Last Updated on March 13, 2021 by pf team
Schwab index funds have been a solid choice for long-term investors for decades but recent reductions in management costs make Charles Schwab index funds more attractive than ever.
Schwab now offers a variety of index funds, ranging from US equities to international stocks with expense ratios at just a fraction of a percent.
Global real estate and inflation-protected bond funds round out the list of your choices.
What is Charles Schwab?
In less than 50 years, The Charles Schwab Corporation has made an indelible mark on the investment world. The company started in 1971, predating its rival Vanguard which opened its doors 3 years later.
Schwab’s story is one of both evolution and revolution. What began as an investment newsletter service later evolved to include a broker-dealer business.
Changes to SEC regulations in the early 70s opened the door for Schwab, which then used the opportunity to launch its first retail brokerage branches.
Today, Charles Schwab has nearly 350 brick-and-mortar brokerages throughout the US. Over time, the brokerage began adding funds of its own, fueling its continued growth.
In 1997, the same year the company was added to the S&P 500 index, Schwab launched its iconic Schwab S&P 500 Index Fund (SWPPX).
Now the company offers more than 50 funds and ranks as the 3rd largest mutual company when measured by assets under management.
What does Charles Schwab offer?
As part of the company’s mission statement, Charles Schwab vowed to empower individual investors. Schwab’s client-first philosophy benefits investors through several types of investment services.
With its retail brokerage roots, Schwab brings the world-class services investors expect to both its retail branches and online accounts.
Online trades as low as $0 keep investing affordable and within reach of everyone. Account options with no minimum deposit remove another common hurdle for investors.
With low investment requirements and the availability of $0 trades, a Schwab brokerage account offers an attractive way to start investing.
Schwab’s goal of empowering investors is evident in the tools the company offers. Research tools and market data abound but at the core of Schwab’s offering is its StreetSmart Edge trading platform.
StreetSmart Edge gives investors powerful tools to make educated trading decisions but you’ll have other trading options as well.
The company also offers trades and research through its website portal and mobile apps, so your portfolio is available to you on the go.
For those who prefer hands-off investing, Schwab offers ways to automate your investment growth. Of course, you can set up automatic reinvestments so dividends and other earnings can continue to grow your account.
Schwab also offers a robo-advisor, an automated service that helps you build an ETF-based portfolio that keeps you diversified. Daily rebalancing, as needed, helps keep your account growth on track to meet your investment goals.
In the background, Schwab’s experts keep an eye on underlying funds to be sure they still match your strategy. You’ll gain the cost advantages of automation combined with expert oversight.
Schwab global account
It’s a big world out there and The Schwab Global Account puts access to the world’s leading markets at your fingertips. Like other Schwab services, Schwab’s global account is designed for accessibility.
With no account minimum and no trade minimum, you can trade on your terms and gain access to leading markets like Australia, Canada, and several European countries, as well as Asian markets.
Education savings accounts
If you’re a parent, you’re probably already familiar with the high cost of education. Schwab’s education savings accounts provide a cost-effective way to save for education expenses whenever they occur, from kindergarten until college.
Withdrawals from your educational savings account (ESA) are tax-free when used for qualified education expenses. Allowed expenses can include tuition as well as supplies. Your earnings grow tax-deferred and there’s no account minimum.
As you’d expect from a client-focused brokerage and fund provider, Schwab offers a full complement of retirement accounts. Choose from Traditional or Roth IRAs. You can also start a Rollover IRA to move retirement funds from another source into your Schwab portfolio.
If you’re self-employed, a SEP IRA or a Simple IRA can also be effective ways to plan for your future using Schwab’s investment services.
Trust, estate, and charitable accounts
For estate planning, you’ll find a support for trust accounts, estate accounts, and charitable accounts, as well as a suite of tools to optimize estate planning.
Schwab’s knowledge center helps guide you through the process and expert help is just a phone call away if needed.
What is the difference between Charles Schwab basic index funds and fundamental index funds?
Traditionally, index funds track a benchmark, with equities weighted according to market cap. This strategy, while having proven effective for investors, creates a portfolio heavily weighted towards the largest companies.
Traditional indexing can also prioritize overvalued stocks in your portfolio, some of which may be headed for a price correction.
Schwab offers both traditional equity index funds and fundamental index funds, an innovation from Schwab targeting greater diversification and reduced risk.
Equity index funds
Similar to equity index funds from other providers, Schwab’s equity index funds follow a chosen benchmark index, such as the S&P 500, the Dow Jones Industrial Index, or more specialized indexes.
Performance of these benchmark indexes should closely mirror the performance in your Schwab funds that track these indexes. No surprises here.
Fundamental index funds
Index-based portfolios tend to outperform actively managed portfolios but what if there was a way to reduce exposure to high-flying and probably overvalued stocks within a benchmark index?
Schwab’s fundamental index funds bring a touch of old-school objective fundamental analysis to index investing, creating a balance between market caps based index strategies and actively managed investments.
Fundamental index funds rebalance periodically, reducing exposure to some of the stocks that have performed best within the index.
Think of it as prudent profit-taking, but automated. The funds then reinvest in some of the securities that meet objective fundamental metrics.
Typically, these are companies with room for stock-price growth. Fundamental metrics measure company size rather than market cap.
Weighting within a fundamental index, called a RAFI index, can hinge on adjusted sales, dividends and buybacks, and retained cash flow, although the strategies used can vary by index.
Charles Schwab equity index funds
Schwab® S&P 500 Index Fund (SWPPX)
If you invest in The Schwab S&P 500 Index Fund (SWPPX), you’ll have a pretty good idea of how your investment performs daily simply by watching the news.
Over the past 10 years, SWPPX has tracked the S&P accurately, rewarding long-term investors with a 10-year average return of over 13%. Top holdings include names we all know, like Microsoft, Apple, Amazon, and Facebook.
The fund even invests in Berkshire Hathaway stock (BRK.B), so you’ll enjoy some of Warren Buffett’s success without having to pay $200+ per share for stock in Buffett’s world-famous investment company.
Information technology stocks dominate the S&P index, making up over 20% of SWPPX’s holdings. Healthcare, financials, and communications companies make up double-digit percentages as well.
Tapping into S&P growth through SWPPX is more affordable than with many competing funds. You’ll pay just 0.02% as an expense ratio.
Schwab Total Stock Market Index Fund® (SWTSX)
Schwab’s Total Stock Market Index Fund does what it says on the tin. You’ll gain access to the entire US stock market, including large cap, mid-cap, and small-cap stocks.
Because asset allocation is based on market capitalization, many of the same names you’ll find in an S&P index fund also appeared as top holdings in total market funds.
Unsurprisingly, Microsoft, Apple and Amazon top the list as equities held by SWTSX.
However, you’ll enjoy a more diversified portfolio through Schwab’s Total Market Index Fund than you’ll find with indexes that track fewer companies.
In total, you’ll own more than 3,000 stocks by purchasing one fund. In keeping with Schwab’s new tradition of lower management fees, the expense ratio for SWTSX weighs in at just 0.03%.
For long-term investors, lower management expenses can lead to larger future gains.
Schwab 1000 Index® Fund (SNXFX)
If you’re not yet familiar with the Schwab 1000 index, this proprietary index tracks both large-cap and mid-cap stocks, ranking the largest US stocks by market capitalization.
In effect, the index is similar to the S&P 500, but allows inclusion of 500 more stocks.
This structure gives you a more diversified portfolio than would an S&P focused fund and also gives you access to companies that still have plenty of room to grow.
When comparing performance over the past 10 years, SNXFX slightly trails Schwab’s SWPPX S&P 500 index fund, giving investors just under 13% as an average annual return.
In exchange for slightly lower performance, investors enjoyed more diversification with exposure to 500 additional companies. Yields for SNXFX were also higher than its S&P index brethren over the past decade, returning 1.79% compared to 1.73%.
SNXFX has an expense ratio of 0.05%.
Schwab Small Cap Index Fund® (SWSSX)
In the right economic environment, small-cap stocks can provide dynamic growth. The Schwab Small Cap Index Fund tracks the small-cap focused Russell 2000 Index, currently comprised of 1,992 stocks.
These are smaller companies, so you’ll find many of the stocks held by the fund are names with which you’re not yet familiar.
Some will be ongoing success stories, some will be tomorrow’s giants and a few may falter. Expect a bit more volatility with this group than with large-cap focused funds.
Schwab’s Small Cap Index Fund holds its own in regard to long-term performance.
Over the past 10 years, the fund indulged performance-driven investors with an average annual return of 12.63%. Since its inception in 1997, the fund has returned nearly 9% on average.
Expense ratio for this well-diversified fund come in at 0.04% and the fund yields 1.32%.
Schwab Fundamental US Large Company Index Fund (SFLNX)
If you prefer to invest in proven success stories, take a closer look at Schwab’s Fundamental US Large Company Index. Large-cap funds aren’t difficult to find. Look no further than Schwab’s S&P 500 Index Fund for an example of an efficient large cap index fund.
However, Schwab’s Fundamental US Large Company Index Fund adds an interesting twist to large cap investing. The fund reduces exposure to large cap stocks that may have outrun their value based on fundamentals.
Nothing goes straight up forever, and SFLNX employs automatic reallocation based on fundamental measurements. As you’d expect with this sort of strategy, the fund’s portfolio has more turnover than you’d find with an S&P fund.
Expense ratio also comes in higher at 0.25%. However, this number is still well below the cost of many actively managed mutual funds.
Schwab Fundamental US Small Company Index Fund (SFSNX)
Following a similar allocation strategy to that used by Schwab’s large-cap fundamental index fund, SFSNX tracks an index of more than 900 small-cap stocks.
The fund is weighted heavily towards industrials, consumer discretionary stocks, and financials, which combined make up nearly 50% of the fund’s holdings.
This mix marks a stark departure from the tech and healthcare dominance found in S&P index funds. You own stocks like Teledyne, GNC Holdings, and Skechers.
You’ll also own hundreds of brands you may not yet know — but which might someday be giants.
Momentum trading and hype have a way of carrying stock prices too far in many cases. SFSNX’s fundamental reallocation strategy reduces exposure to stocks that may have run a bit too far, too fast.
The fund then reinvests in stocks that may be undervalued based on their fundamentals. You’ll pay 0.25% as an expense ratio, which again is much less expensive than many actively managed funds.
Charles Schwab international index funds
Schwab Fundamental International Large Company Index Fund (SFNNX)
With nearly $1.3 billion in assets under management, SFNNX proves that you don’t need active management to attract investors for international companies.
Household names like Samsung, Toyota, Honda, & Nestle make up some of the fund’s largest holdings. Nearly 25% of its investments are in Japan and another 16% are for UK-based companies.
Dividend fans should take a closer look at Schwab’s SFNNX. Currently, the fund yields over 3%. However, overall performance lags behind US large-cap indexes.
Average 10-year performance for SFNNX is under 5%. As a Fundamental index fund, expect some reallocation as individual stocks become a bit top-heavy.
Again, expense ratios are higher than with some of Schwab’s standard equity index funds. You’ll pay 0.25% as an expense ratio.
Interestingly, SFNXX has a price to earnings ratio of just 12.66%. When compared to the S&P’s price to earnings of over 20% (24.28% at the time of this writing), there may be added value in SFNXX at these prices.
Schwab Fundamental International Small Company Index Fund SFILX
Made up of about 1,700 smaller companies, SFILX focuses on international investments in developed countries. Neither SFILX nor SFNNX, its large-cap kin, invest in US stocks, although some of the holdings are brands well-known in US households.
For example, the fund owns shares in Hitachi and Quantus. Exposure is heavily skewed toward Japan, with nearly 35% of the fund’s assets invested in Japanese stocks.
Expect higher turnover with small-cap index funds — especially in a fundamental index fund — often leading to higher management costs. You’ll pay 0.39% as an expense ratio, which is still low compared to many actively managed funds but higher than large-cap passive funds.
SFILX’s 10-year average performance comes in at just over 7% with a stronger-than-average 2.34% yield.
Schwab International Index Fund® SWISX
Another option for large-cap non-US companies, The Schwab International Index Fund invests in countries with developed equity markets.
Stocks from Japan, the UK, and France make up over 50% of the fund’s holdings. You’ll find big names like Nestle, Toyota, and HSBC among the fund’s top assets.
Low portfolio turnover translates into lower fees and with just 5% turnover, SWISX delivers steady gains with an affordable 0.06% expense ratio.
Yields are strong with this fund as well. With a 2.67% yield, you can afford to weather a soft year here and there if international markets lag US performance.
Charles Schwab real estate index fund
Schwab Fundamental Global Real Estate Index Fund (SFREX)
As you might expect from a fund that tracks a global index heavy on REITs, yields for The Schwab Fundamental Global Real Estate Index Fund are higher than for broad market funds. Current yield is over 3.5%.
The fund’s short-term returns are strong as well, with a 1-year annual return of over 12%. Since inception in 2014, SFREX investors have earned an average of 7.63%.
Nearly half of investments focus on US real estate. China, Hong Kong, and Japan follow, each with 8-9% of the fund’s assets.
Charles Schwab treasury index fund
Schwab® Treasury Inflation Protected Securities Index Fund (SWRSX)
In times of uncertainty or if you’re in-between investments, it’s hard to put a price on the safety of US bonds. SWRSX invests nearly 100% of the fund’s assets in US Government Securities.
For those nearing retirement and who want to begin reducing risk, The Schwab Treasury Inflation Protected Securities Index Fund may be a good choice. Trailing 12-month yields are steady at 2.29%, giving your savings a built-in hedge against inflation.
With trading fees as low as, well, free — and no minimum investment requirements on many types of funds, Schwab makes a compelling offer to those new to investing or those looking for a new brokerage to call home.
While Schwab doesn’t have as many funds as some other providers, you could make a successful argument that the broker offers enough variety to meet the needs of most investors.
Whether you prefer large-cap, small-cap, or something in-between, Schwab funds have a low-cost solution ready to go. Mix and match to build your own portfolio or take advantage of Schwab’s robo-advisor if you have a bit more to invest.