How about a tip of the cap to the index fund?
The price of almost everything we buy has gone up over the past few years, but index funds not only remain a source of stable low costs—they keep getting cheaper by the year! Indeed, index mutual funds and ETFs have been a disinflationary agent for literally decades, pushing down the cost of investing for regular Joes and Janes who just want to build a little wealth for themselves.
Schwab’s index mutual funds go one step further. In addition to some of the lowest expenses you’ll find, Schwab keeps it cheap in one way most mutual fund providers don’t: investment minimums. Even if a fund has an extremely low annual expense ratio, it might still require an initial investment in the thousands of dollars. That’s a high barrier to entry for people with low liquid assets, or just low assets altogether. But in most cases, all it takes to get started in a Schwab mutual fund is just one buck.
The ideal combination, of course, is low fees, low starting costs, and high quality. And like with any other provider, some Schwab funds are better than others. So today, I’m going to introduce you to some of the best Schwab index funds you can buy—a group of core and satellite holdings that can each be purchased for a song.
Disclaimer: This article does not constitute individualized investment advice. These securities appear for your consideration and not as personalized investment recommendations. Act at your own discretion.
Why Schwab?
Charles Schwab is a U.S.-based brokerage and banking company founded in 1971 as a traditional brokerage company and then as a discount brokerage service in 1974. It’s the largest publicly traded investment services firm with more than $10 trillion in client assets. And it offers a wide range of financial services, such as investment advice and management, trading services, financial planning, banking services, workplace and individual retirement plans, annuities, and more.
It also offers very low-cost and extremely low-minimum mutual funds. Annual expenses on its mutual funds are well below the industry average. And Schwab really stands out from a nominal-expense perspective. Many providers’ mutual funds require minimum initial investments in the thousands of dollars. But most Schwab mutual funds require a mere $1—an ideal situation for investors who don’t have much capital to put to work.
In short: Schwab offers a nice variety of mutual funds, some of which are among the best on the market, and they won’t leave your wallet in tatters.
Why Index Funds?
For most of their history, investment funds (like mutual funds) were entirely run by human managers, who would research, select, buy, and sell securities on the fund’s behalf.
That changed in the mid-1970s with the advent of the index fund.
An index measures the performance of a group of assets, and those assets are determined by the index’s rules. An index fund “tracks” the index by actually investing in all (or in some cases, a representative sampling of) the underlying assets. An index’s strategy can be broad, like the S&P 500, which measures a wide assortment of American companies. Or the focus can be as narrow as, say, holding only below-investment-grade bonds issued by chip and cookie makers in the Asia-Pacific.
While I don’t recommend buying my hypothetical APAC Junk Food Index Fund, I do recommend buying index funds in general, for a few reasons.
They’re typically cheaper. An actively managed index fund has one or more managers, all of whom need to be paid. An index fund technically has a manager overseeing the fund, but they’re not performing stock research and deciding on trades—the index’s rules determine those actions. Thus, fund providers can afford to charge (often much) lower expenses on index funds.
Index funds tend to perform well, too, compared to comparable actively managed funds. I’ll provide a pretty stark example later, but just know that human managers often struggle to beat the benchmark indexes. So, if you have a fund that cheaply tracks a benchmark index, and many human managers can’t even beat that benchmark index … that index fund starts to look awfully good.
How Were the Best Schwab Index Funds Selected?
Unlike other mutual fund giants, Schwab’s assets are concentrated in a tight roster of just a few dozen mutual funds. So, investors sorting through Schwab’s index mutual funds won’t have nearly as bad a case of analysis paralysis.
Still, a little filtering is necessary to get us down to a more manageable list. So I’ve started with a quality screen, including only Schwab index funds that have earned a Morningstar Medalist rating.
Unlike Morningstar’s Star ratings, which are based upon past performance, Morningstar Medalist ratings are a forward-looking analytical view of a fund. Per Morningstar:
“For actively managed funds, the top three ratings of Gold, Silver, and Bronze all indicate that our analysts expect the rated investment vehicle to produce positive alpha relative to its Morningstar Category index over the long term, meaning a period of at least five years. For passive strategies, the same ratings indicate that we expect the fund to deliver alpha relative to its Morningstar Category index that is above the lesser of the category median or zero over the long term.”
As I’ve written in other Young and the Invested articles, a Medalist rating doesn’t mean Morningstar is necessarily bullish on the underlying asset class or categorization. It’s merely an expression of confidence in the fund compared to its peers.
From the remaining universe of funds, I selected a range of products that invest in various core and satellite strategies, with a distinct focus on the absolute lowest annual expenses. To be fair, the overall best Schwab funds to buy are pretty cheap in their own right, and include a couple funds from this list. But here, the most expensive fund charges 0.25%, or $2.50 annually on a $1,000 investment—and most of the index funds here charge far less than that.
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The Best Schwab Index Funds to Buy
Below are some great Schwab index mutual funds—most of which one would consider core holdings, though a couple are better used as satellite positions to help you either generate a little more alpha or get more defensive.
And good news: Indexing is where Schwab excels. Its highest-rated funds are all indexed products, so you’re getting an ideal combination of high quality and very, very low costs.
And every Schwab fund on this list has a minimum initial investment of just $1. Typically, when I’m writing about mutual funds, I try to also list ETF share classes or equivalent ETFs for investors who might have less capital to put to work. But in this case, there’s no need—even if your liquidity is limited to a single greenback, you’ve got enough to get started.
1. Schwab S&P 500 Index Fund
- Style: U.S. large-cap stock
- Assets under management: $110.8 billion
- Dividend yield: 1.2%
- Expense ratio: 0.02%, or 20¢ per year for every $1,000 invested
- Morningstar Medalist rating: Gold
The vast majority of fund managers who run large-cap funds (funds that invest in larger companies) struggle to consistently beat the S&P 500 Index, particularly after fees. According to S&P Dow Jones Indices’ SPIVA (S&P Indices versus Active) data, roughly 85% of actively managed large-cap funds have failed to beat the S&P 500 across the trailing 10-year period.
So, as I typically say when confronted with an S&P 500 fund: If you can’t beat it, join it.
The Schwab S&P 500 Index Fund (SWPPX) isn’t just a cheap way to get access to the S&P 500—it’s one of the cheapest ways across both mutual funds and ETFs alike, charging a razor-thin expense ratio of just 0.02%. That’s not free, but it’s mighty close.
The S&P 500 is a collection of some of the largest American companies, but to be clear, it’s not automatically the 500 largest American companies. Among criteria for this index: A company must have a market capitalization of at least $20.5 billion, its shares must be highly liquid (shares are frequently bought and sold), and at least 50% of its outstanding shares must be available for public trading. Where you start to weed out a few large companies is that, for inclusion, a company must also have positive earnings in the most recent quarter, and the sum of its previous four quarters must be positive.
And once a company becomes an S&P 500 component, it’s not automatically kicked out if it fails to meet all of the criteria. However, the selection committee would take this under consideration and possibly boot the company.
The S&P 500 is considered a reflection of the U.S. economy—but that doesn’t mean all industries are represented equally. For instance, the technology sector accounts for nearly 30% of SWPPX’s assets, but real estate, utilities, materials, and energy merit about 3% or less apiece. This is in no small part because, like many indexes, the S&P 500 is market capitalization-weighted, which means the greater the size of the company, the more “weight” it’s given in the index. Currently, trillion-dollar-plus companies Apple (AAPL), Nvidia (NVDA), and Microsoft (MSFT) rank among Schwab S&P 500 Index Fund’s top holdings.
Turnover (how much the fund tends to buy and sell holdings) tends to be low, as only a handful of stocks enter or leave the index in any given year. That greatly minimizes (and in some years, eliminates) capital-gains distributions, which receive unfavorable tax treatment. This makes SWPPX an extremely tax-efficient option for taxable brokerage accounts.
A combination of the S&P 500’s excellence as an index, as well as SWPPX’s bare-bones costs and tax-efficiency, merit a Gold Medalist rating from Morningstar. It’s just one of three Schwab products to earn that coveted ranking, making it easily one of the best Schwab index funds you can buy.
Want to learn more about SWPPX? Check out the Schwab provider site.
Related: 10 Monthly Dividend Stocks for Frequent, Regular Income
2. Schwab U.S. Large-Cap Growth Index Fund
- Style: U.S. large-cap growth stock
- Assets under management: $3.3 billion
- Dividend yield: 0.5%
- Expense ratio: 0.035%, or 35¢ per year for every $1,000 invested
- Morningstar Medalist rating: Silver
The stock market can be sliced in any number of ways, but one of the broadest and most commonly used categorizations is growth vs. value.
Generally speaking, growth stocks are expected to produce higher-than-average growth—typically in metrics like revenues and profits—which should lead to better-than-average stock performance. Meanwhile, value stocks are considered to be underappreciated by investors based on metrics such as price-to-earnings (P/E) or price-to-sales (P/S), among others. The idea is that once the market gets wise, they’ll buy up shares, driving the stock’s price higher as it reaches a fairer value. (These stocks also are more likely to pay dividends.) It’s not a perfect dichotomy—some stocks can both have growth characteristics and be undervalued, and some stocks can be neither growthy nor underpriced. But growth and value are nonetheless two primary “stock types” that investors tend to gravitate toward.
Investors who would like to stuff their portfolio with growth stocks can do so through the Schwab U.S. Large-Cap Growth Index Fund (SWLGX). SWLGX tracks the Russell 1000 Growth Index, which consists of any Russell 1000 companies that sport higher I/B/E/S forecast two-year growth, higher five-year historical growth in sales per share, and relatively higher price-to-book (P/B) ratios.
A side note: The high P/B is interesting because that’s not a growth metric, but a valuation metric—one that indicates a stock is potentially expensive, no less. However, it illustrates the commonly held idea that growth exists opposite of value. (Even though you can find companies that are both undervalued and have growth characteristics. But I digress.)
Also, the index is float-adjusted market cap-weighted. Traditional market cap-weighting accounts for all of a company’s shares—even those that might be privately held and non-transferable. (Owners, directors, and insiders sometimes hold these kinds of shares.) But float-adjusted market cap weighting accounts only for market capitalization based on the “float,” which is shares available for public trading.
Like many growth funds, the roughly 400-stock SWLGX is all-in on tech. The technology sector itself accounts for roughly half of the fund’s assets. Consumer discretionary is 16% of assets, largely because of big holdings in tech-esque Amazon (AMZN) and Tesla (TSLA). And the tech-adjacent communication services sector accounts for another 13%.
And like many growth-oriented funds, a richly valued portfolio is table stakes. SWLGX’s P/E, price-to-cash flow (P/CF), and other valuation ratios are all higher than the broader market. But since inception in 2017, it has provided the outperformance investors seek from growth stocks, leading the S&P 500 in all meaningful time periods since inception. That, as well as a Silver Medalist rating, gives U.S. Large-Cap Growth Index a place among the best Schwab index funds you can buy.
Want to learn more about SWLGX? Check out the Schwab provider site.
Related: 9 Best Fidelity Index Funds to Buy
3. Schwab U.S. Large-Cap Value Index Fund
- Style: U.S. large-cap value stock
- Assets under management: $802.8 million
- Dividend yield: 2.0%
- Expense ratio: 0.035%, or 35¢ per year for every $1,000 invested
- Morningstar Medalist rating: Silver
On the other side of the coin, we have the Schwab U.S. Large-Cap Value Index Fund (SWLVX).
Schwab’s value index fund addresses value in a strange way, effectively seeking out the inverse of the SWLGX. It tracks the Russell 1000 Value Index, which is made up of Russell 1000 companies with “relatively lower price-to-book ratios, lower I/B/E/S forecast medium term (2 year) growth and lower sales per share historical growth (5 years).”
In other words, rather than selecting companies by explicitly using valuation metrics, it does use P/B … but otherwise tries to define value through relatively low growth. The use of price-to-book is also odd in and of itself—while very helpful when trying to value capital-intensive businesses (manufacturers, energy companies, banks), but not very useful when trying to value companies with a lot of intangible assets like patents and intellectual property (tech firms). Even more curious? Despite effectively being the inverse of Russell 1000 Growth, which holds 400 of the Russell 1000’s stocks, Russell 1000 Value is made up of nearly 860 of the Russell 1000’s stocks.
These head-scratching facts aside, Schwab U.S. Large-Cap Value Index Fund’s resulting portfolio does end up being value-priced across a range of metrics—not just P/B, but also P/E and P/CF as well. And as you’d expect, the portfolio also sports a much lower average return on equity.
SWLVX is much more balanced from a sector perspective than its growth-stock cousin, though it still has some high concentrations—currently financials (23%), industrials (15%), and health care (14%). There’s far less single-stock risk, too, with top holdings like Warren Buffett’s Berkshire Hathaway (BRK.B), JPMorgan Chase (JPM), and Exxon Mobil (XOM) sitting around 2% to 3%.
Lastly, this concentration in value stocks also results in a higher-than-average yield. SWLVX currently yields ~2.0%, compared to just 1.2% for the S&P 500.
Performance comparisons aren’t really that helpful, though. Both SWLGX and SWLVX started in December 2017, and while the large-growth fund has rocketed past its value brother since then, you can credit a prolonged outperformance from growth stocks in general for that.
Want to learn more about SWLVX? Check out the Schwab provider site.
Related: 10 Best Fidelity Funds to Buy
4. Schwab Fundamental U.S. Small Company Index Fund
- Style: U.S. small-cap stock
- Assets under management: $1.8 billion
- Dividend yield: 1.7%
- Expense ratio: 0.25%, or $2.50 per year for every $1,000 invested
- Morningstar Medalist rating: Silver
Investors who want more explosive returns (and who can deal with higher risk) can typically find that kind of action in small-cap stocks.
As a general rule, smaller companies (usually considered to be those with market capitalizations of $2 billion or less) have more growth potential than larger firms. For one, as they say, it’s much easier to double your revenues from $1 million than $1 billion. And as these stocks become noticed by institutional investors and fund managers, or begin qualifying for certain indexes, they can begin to enjoy large-scale investments that drive their prices even higher.
But smaller stocks are riskier. A smaller company’s revenues might be dependent on just one or two products or services—meaning a single disruption could have massive financial consequences. They also have less access to capital than their larger peers, so they’re less likely to get a lifeline should they suffer from broader economic headwinds.
It’s a high-risk, high-reward proposition—a small company could feasibly double in short order … or get cut in half overnight.
You can, however, harness some of these firms’ upside potential while tamping down on risk by investing in a small-stock fund like Schwab Fundamental U.S. Small Company Index Fund (SFSNX). This Schwab product differs from your traditional small-cap index fund in that, rather than weighting its components by size, SFSNX effectively weights its roughly 1,000 holdings by quality. It tracks the RAFI Fundamental High Liquidity US Small Index, which both selects and weights stocks by fundamental metrics including adjusted sales, retained operating cash flow, and dividends plus buybacks.
In short: The better the fundamental quality, the more assets a stock will command.
For what it’s worth, most broad small-cap funds have very little single-stock risk to begin with. Even SFSNX’s greatest holdings command weights of roughly half a percent or less, and that’s par for the course. But how the fund assigns those weights makes a huge difference—SFSNX has solidly outperformed its basic-index counterpart, the Schwab Small Cap Index Fund (SWSSX), over every meaningful trailing time period.
Want to learn more about SFSNX? Check out the Schwab provider site.
Related: 10 Best Vanguard Funds for the Everyday Investor
5. Schwab Total Stock Market Index Fund
- Style: U.S. all-cap stock
- Assets under management: $26.8 billion
- Dividend yield: 1.2%
- Expense ratio: 0.03%, or 30¢ per year for every $1,000 invested
- Morningstar Medalist rating: Gold
Who says you can’t have it all?
That’s the idea behind total-market funds like the Schwab Total Stock Market Index (SWTSX), which is designed to “track the total return of the entire U.S. stock market.”
Listen, if we’re splitting hairs, SWTSX’s 3,100-stock portfolio doesn’t technically equate to the “entire U.S. stock market” … but it’s about as close as you’d ever reasonably need to get.
A total-market fund typically won’t give you equal exposure to all the different stock sizes—they’re typically market cap-weighted, which means they’re heavily tilted toward large caps. And so it is with SWTSX, which currently has a little more than 70% of its assets wrapped up in large caps (like with the S&P 500 fund, Apple, Nvidia, and Microsoft are top weights here), 19% in mid-caps, and the remainder in smalls.
The point of a total-market fund like SWTSX is simplicity. One fund gets you exposure to most of the U.S. stock market—and it overloads you in the largest, most stable firms while providing only modest exposure to smaller, more volatile firms. Better still? You can get all this for just 0.03% in annual expenses. It’s a one-two punch of coverage and price that has been recognized with a Morningstar Gold Medalist rating, and inclusion on my list of Schwab’s top index funds.
How (or whether) you use it is a matter of preference.
If you like the exact breakdown of SWTSX’s large-, mid-, and small-cap exposure, you could make it the core of your portfolio and not have to bother with any other broad U.S. stock funds.
If you like the idea of owning all these different-sized stocks, but would want to do so in different ratios, you could either hold SWTSX and augment with the funds above, or buy your ideal mixture of large-, mid-, and small-cap funds.
Want to learn more about SWTSX? Check out the Schwab provider site.
Do you want to get serious about saving and planning for retirement? Sign up for Retire With Riley, Young and the Invested’s free retirement planning newsletter.
6. Schwab International Index Fund
- Style: International large-cap stock
- Assets under management: $10.1 billion
- Dividend yield: 3.3%
- Expense ratio: 0.06%, or 60¢ per year for every $1,000 invested
- Morningstar Medalist rating: Silver
You’ve probably noticed by now that this list of funds, like many, is loaded with U.S.-centric options. That’s for good reason. U.S. markets have long been among the most productive in the world, and if you believe in the American economy’s ability to keep growing, that should remain the case. Thus, most financial experts here will direct you to gobble up U.S. stock funds.
But those same experts would tell you that it’s worth having at least some international exposure. And you can do that for a song through the Schwab International Index Fund (SWISX).
Among the best Schwab index funds listed here, SWISX is technically the most expensive—but still a roaring bargain at just 0.06% annually. This measly cost gets you invested in nearly 800 stocks across primarily developed markets in Europe and Asia. Japan is tops at 22% of assets, though you also get double-digit exposure to the U.K., France, and Switzerland.
More than 85% of SWISX’s holdings are large-cap stocks, and top holdings are full of blue-chip multinationals like Swiss foods giant Nestlé (NSRGY), Japanese auto giant Toyota (TM), and Dutch semiconductor firm ASML Holding (ASML). And like with most international funds with a heavy bent toward large firms, SWISX has an outsized dividend yield that’s currently above 3%.
Like with Schwab’s small-cap index fund above, Schwab has a more expensive but more productive “fundamental” alternative, the Schwab Fundamental International Large Company Index Fund (SFNNX), that’s worth looking into. It’s not a perfect one-for-one—even though SFNNX has an explicit goal of holding large caps, it ends up actually holding more mid-caps than SWISX—but it’s a better-rated, better-performing fund with similar enough exposure that it’s worth considering.
That said, SWISX is no slouch. If your goal is to invest as cheaply as possible, SWISX provides some of the most inexpensive international coverage you’ll find, and it has historically produced better-than-average returns.
Want to learn more about SWISX? Check out the Schwab provider site.
7. Schwab U.S. Aggregate Bond Index
- Style: U.S. intermediate-term bond
- Assets under management: $5.3 billion
- SEC yield: 4.5%*
- Expense ratio: 0.04%, or 40¢ per year for every $1,000 invested
- Morningstar Medalist rating: Bronze
Most investors need some exposure to bonds, which is debt that’s issued by governments, companies, and other entities. Their interest payments and relative lack of volatility make them an excellent tool for providing a portfolio with stability and income.
But how much bond exposure you need will vary by age. They’re not great for generating wealth, which is your prime concern when you’re younger, but they’re outstanding for protecting wealth, which becomes increasingly pivotal as you age. So generally speaking, when you’re younger, you’ll want to be primarily invested in stocks … and as you get older, you’ll want to go lighter on stocks and start buying more bonds.
You might not want to buy individual bonds, however. Data and research on individual issues is much thinner than it is for publicly traded stocks. And some bonds have minimum investments in the tens of thousands of dollars. So, your best (and most economical) bet is to buy a bond fund, which allows you to invest in hundreds or even thousands of bonds with a single click.
One of the best Schwab mutual funds you can buy for this access is the Schwab U.S. Aggregate Bond Index Fund (SWAGX), which holds a whopping 10,500 debt issues. At the moment, 44% of the portfolio is in U.S. government bonds, another 25% is in mortgage-backed securities (MBSes), and 24% is in corporate bonds. The rest is peppered around other government-related bonds, municipal bonds, and other debt.
SWAGX’s maturities range from less than a year to more than 20 years. Meanwhile duration—a measure of interest-rate sensitivity—is 5.9 years, implying that a 1-percentage-point hike in interest rates would result in a 5.9% decline in the fund, and vice versa. In short, this is moderate interest-rate risk, which is perfectly acceptable for a basic core bond holding like this.
* SEC yield reflects the interest earned across the most recent 30-day period. This is a standard measure for funds holding bonds and preferred stocks.
Want to learn more about SWAGX? Check out the Schwab provider site.
Related: What Is a Roth Conversion? [A Tax-Smart Retirement Strategy]
Learn More About These and Other Funds With Morningstar Investor
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Schwab Funds for Retirement: Frequently Asked Questions (FAQs)
What is the minimum investment amount on Schwab mutual funds?
Schwab is one of the most friendly fund companies for beginners. That’s not just because both its mutual funds and ETFs sport below-industry-average expense ratios, but because you don’t need much money to invest in them in the first place. Most Schwab mutual funds have a negligible investment minimum—you can literally start with as little as $1.
That’s extremely beneficial in self-directed accounts like an IRA. Many mutual funds from other providers require high minimums in the thousands of dollars, hamstringing investors with little capital to work with.
