While Vanguard is often considered the champion of low-cost, diversified index funds, Charles Schwab poses some serious competition. With one of the biggest variety of funds in the industry accompanied by some some of the lowest fees on offer, this list of the best Schwab index funds may be just what you need for building your portfolio.
What is Charles Schwab?
The Charles Schwab Corporation is a financial services company. It’s currently the third largest asset manager in the US, behind BlackRock and Vanguard.
Starting out as a simple investment newsletter, it’s evolved to become one of the go-tos in the industry for individual investors, including those looking to invest in broad market index funds.
Can I buy index funds on Charles Schwab?
Schwab is one of the best in the business for those looking to buy index funds.
It launched its first index fund in 1991 and, since then, has become one of the largest providers of index funds and exchange-traded funds (ETFs) in the world.
Specifically, the value of the index funds and ETFs it manages is currently around $255.8 billion.
The best Schwab index funds
Best overall: Schwab S&P 500 Index Fund (SWPPX)
Expense ratio: 0.02%
Details: There’s a reason that funds that track the S&P 500 are the index fund of choice for many investors. They offer great diversification and solid returns historically, all at a far lower cost than if you tried to do the same by buying the individual underlying shares.
Specifically, by tracking the performance of the 500 largest publicly traded companies in the US, investing in an S&P 500 index fund is equivalent to owning stocks in some of the biggest companies in the world such as Microsoft, Apple, Amazon, Facebook and more – without having to directly buy their shares yourself.
This makes it an extremely cheap option if you’re looking to invest in a fund that provides for diversification while ensuring that your returns mirror those of one of the best performing investments of all time: the US stock market.
Best US diversification: Schwab Total Stock Market Index Fund (SWTSX)
Expense ratio: 0.03%
Details: This is similar to the previous fund, except that here you’re tracking the entire US stock market, not just the top performing companies.
While the 500 funds making up the previous fund equate to around 80% of the total value of the market, this fund goes even further by basically being the same as if you owned stocks in the over 3,000 companies that are publicly traded in the US.
While you can’t go wrong with either of them, this fund will have an advantage at times when smaller company stocks outperform larger ones.
Silver medal: Schwab 1000 Index Fund (SNXFX)
Expense ratio: 0.05%
Details: This fund invests in the 1,000 largest stocks traded on the US stock market, making it more diversified than just tracking the S&P 500.
That said, this fund hasn’t performed as well as the S&P 500 fund over the last 10 years. This is largely due to the higher fees in the 1000 Index Fund which have eaten into its gains.
If you’re looking for diversification, the Total Stock Market fund may be a better option, given that it’s outperformed both this and the S&P 500 Fund.
Best for small caps: Schwab Small Cap Index Fund (SWSSX)
Expense ratio: 0.04%
Details: This fund tracks the Russell 2000 Index, which is focused on around 2,000 of the smallest-cap American companies.
This can be a good option if you’re interested in some additional diversification outside of the major companies. At the same time, smaller companies tend to be less stable in terms of performance than the larger companies in the S&P 500, so expect more volatility.
But with a ten-year average annual return of over 10%, this can be a great addition to your portfolio for longer-term gains.
Best for international developed markets: Schwab International Index Fund (SWISX)
Expense ratio: 0.06%
Details: This tracks the performance of over 900 large, publicly traded, non-US companies, including major names like Nestle, Toyota, LVMH (Moët Hennessy – Louis Vuitton) and more.
Over 99% of its assets are located in developed markets, with the three largest being around 24% in Japan, 16% in the UK and 10% in France.
For those looking to diversify outside of the US market, you can’t go wrong with this fund. The fees are slightly higher than some of the US-based funds but despite this, it can be a good way to protect your investments from any US-specific volatility that may arise.
Best for emerging markets: Schwab Fundamental Emerging Markets Large Company Index Fund (SFENX)
Expense ratio: 0.39%
Details: Emerging markets do present more risk than some of the other options on this list but if you’re looking to invest in this area, then the Emerging Markets Large Company fund is worth considering.
It has almost 300 holdings in countries such as China, Taiwan, Russia, Brazil and India. Performance has been strong but quite volatile, as may be expected with a fund tracking these sorts of assets.
But for those looking for further diversification outside of other markets with fairly low fees, albeit higher than some of the other funds, this is a great way to do so.
Best for bonds: Schwab Treasury Inflation Protected Securities Index (SWRSX)
Expense ratio: 0.05%
Details: Many investors like to keep some of their money in bonds as a more stable buffer against the fluctuations often seen in purely stock-based funds.
This is especially the case for older investors who may be looking to reduce the risk of volatility in their portfolios as they approach retirement or simply those who are more comfortable with balancing their investments in this way.
To this end, the Treasury Inflation Protected Securities Index is Schwab’s total bond market index fund, consisting solely of US government securities. In other words, it’s made up of 100% US bonds, making this an easy solution for those looking to invest in this way.
Best for real estate: Schwab Fundamental Global Real Estate Index Fund (SFREX)
Expense ratio: 0.39%
Details: Index funds can also be focused on specific sections of the market, such as this one which invests in major real estate companies around the world.
Over 47% of its 333 holdings are based in the US, with others being from China, Hong Kong, Japan and Australia.
The expense ratio is quite high on this fund, although performance has still been strong. For those looking to invest in real estate without the hassle of actually buying property yourself, this could definitely be a fund to consider.
Are Schwab index funds good?
While what makes an investment “good” will very much depend on your individual circumstances, Schwab index funds have some great advantages that should make you seriously consider investing in them.
One of the biggest advantages of investing in any index fund is the fact that they’re generally subject to much lower fees than other investment products, largely due to the fact that they’re not actively managed.
Schwab index funds are no different and, in many cases, have the lowest fees in the industry.
Vanguard is often considered the benchmark amongst index fund providers, but Schwab’s fees are often (slightly) less than Vanguard’s, making them a really viable alternative.
No minimum investment
One of Schwab’s company philosophies has long been to ensure they’re accessible to everyday investors, not just major firms.
And a clear example of this is the fact that they have no minimum investment amount, meaning that whether you have $5 or $5 million to invest, you’re able to take advantage of what they have on offer.
This is different from Vanguard which does have some minimum investment limits, so could be a reason for you to invest in a Schwab index fund instead.
Free online trades
As mentioned above, online trades through Schwab’s own brokerage account are $0, making sure that investing is available to as many people as possible.
There are exceptions, so make sure you read the fine print. In particular, I would strongly recommend against using Schwab to invest in non-Schwab mutual funds as they charge up to an astronomical $75 for this.
But for those looking to invest in one of Schwab’s own broad market index funds, you’ll be able to take advantage of free online trades.
Like most index fund providers, Schwab offers automatic reinvestments so that dividends and other earnings are immediately put back into your account to continue to grow.
However, they also have “Intelligent Portfolios”, which essentially involves a robo-advisor building your portfolio for free.
How it works is that you answer a few questions to determine your investment goals, your risk tolerance and how long you wish to invest for.
It will then create a portfolio for you of low-cost ETFs, with the fees being identical to if you had done this yourself. It will also rebalance your portfolio as the value of the individual funds change over time.
This may not be a requirement for you if you only intend to invest in only one or a few funds, but for those looking for more diversification, this can be an attractive option.
Difference between Charles Schwab basic index funds and fundamental index funds
Basic index funds follow a chosen benchmark index, like the S&P 500, a more specialized index or a foreign market. This means that the performance of these funds will reflect the performance of the chosen index.
Fundamental index funds is a Schwab-specific offering that is slightly more actively managed than your usual basic index fund. It involves rebalancing the fund to reduce exposure to stocks that have performed the best (and thus may be overvalued).
Essentially, this involves selling high-performing stocks from the fund and then reinvesting that money into other stocks that meet certain fundamental requirements which make them likely to provide further growth
What are the best Schwab funds?
Figuring out which Schwab index fund is the “best” for you is based on a range of factors.
Generally speaking, you should always do your research before deciding where to invest your money. Some of the aspects you should consider when figuring out which one is “best” could include the following:
- Your risk tolerance – look into the potential volatility of the different funds based on their underlying assets to see whether you think you can handle the higher risks involved in some of them
- Past performance – past performance does absolutely not guarantee future performance, but it can be helpful to get an idea of how your investment may perform, particularly when looking to balance risk v potential reward
- Diversification – index funds by their very nature are already highly diversified. Most people aren’t going to take the time to buy 500 stocks, for example, compared to simply investing in an S&P 500 index fund. But different markets can offer different potential outcomes, which could be of interest to you
- Expense ratio – fees are a hugely important part of any investment decision and are one of the main reasons why index funds are such a good investment vehicle. That is, their generally low fees ensure that you get the benefit of almost all the gains made by a fund. At the same time, some have lower fees than others, so it’s always something to check.
How can I buy Schwab index funds?
The way you invest in Schwab index funds will largely depend on if you choose to invest in an index mutual fund or ETFs.
(If you’re not sure of the difference between the two, take a look at the FAQs near the end of this article.)
Either way, you’ll need to create a brokerage account, which can be done here. It’s free to open the account, there’s no minimum deposit and it has $0 online trades.
This last point is important, as a lot of brokerage accounts offered by other companies – which you will always need to buy ETFs (the arrangement can be different with some mutual fund providers) – will charge a small amount for trades.
While these fees aren’t huge, they can add up over your investing life, so it’s good to take advantage of free trades when they’re on offer.
Does Schwab have hidden fees?
Schwab’s pricing structure can be seen here. This clearly shows which products and services are free and which may incur extra fees.
Overall, the fee disclosure is very transparent and thus there certainly isn’t anything that could be considered a “hidden” fee.
At the same time, you should always do your research before any investment decision to know what you’re getting yourself into, including with respect to any fees, to avoid any nasty surprises later on.
Is Schwab better than Fidelity? Or is Vanguard or Charles Schwab better?
This very much depends on what you’re looking for but, in general, all three are excellent options for investing in index funds.
Vanguard index funds are world renowned for their low fees and broad range of options. Similarly, Fidelity’s product offerings are similar to Charles Schwab in many ways.
But one way to distinguish between Schwab index funds vs Vanguard vs Fidelity is by comparing their expense ratios. Examples used are the equivalent funds at each company to those discussed in this article:
S&P 500 Index Fund (SWPPX)
500 Index Fund (VFIAX)
500 Index Fund (FXAIX)
Total Stock Market Index Fund (SWTSX)
Total Stock Market Index Fund (VTSAX)
Total Market Index Fund (FSKAX)
1000 Index Fund (SNXFX)
Large-Cap Index Fund (VLCAX)
Large Cap Value Index Fund (FLCOX)
Small Cap Index Fund (SWSSX)
Small-Cap Index Fund (VSMAX)
Small Cap Index Fund (FSSNX)
International Index Fund (SWISX)
Developed Markets Index Fund (VTMGX)
International Index Fund (FSPSX)
Fundamental Emerging Markets Large Company Index Fund (SFENX)
Emerging Markets Stock Index Fund Admiral Shares (VEMAX)
Emerging Markets Index Fund (FPADX)
Treasury Inflation Protected Securities Index (SWRSX)
Short-Term Inflation-Protected Securities Index Fund (VTAPX)
U.S. Bond Index Fund (FXNAX)
Fundamental Global Real Estate Index Fund (SFREX)
Real Estate Index Fund Admiral Shares (VGSLX)
Real Estate Index Fund (FSRNX)
What does Charles Schwab offer?
In addition to its range of low-cost index funds, Charles Schwab offers a variety of other investment products.
Its product offerings include:
- Mutual funds – a pool of funds from a number of investors that buys stocks, bonds, and other securities
- Stocks – a share in the ownership of a company
- Exchange-traded funds (ETFs) – an investment fund or portfolio of securities that holds assets like stocks, bonds, or commodities, generally designed to track an index
- Options – a contract sold by one party to another, where the latter has the option to buy (“call”) or sell (“put”) a security or other financial asset at an agreed price (the “strike price”) until a certain date (the “expiration date”)
- Futures – a contract that requires someone to buy or sell an asset at a certain future date and price
- Closed-end funds (CEF) – a fund managed by an investment advisor that issues a certain number of shares that trade on an exchange. These differ from mutual funds in that even if there’s demand, new shares aren’t issued within a CEF
…along with bonds, money market funds, certificates of deposit and more.
Take a look at the Schwab website for more information on the investment products they offer.
General questions on index funds
Do index funds pay dividends?
Yes, usually every three to six months.
Take a look at the “Distribution” section of the funds you’re interested in to see each one’s dividend history. This should help give you an idea of not only how often dividends are paid, but how much has been paid during previous disbursements.
Can you lose money in an index fund?
Any investment vehicle has some element of risk that they’ll lose some value. It’s worth noting though that index funds are much lower risk than buying regular shares in a company that has the possibility of going bankrupt (resulting in you losing everything).
This is because if, say, you invest in an S&P 500 index fund and one of the top 500 companies goes bankrupt, it will simply drop out of the list and be replaced with what was previously no. 501. The value of your investment may drop in value slightly if this happens, but there’s next to no chance that it will go to zero.
That said, do your research before making any investment-related decision, including in terms of the risk you’re willing to assume.
Don’t forget as well that you’re investing for the long term here and there will be inevitable peaks and troughs. You only lose money if you sell so even if times are rocky, the best strategy over time has been to hold and ride it out.
What’s the difference between index mutual funds and ETFs?
Although both track indexes, they differ in how they are structured, bought and sold. This can also result in different costs for those who choose to use one or the other, such as the need to pay trading commissions.
ETFs are purchased through a brokerage account and are traded like stocks based on prices that fluctuate throughout the day.
You buy them from other market participants, which may be an individual investor or, more likely, a firm that specializes in buying and selling ETFs.
Mutual funds, including those that track an index, are bought directly from a fund company, like Schwab.
They are priced just once per day: when the markets close so their net asset value can be determined.
Does Warren Buffett buy index funds?
Warren Buffet is one of the most successful investors of all time and has described low-cost index funds as “the most sensible equity investment for the great majority of investors”.
What index funds does Warren Buffett recommend?
In his 2016 Berkshire Hathaway annual shareholder letter, Buffet wrote: “My regular recommendation has been a low-cost S&P 500 index fund”.
And if there’s anyone we should listen to on this point, it’s him!