These top Schwab funds are convenient and affordable.
Exchange-traded funds, or ETFs, might be highly popular in 2023, but mutual funds can still offer investors great value. Whereas ETFs must be purchased in increments of one share, investors can buy into mutual funds at whatever amount they wish. They can make automating a recurring investment much easier. Thanks to competition, fees for mutual funds are becoming increasingly more affordable, making them a viable option for cost-conscious investors once again. A great firm to start investing in mutual funds with is Charles Schwab Corp. (ticker: SCHW). With a large lineup of active, index and specialty mutual funds, Schwab has something suitable for nearly every investment objective. Here are seven of the best Charles Schwab mutual funds, which hold four- or five-star Morningstar ratings.
Schwab Fundamental US Large Company Index Fund (SFLNX)
SFLNX tracks the Russell RAFI US Large Company Index, which implements a screener based on three fundamental metrics of company scale and success: adjusted sales, retained operating cash flow and dividends plus buybacks. These metrics are averaged to create an overall company score that determines a stock’s weight in SFLNX. Currently, the top holdings in SFLNX include Apple Inc. (AAPL), Exxon Mobil Corp. (XOM), Microsoft Corp. (MSFT), JPMorgan Chase & Co. (JPM) and Chevron Corp. (CVX). Compared with a typical large-cap U.S. equity index fund, SFLNX is less concentrated in its top 10 holdings, with less of a tech-sector tilt as well. This strategy has paid off over the long term, with SFLNX returning an annualized 9.8% over the trailing five years, compared to 9.4% for the S&P 500. The fund costs an expense ratio of 0.25%.
Schwab S&P 500 Index Fund (SWPPX)
Investors interested in indexing the S&P 500 can do so with SWPPX, which seeks to replicate the benchmark’s performance by assigning the same weight to each stock as the index does. S&P 500 funds like SWPPX are extremely popular for U.S. equity investors due to their low turnover and fees. To that point, SWPPX currently has a turnover of just 2%, with an expense ratio of 0.02%. So, for a $10,000 investment in SWPPX, investors can expect to pay just $2 in annual fees. Best of all, SWPPX has a minimum initial investment requirement of just $1, making it great for investors starting out with smaller accounts. A great use for SWPPX is as a core portfolio holding, which can then be supplemented with international stocks and bonds for greater diversification.
Schwab US Large-Cap Growth Index Fund (SWLGX)
Growth stocks are those expected by the market to increase their earnings, revenues and cash flows at a faster rate compared to their sector peers. These stocks often trade at high valuations and can experience strong run-ups during favorable economic conditions. A great way to passively invest in U.S. growth stocks is via SWLGX, which tracks the Russell 1000 Growth Index. Top holdings in this fund include Apple, Microsoft, Amazon Inc. (AMZN), Alphabet Inc. (GOOG, GOOGL) and Tesla Inc. (TSLA). SWLGX is ideal for taxable brokerage accounts due to its low distribution yield of just 0.93%. Because most of its underlying growth stocks do not pay dividends, the fund is very tax-efficient. SWLGX currently costs an expense ratio of 0.035%.
Schwab Fundamental US Small Company Index Fund (SFSNX)
The small-cap counterpart to SFLNX is SFSNX, which tracks the Russell RAFI U.S. Small Company Index. The fund holds a blend of both small-cap value and small-cap growth stocks for a more balanced approach. As with SFLNX, SFSNX uses the same methodology of scoring its holdings based on their adjusted sales, retained operating cash flow and dividends plus buybacks. This is especially important when it comes to small-cap stocks, as it can help weed out unprofitable companies with poor fundamentals. This strategy has paid off over the trailing 15 years, with SFSNX returning an annualized 9.9%, beating the Russell 2000 Index’s return of 8.3%. Like SFLNX, SFSNX charges a 0.25% expense ratio.
Schwab Health Care Fund (SWHFX)
Overweighting a particular stock market sector in your portfolio is called a “sector tilt.” The primary reason to do so is because some sectors tend to be more resilient in unfavorable economic conditions. For example, the health care sector has historically been resilient during bear markets and recessions due to inelastic demand for its products and services. For an actively managed approach to health care investing, investors can buy SWHFX, which holds global pharmaceutical, biotechnology, medical product and medical service companies with a U.S. bias. The underlying stocks are selected based on their fundamentals, valuation and momentum to target the best risk-adjusted returns. However, the fund costs a higher expense ratio of 0.8% due to the active management.
Schwab Target 2045 Index Fund (SWYHX)
A type of mutual fund that is ideal for hands-off investors is the target-date fund. These funds hold an allocation of stocks and bonds that is adjusted over time to become more conservative. Usually, this involves decreasing the stock allocation and increasing the bond allocation at a predetermined pace, called a glide path. A great example is SWYHX, which is intended for investors planning to retire around 2045. The fund currently holds about 90% equities and 10% bonds, and will “glide” to 44% equities and 56% bonds by the target date. On the equity side, SWYHX holds U.S. stocks, international developed stocks, emerging-markets stocks and real estate investment trusts, or REITs. On the bond side, SWYHX holds aggregate U.S. bonds and short-term Treasurys. The fund charges a net expense ratio of 0.08%.
Schwab Target 2025 Index Fund (SWYDX)
Because SWYHX is intended for investors planning to retire in more than 20 years, it is currently very equity-heavy. The higher allocation of stocks can lead to better returns but also greater volatility, which may not be desirable for those with a lower risk tolerance. Investors looking for a more conservative allocation should consider SWYDX, which is intended for those looking to retire by 2025. Accordingly, this fund holds a much greater allocation in bonds. Currently, the fund is 39.7% U.S. bonds, which includes aggregate bonds, short-term Treasurys and Treasury inflation-protected securities, or TIPS. There is also a small, 2.5% allocation to foreign bonds and 3.9% in cash equivalents. Like SWYHX, SWYDX charges a net expense ratio of 0.08%.
7 of the best Charles Schwab mutual funds:
— Schwab Fundamental US Large Company Index Fund (SFLNX)
— Schwab S&P 500 Index Fund (SWPPX)
— Schwab US Large-Cap Growth Index Fund (SWLGX)
— Schwab Fundamental US Small Company Index Fund (SFSNX)
— Schwab Health Care Fund (SWHFX)
— Schwab Target 2045 Index Fund (SWYHX)
— Schwab Target 2025 Index Fund (SWYDX)
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7 of the Best Charles Schwab Mutual Funds originally appeared on usnews.com
Update 01/18/23: This story was previously published at an earlier date and has been updated with new information.
