If you’re searching for the best mutual funds from Charles Schwab Corp. (ticker: SCHW), your first instinct might be to sort them by historical returns.
However, this approach isn’t as intuitive as it seems. Not only does past performance fail to predict future results, but it’s also not an apples-to-apples comparison.
For instance, you can’t fairly compare a U.S. equity fund to an international equity fund, or a bond fund to a real estate fund — each operates in a different segment of the market with unique risks and opportunities.
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To make a meaningful comparison, you’d need proper benchmarks. Without familiarity with these benchmarks, selecting an objective standard can be tricky. That’s where third-party data providers like Morningstar come in.
Morningstar groups funds into peer categories, making comparisons more consistent and fairer. For example, a U.S. equity fund tracking the S&P 500 falls within the “U.S. large blend” category and is assessed alongside similar funds holding U.S. large-cap stocks that blend growth and value styles.
Using this framework, Morningstar rates funds on a five-star quantitative scale. The top 10% of funds in their peer category receive five stars, while the next 22.5% earn four stars.
These ratings aren’t solely based on total returns — they also consider the fund’s volatility, producing a risk-adjusted return metric that helps investors identify the best funds relative to their risk.
Fortunately, Schwab makes it easy by listing all of its mutual funds that have earned four- and five-star ratings over various time periods on its website.
“A factor that makes Schwab a top fund provider for me is the user-friendly platform they provide for researching, buying and managing funds,” says Jim Penna, senior manager of retirement services at VectorVest.
Here are seven of the best Charles Schwab mutual funds that currently hold a four- or five-star overall Morningstar rating:
Fund | Expense ratio |
Schwab S&P 500 Index Fund (SWPPX) | 0.02% |
Schwab 1000 Index Fund (SNXFX) | 0.05% |
Schwab Fundamental U.S. Large Company Index Fund (SFLNX) | 0.25% |
Schwab U.S. Large-Cap Growth Index Fund (SWLGX) | 0.04% |
Schwab Large-Cap Growth Fund (SWLSX) | 0.99% |
Schwab MarketTrack All Equity Portfolio (SWEGX) | 0.51% |
Schwab Balanced Fund (SWOBX) | 0.50% |
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%.” This fund passively tracks the S&P 500 index, a benchmark of large-cap U.S. stocks screened for liquidity and earnings quality.
With a minimal 2% annual portfolio turnover rate, SWPPX isn’t engaging in frequent trading. As such, capital gains distributions are minimized, making this fund fairly tax efficient. Over the trailing 10 years, this fund has delivered a 13.7% annualized total return. Schwab offers SWPPX with a minimal initial investment requirement of just $1, making it very accessible to beginners.
Schwab 1000 Index Fund (SNXFX)
While popular, the S&P 500 index does have some limitations. Notably, the restriction to 500 companies gives it a large-cap tilt and omits many mid- and small-cap stocks. If you’re seeking greater diversification, then SNXFX might be a better alternative. This Schwab mutual fund tracks the proprietary Schwab 1000 Index, which simply weights the largest 1,000 public U.S. companies by their market capitalization.
SNXFX is also highly tax efficient, with a minimal portfolio turnover rate of 3%. As with SWPPX, SNXFX is not actively trading. The fund simply aims to replicate the characteristics of its benchmark, which doesn’t change much. Over the past 10 years, SNXFX has delivered a 13.2% annualized return, lagging slightly behind SWPPX due to the relative underperformance of small- and mid-cap stocks.
Schwab Fundamental U.S. Large Company Index Fund (SFLNX)
Many broad market index funds are market-cap weighted — the larger a company is, the greater weight it gets assigned. While efficient and low-cost, this approach can lead to concentration risk if a handful of companies perform extremely well, such as the “Magnificent Seven” technology stocks. An alternative weighting system to consider is fundamental indexing, which doesn’t prioritize size.
A great example is SFLNX, which tracks the RAFI Fundamental High Liquidity U.S. Large Index. The stocks in this benchmark are selected, ranked and weighted based on factors like adjusted sales, retained operating cash flow, dividends and buybacks. However, over the past 10 years this fund has failed to outperform the S&P 500, with an 11.8% annualized return. It’s also pricier, with a 0.25% expense ratio.
Schwab U.S. Large-Cap Growth Index Fund (SWLGX)
SWLGX is one of the few Schwab funds to outperform the S&P 500 over the past five years. Over this period, SWLGX returned an annualized 18.8%, while the S&P 500 delivered 14.9%. This outperformance was attributable to SWLGX’s benchmark, the Russell 1000 Growth Index. This benchmark employs a number of screeners designed to identify and overweight growth stocks.
As a result, SWLGX’s top holdings currently include all of 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). It is very concentrated, with the top 10 stocks making up approximately 60% of the fund’s portfolio. SWLGX charges a 0.035% expense ratio.
[READ: 7 Best Long-Term ETFs to Buy and Hold]
Schwab Large-Cap Growth Fund (SWLSX)
Investors willing to give active management a try can use SWLSX in lieu of SWLGX. This fund also employs a large-cap growth strategy but does not passively track an index. Instead, it owns a concentrated portfolio of just 61 holdings selected by a portfolio manager and research analysts. However, the use of active management results in a high 0.99% expense ratio.
SWLSX’s strategy selects growth stocks based on high earnings, sales and cash flow growth rates, and low dividend yields. The fund features an overweight to technology sector stocks at 46% and has all of the Magnificent Seven stocks minus Tesla in its top holdings. However, while the fund has outperformed the S&P 500 over the past five years, it has not outperformed the cheaper SWLGX.
Schwab MarketTrack All Equity Portfolio (SWEGX)
All of the aforementioned Schwab funds have a bias toward U.S. large-cap stocks. For greater diversification, consider an allocation fund like SWEGX. This “fund of funds” currently holds 11 other Schwab index funds to provide a globally diversified equity allocation across U.S., international developed and emerging markets. All this comes with a 0.51% expense ratio.
The underlying holdings in SWEGX span broad market index funds, fundamental funds and even some exchange-traded funds (ETFs). Notable is the extra allocation to small-cap equities and even real estate investment trusts (REITs), both of which are usually underweighted in broad-market index funds. However, the tax efficiency of this fund isn’t the best due to a high 17% turnover rate.
Schwab Balanced Fund (SWOBX)
While globally diversified, SWEGX is still a 100% equity fund. As such, it can be highly volatile. Investors looking for a lower risk, lower return solution may prefer a balanced fund like SWOBX. This fund targets an allocation of 55% to 65% in equities and 35% to 45% in fixed income and cash equivalents. As with SWEGX, SWOBX uses a fund of funds structure comprising seven other Schwab funds.
On the equity side, SWOBX allocates to large-cap U.S. core equities, large-cap U.S. growth, U.S. small-caps and international blend equities. For bonds, the fund prioritizes U.S. aggregate bonds and a small holding in government money market securities. Schwab rates the historical risk of this fund as “average” based on realized volatility. SWOBX charges a 0.5% expense ratio.
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7 of the Best Charles Schwab Mutual Funds originally appeared on usnews.com
Update 01/30/25: This story was published at an earlier date and has been updated with new information.