Choosing the “best” mutual fund can be subjective and largely depends on an individual investor’s goals and risk tolerance. For example, while an equity fund that performed exceptionally over the past decade may appeal to a growth-focused investor, it might not suit someone seeking stable income.
To help standardize fund evaluation, Morningstar, a well-respected investment research firm, has developed a rating system based on an objective, quantitative assessment of a fund’s historical performance.
This system assigns one to five stars, with ratings recalculated at the end of each month. Funds are evaluated within their specific peer categories, such as large-cap blend or small-cap value, ensuring they are fairly compared to similar funds.
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Only the top-performing funds within each peer category achieve the coveted four- or five-star ratings. Specifically, funds in the top 10% of their peer category receive five stars, and those in the top 22.5% receive four stars.
Importantly, these ratings are based on risk-adjusted performance, which means they consider not only the returns a fund achieved but also the volatility it experienced to get those returns. Essentially, the best funds are those that have historically offered more return per unit of risk.
Morningstar’s ratings are calculated for three-, five- and 10-year trailing risk-adjusted returns, with the “overall Morningstar rating” for a fund calculated as a weighted average of these years.
Most asset managers, including Charles Schwab Corp. (ticker: SCHW), provide tools that allow investors to screen funds based on their Morningstar rating, in addition to other variables.
While past performance doesn’t predict future performance, a well-rated fund is an indication of effective risk management and operational efficiency, qualities that are valuable when considering investment options.
“What makes Charles Schwab stand out is their commitment to providing a diverse range of investment options to suit the needs of all types of investors,” says Andrew Mark Latham, director of content at SuperMoney.com.
Jim Penna, senior manager of retirement services at VectorVest, agrees with Latham, noting: “A factor that makes Schwab a top fund provider for me is the user-friendly platform they provide for researching, buying and managing funds.”
Here are seven of the best Charles Schwab mutual funds that currently hold a four- or five-star overall Morningstar rating:
| Mutual fund | Expense ratio |
| Schwab S&P 500 Index Fund (SWPPX) | 0.02% |
| Schwab 1000 Index Fund (SNXFX) | 0.05% |
| Schwab International Index Fund (SWISX) | 0.06% |
| Schwab U.S. Large-Cap Growth Index Fund (SWLGX) | 0.04% |
| Schwab Health Care Fund (SWHFX) | 0.79% |
| Schwab Balanced Fund (SWOBX) | 0.50% |
| Schwab Target 2065 Index Fund (SWYOX) | 0.08% |
Schwab S&P 500 Index Fund (SWPPX)
“As in any fund you may consider, there are certain characteristics to always look for, starting with expense ratios, and the Schwab index funds have a favorable expense for passive funds,” Penna says. “For example, SWPPX has an expense ratio of just 0.02%.” For a $10,000 investment in SWPPX, investors can expect just $2 in annual fees, making it an incredibly affordable core holding.
SWPPX isn’t a slouch in terms of performance, either. Historically, the S&P 500 index tracked by SWPPX has been difficult to beat, with approximately 88% of all U.S. large-cap funds underperforming it over the past 15 years. Over the past 15 years, SWPPX has delivered an annualized total return of 14.8%, handily outperforming the 13.7% average return of Morningstar’s “Large Blend” category.
Schwab 1000 Index Fund (SNXFX)
The S&P 500 may be a very well-known and popular benchmark, but it’s hardly the only one passive investors have at their disposal. Another well-performing alternative is the proprietary Schwab 1000 Index, which offers greater diversification than the S&P 500 by including more mid-cap and small-cap stocks. It comes with a 0.05% expense ratio and no minimum required investment.
SNXFX’s index simply tracks the top 1,000 U.S. stocks ranked by float-adjusted market capitalization. This means it only considers shares that are available for public trading, excluding those held by insiders or major stakeholders. Due to its broad focus, the fund rarely has to buy and sell securities. This results in a low portfolio turnover rate of just 3%, a hallmark of good tax efficiency.
Schwab International Index Fund (SWISX)
International funds have largely suffered the same underperformance as their U.S. counterparts have. For example, the S&P Indices Versus Active, or SPIVA, study found that over the past 10 years, around 92% of all European equity funds underperformed the S&P Europe 350 Index. Similar results were observed for Japanese equity funds, where 85% underperformed the S&P/TOPIX 150 over a 10-year period.
Thus, investors looking to stack the odds in their favor may prefer an international index fund like SWISX. This fund tracks the MSCI EAFE Index (EAFE stands for Europe, Australasia and the Far East). The fund features around 780 holdings weighted by market capitalization and dates back to 1997. Currently, SWISX charges a 0.06% expense ratio and also pays a decent 3.1% distribution yield.
Schwab U.S. Large-Cap Growth Index Fund (SWLGX)
Investors interested in targeting a particular equity style, such as growth or value stocks, can also make use of low-cost Schwab funds. For instance, growth investors can buy and hold SWLGX, which tracks the Russell 1000 Growth Index. This ETF is dominated by large-cap growth stocks from the technology, consumer discretionary and communication sectors.
Notable top holdings in SWLGX include the “Magnificent Seven” stocks: Microsoft Corp. (MSFT), Apple Inc. (AAPL), Nvidia Corp. (NVDA), Amazon.com Inc. (AMZN), Meta Platforms Inc. (META), Alphabet Inc. (GOOG, GOOGL) and Tesla Inc. (TSLA). The fund charges a 0.035% expense ratio and is also very tax efficient due to its low 0.6% distribution yield, despite having a high 20% portfolio turnover rate.
[READ: Magnificent 7 Stocks: What Are They and How They Dominate the Market]
Schwab Health Care Fund (SWHFX)
One of the few actively managed funds in Schwab’s lineup to earn a four-star Morningstar rating is SWHFX. Compared to the previous funds, SWHFX is much more narrowly focused, holding just 75 companies involved in pharmaceuticals, biotechnology, medical services and medical devices. As an actively managed fund, it does not track a benchmark. Instead, a portfolio manager picks stocks.
SWHFX’s portfolio management team evaluates health care stocks for inclusion based on three main variables: fundamentals, valuation and momentum. These measure financial health, market price relative to perceived value and recent price trends, respectively. However, as an actively managed fund, SWHFX charges a high 0.79% expense ratio and has a greater 53% turnover rate.
Schwab Balanced Fund (SWOBX)
Risk-averse investors can also find some four- and five-star-rated funds within Schwab’s lineup. A standout example is SWOBX, which targets an allocation of 55% to 65% in equities and 35% to 45% in fixed income. In addition, the fund is able to take a temporary defensive stance during adverse market conditions by moving to a 100% cash or money market portfolio in order to reduce drawdowns and volatility.
SWOBX’s construction uses a “fund of funds” structure. At this time, it consists of six underlying Schwab mutual funds that provide exposure to U.S. aggregate bonds, U.S. core equities, large-cap growth, international equities, small-cap stocks and money market instruments. The fund charges a 0.5% net expense ratio and keeps portfolio turnover reasonable at 10%.
Schwab Target 2065 Index Fund (SWYOX)
Even the most hands-off investors can find the perfect fund within Schwab’s lineup. Notably, four of Schwab’s target-date index funds have currently earned four-star overall Morningstar ratings. These funds are intended to be an all-in-one retirement plan, featuring a globally diversified mix of stocks and bonds that adjust over time to become more conservative as the target date nears.
SWYOX represents the option intended for investors to retire on or around 2065. Currently, this fund features seven underlying Schwab mutual funds, with just 2.5% in bonds in order to maximize long-term growth. On the equity side, investors can expect U.S., international and emerging-market equities, along with an extra allocation to small-cap stocks and real estate investment trusts, or REITs. SWYOX charges a 0.08% expense ratio.
[Read: The 6 Best Fidelity Mutual Funds to Buy and Hold]
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7 of the Best Charles Schwab Mutual Funds originally appeared on usnews.com
