, SWISX. The Schwab International Index Fund tracks the MSCI EAFE Index. An equity index which captures large and mid cap representation across 21 Developed Markets countries around the world, excluding the US and Canada.
It represents approximately 831 international companies from developed nations like Japan, United Kingdom and France. Charles Schwab unfortunately doesn’t have good low cost international index funds that tracks both developed and emerging markets. The funds that somewhat do are actively managed funds with high expense ratios and I personally wouldn’t recommend them.
Schwab International Index Fund has an expense ratio of 0.06%. Which means if you have $10,000 invested in SWISX, you are essentially paying $6.00 for Charles Schwab to manage this fund for you. Now let’s take a look at its composition.
The biggest countries being Japan at 22%, United Kingdom at 16%, France at 11%, Switzerland at 10% and Australia at 8%. The top 5 companies represented are Nestle, ASML Holding, Roche Holding, Shell and AstraZeneca.
One question people often ask when told about international funds is, do we really need them in our portfolio? And that is a very good and valid question. I like to talk about the Japanese stock market as a lesson on why we might want to hold an international fund. At the end of 1989, the Japanese stock market’s capitalized value was considered the largest in the world. The Nikkei 225 Index, the index of 225 largest publicly owned companies in Japan, reached an all-time high of close to 40,000. Sadly 22 years later, the Nikkei was under 8,500 and to this day has yet to reach its all time high again. But sadder is the Japanese investor who failed to invest in international stocks outside Japan.
The US based companies are currently the world leaders in market capitalization and revenue, but who can confidently say it will stay like that in the future? It would be unfortunate, but the same thing could happen to the US stock investors. I personally still have strong confidence in the US economy and US based companies as a whole, but I also have to continuously check my assumptions. Financial writer Larry Swedroe had a saying.
“Never treat the highly likely as certain and the highly unlikely as impossible.” - Larrry Swedroe
If you are invested with Charles Schwab and are looking for a good international index fund to broaden your exposure, Schwab International Index Fund is a great option and this also fits nicely into the international slot in our 3-fund portfolio model.
Schwab S&P 500 Index Fund (SWPPX)
The fourth Charles Schwab fund you want to buy and hold forever is Schwab S&P 500 Index Fund. The fund tracks the S&P 500 Index and allows access to 500 leading U.S. companies and captures approximately 80% coverage of available U.S. market capitalization. 504 to be exact at the time of this post.
The top holdings in this fund are Apple, Microsoft and Amazon. Not a surprise given the company representation is based on market capitalization and these big companies represent a good percentage of the market as a whole. Schwab S&P 500 Index Fund has an expense ratio of 0.02%. So, if you have $10,000 invested in Schwab S&P 500 Index Fund, you are essentially paying $2.00 annually for Charles Schwab to manage this fund for you.
So what is great about the S&P 500? When most people talk about "the stock market" they are most often referring to the Standard & Poor's 500, not the total market index. And the reason is because it is so much older and time tested. The original index was created in 1926 when it began tracking 90 stocks and in 1957, the list expanded to 500. And since then, the S&P 500 has been one of the most widely quoted American indexes because it represents the largest publicly traded corporations in the U.S.
When you turn on any financial news, reporters are always discussing how the S&P 500 is up 50 points or down 100 points. Also the S&P 500 is a float-weighted index, meaning the market capitalizations of the companies in the index are adjusted by the number of shares available for public trading.
Because it’s weighted by market cap, though there are approximately 4,000 publicly traded companies in the United States total, these 500 stocks represent about 80 to 85% of the market value of all US stocks. And weight within the index automatically adjusts based on the changing stock prices. To this day, the S&P 500 remains the standard to which professional mutual fund managers and investment firms compare their returns against.
So if you want your equities holding to match the performance of the largest US stocks since they are essentially what moves the market, hold Schwab S&P 500 Index Fund as your core equities holding.
Schwab Total Stock Market Index Fund (SWTSX)
The fifth Charles Schwab fund you want to buy and hold forever is Schwab Total Stock Market Index Fund also known as SWTSX. The fund tracks the Dow Jones U.S. Total Stock Market Index and it represents approximately 3,481 US based companies. The top holdings in this fund are Apple, Microsoft and Amazon. Very similar to the Schwab S&P 500 Index Fund.
It has an expense ratio of 0.03%. Which means if you have $10,000 invested in Schwab Total Stock Market Index Fund, you are essentially paying $3.00 for Charles Schwab to manage this fund for you. This one fund allows investors simple access to the entire U.S. stock market. The index is designed to provide a comprehensive measure of large-cap, mid-cap, and small-cap U.S. equity securities
As I mentioned earlier, when it comes to investing in the stock market, the key principle you want to abide by is diversification. Many people tend to think the only way to make money in the market is to “beat the market.” By either selecting good stocks or good actively managed mutual funds.
Unless you are a professional investor with hundreds of analysts working for you around the clock. Analysts who are constantly interviewing and researching companies and industries, we can’t win in the stock picking or fund picking game. The odds are just stacked too high against the individual investor. So the best strategy to beat wall street, is to just track the market, and at the lowest cost. Schwab Total Stock Market Index Fund is the perfect fund to do that for you.
Another great benefit of investing in a fund like Schwab Total Stock Market Index Fund is the fact that the fund is self-cleaning. There are approximately 3,500 companies in this fund, and throughout our lifetime, many will go bankrupt and disappear. However, new companies will come and take its place in the fund.
And here is the upside of this mechanism. While the worst possible performance a stock can deliver is 0, when they go bankrupt and disappear from your Schwab Total Stock Market Index Fund, the upward potential is limitless. The best performance a company can deliver isn’t 100%, it can be 1,000%, 10,000% or more.
Tesla is a great example of this. Take a look at its growth in the last 10 years. Close to 20,000%. If you hold onto SWTSX, you get the unlimited upside of companies like Tesla. During these 10 years, there have been many other electric car companies that have faded away and disappeared. SWTSX automatically replaced these dead and dying from its fund with new and upcoming companies with great potential. This mechanism of self-cleansing is automatic with funds like Schwab Total Stock Market Index Fund and also in all other index funds we discussed in this post. If you are looking to hold one equities fund in your portfolio, Schwab Total Stock Market Index Fund is a great fund to hold.
I normally advocate for Vanguard funds, but sometimes you may not be able to choose the investment firm you want because your employer doesn’t offer it. Charles Schwab is a great investment firm with a long history and if you are looking to invest with them, pick any of the 5 I mentioned here and you can’t go wrong. If you like to learn more about the 3-fund portfolio and why you might want to consider it as your strategy, check out my post here.
