10 Best Schwab Index Funds

The Charles Schwab Corporation (NYSE:SCHW) is one of America’s largest brokerages and wealth management companies. Servicing over 35 million individual accounts, it provides everything from basic banking services to proprietary investment products.

Among these products are a host of mutual funds and ETFs that investors can use to quickly create diversified portfolios for growth, income or capital preservation. Here are some of the best Schwab funds to buy in today’s market.

Schwab S&P 500 Index Fund (SWPPX)

Composed of 500 of America’s leading large-cap stocks, the S&P 500 index has been one of the best and most reliable investments in modern history.

Since its formal inception in 1957, the index has generated an average annual return of 10.3%. The S&P 500 is so reliable that even Warren Buffett, one of the very few investors to consistently beat it over time, has made provisions for his estate to be put into a low-cost S&P 500 index fund for his wife after his death.

Given the long and successful track record of the S&P 500 as an investment, it should come as no surprise that Schwab’s S&P 500 Index Fund is one of the best Schwab mutual funds to buy in practically any market.

This fund tracks the S&P 500 index to deliver results in line with the largest and most successful American businesses, allowing SWPPX to produce excellent compounded returns. Over the last 15 years, for example, SWPPX has returned an average of 15.4% annually.

The S&P 500 fund is also a decent choice for investors seeking income. SWPPX currently yields 1.3%, providing a modest but reliable stream of dividend income for investors who hold it. Over time, dividend reinvestment also accounts for a considerable amount of the S&P 500’s compounding power.

While there are many funds that track the S&P 500, Schwab’s is among the least expensive. SWPPX carries an expense ratio of 0.02%. For reference, the competitive Vanguard S&P 500 ETF (VOO) carries an expense ratio of 0.03%. While both are low-cost, Schwab stands out for its ability to beat competitor funds on fees.

Schwab Total Stock Market Index Fund (SWTSX)

Index investing pioneer and Vanguard founder Jack Bogle famously advised investors to “buy everything and hold it forever.”

By this, Bogle meant purchasing a weighted index of all publicly traded American companies and allowing it to grow through the periodic ups and downs of the stock market. Schwab’s SWTSX total market fund allows investors to do just that, as the fund is made up of over 3,400 individual stocks.

Buying a total market index fund like SWTSX comes with both advantages and disadvantages.

On the plus side, these funds capture the entire performance of the American stock market, allowing them to benefit from growth outside of large, established companies of the sort that make up the S&P 500. These funds also tend to have lower volatility than large indices like the S&P 500 due to their sheer diversification.

On the downside, funds that track the entire stock market can also deliver slightly inferior long-term returns to those that track large-cap stocks.

SWTSX and SWPPX offer a good example of this fact. Compared to the S&P 500 fund’s 15.4%, the Schwab total market fund has returned 15.2% over the past 15 years. This gap in returns is small but can produce meaningful differences in results when compounded over time.

Like SWPPX, SWTSX yields about 1.3%. The fund does, however, carry an expense ratio of 0.03%. As such, investors will pay a slightly higher price to invest in the Schwab total market fund when compared to the S&P 500 fund.

Schwab US Dividend Equity (SCHD)

While S&P 500 or total market index funds are likely the best choices for long-term growth, some investors require more income from their portfolios.

For these investors, a high-yield dividend ETF like SCHD can be a useful tool. SCHD tracks a group of 104 stocks that offer high dividend yields, resulting in an overall yield of 3.4% at the time of this writing.

In addition to yielding more than double what SWPPX or SWTSX does, SCHD has delivered a respectable growth rate over time. Since the fund’s inception in 2011, it has averaged a 13.0% annual rate of compounded returns.

While still below the S&P 500 or the total market fund, this high-yield fund has managed to hold its own while delivering a more substantial stream of income to its investors.

High-yield funds like SCHD can be particularly attractive to investors during downturns or periods of high inflation. Dividends often keep pace with inflation, allowing investors to earn more reliable returns when prices are rising. During bear markets, the payouts may also offset losses from lower share prices.

Schwab International Equity ETF (SCHF)

Although the American stock market has proven to be the best buy-and-hold investment over time, foreign stocks provide an additional degree of protection and diversification. For this reason, a foreign fund like SCHF is often a worthwhile addition to a broader portfolio.

SCHF is a large fund composed of over 1,500 international stocks. The fund tracks the FTSE Developed ex US index, an index of companies in developed nations outside the United States. Prominent holdings in SCHF’s portfolio include Toyota, Samsung and AstraZeneca.

Despite tracking a large index of successful businesses, SCHF has historically underperformed Schwab’s American stock funds. Since SCHF began trading in 2009, the fund has returned an average of 5.7%.

One area where SCHF does beat certain US funds, though, is its yield. The fund yields 2.5%, nearly double that of Schwab’s total market and S&P funds. Along with the natural diversification provided by investing in foreign markets, this higher yield makes SCHF a good choice for investors looking to hedge their investments against domestic inflation or economic downturns.

Schwab US Aggregate Bond Index Fund (SWAGX)

In addition to stocks, Schwab’s funds can also help investors diversify their portfolios with positions in the bond market.

One of the best Schwab bond funds to buy is SWAGX, a bond mutual fund that tracks the total US investment-grade bond market. In this sense, SWAGX is a bond-based counterpart to SWTSX’s full coverage of the American stock market.

As a bond fund, SWAGX is better suited to income and capital preservation than growth. With a low level of volatility since its inception and a current 30-day yield of 4.4%, the fund accomplishes both of these goals quite well. It should be noted, however, that the current yield is well above the weighted average coupon of 3.2% due to the current higher interest rate environment.

It’s also worth noting that SWAGX is highly diversified, even for a large index fund. The fund includes over 8,000 bonds. In addition, all of SWAGX’s top 10 holdings are various forms of US government debt, making the largest portions of its portfolio quite low-risk, theoretically.

Schwab US REIT ETF (SCHH)

For investors seeking exposure to the real estate market without the logistical difficulties of owning properties directly, real estate investment trusts (REITs) can prove both convenient and lucrative.

The problem, however, is that individual REITs can be quite risky, especially those that predominantly invest in mortgage instruments instead of physical properties. To mitigate these risks, one solution is to invest in a broad REIT fund like Schwab’s SCHH.

The SCHH fund tracks a group of 121 REITs. With this group of companies, the fund offers investors exposure to residential and commercial real estate, data centers and even storage facilities.

The current 30-day yield for SCHH is 3.9%, making SCHH a substantially attractive income opportunity for investors. Though slower than the growth of the broader stock market, the price of this REIT fund has also appreciated by an average of 6.4% annually since 2011.

Due to the relatively small number of REITs compared to stocks generally, investors should be aware that SCHH is somewhat more concentrated than some of the other funds listed here. The fund’s top holding, for example, is Prologis, which accounts for 9.4% of the total portfolio.

Schwab Global Real Estate Fund (SWASX)

Another good choice for investors looking for real estate exposure is Schwab’s SWASX global real estate mutual fund.

While SCHH focuses heavily on domestic real estate, SWASX provides investors with a broader opportunity to invest in international real estate assets. It’s worth noting, however, that many of the REITs that show up in SCHH are also part of the SWASX portfolio.

Although investing internationally provides extra diversification, investors should be aware that SWASX has historically trailed SCHH in terms of performance.

The fund’s yield is 3.4%, about 0.5% below its American counterpart. Since the fund began in 2007, its price has appreciated by a modest 1.5% annually. As such, investors likely won’t see as much growth from international real estate as they would from domestic alternatives.

Schwab US Large-cap Growth ETF (SCHG)

Recently, the trajectory of the overall stock market has been largely determined by the fortunes of a relatively small group of fast-growing tech companies.

Last year, for example, seven of the largest tech companies accounted for the vast majority of the S&P 500’s gains. Without these mega-cap firms included, the rest of the index would have climbed by just 8% in 2023, compared to the actual figure of 26%.

With gains rapidly accruing to the top tech firms, a fund like SCHG that focuses on large, fast-growing companies is a useful tool for capturing returns in today’s market.

SCHG follows 249 companies posting rapid earnings growth. The fund, however, is heavily concentrated on America’s leading tech companies. SCHG’s top five holdings are Microsoft, Apple, NVIDIA, Meta and Amazon. These five stocks make up over 40% of the fund’s total portfolio.

Due to its focus on fast-growing companies, SCHG has produced excellent returns for investors in recent years. The fund’s average compounded annual return since 2009 has been 16.0%, and that number has risen to 19.8% over the past five years.

This closely tracks the performance of the broader market, as the tech majors that make up most of the fund’s portfolio have offered by far the most attractive growth stories during that time.

One trade-off for SCHG’s rapid growth is its comparative lack of ability to generate income via dividends. The fund yields just 0.4%, producing a very minor amount of cash flow for investors.

With companies like Microsoft and Apple gradually raising their dividends and Meta having recently decided to pay one for the first time, however, SCHG’s yields could improve in the coming years.

Schwab Short-term US Treasury ETF (SCHO)

For investors looking to preserve capital while earning a modest income, US treasuries offer a relatively low-risk opportunity backed by the American government.

Investors who want to take advantage of short-term treasuries may want to consider SCHO, a fund that tracks treasuries maturing within 1-3 years.

At the moment, SCHO’s most appealing feature is its 4.7% yield. While the fund’s weighted average coupon is a much lower 2.5%, recent interest rate hikes have driven bond yields up to levels not seen since before the 2008 financial crisis.

While the Federal Reserve still plans to cut interest rates this year, bond yields remain an attractive option for investors seeking low-risk income opportunities in a generally volatile market.

Schwab Emerging Markets Equity ETF (SCHE)

Finally, investors may want to look at the SCHE emerging markets fund to access growth opportunities in less mature economies.

Though riskier than developed market investments, companies operating in emerging markets can sometimes produce faster growth than the large, established firms doing business in the United States or Europe.

SCHE tracks nearly 2,000 emerging market companies, but many of its top holdings are recognizable growth names. Included in the fund’s top 10 holdings are Taiwan Semiconductor, Tencent and Alibaba.

While Chinese stocks are currently depressed due to ongoing economic and regulatory difficulties in the country, these companies may offer investors solid long-term returns if China and other emerging market economies regain their footing in the coming years.

Best Schwab Index Funds

The best performing Schwab fund is the the Schwab US Large-cap Growth ETF that has delivered an average compounded annual return since 2009 of 16.0%.

For income-oriented investors, the best fund is the Schwab US Dividend Equity fund that has averaged a 13.0% annual rate of return since 2011.

Building a Portfolio With ETFs and Mutual Funds

Thanks to the proliferation of broad, diversified funds like those offered by Charles Schwab, investors have more options than ever before for building diversified portfolios.

One popular approach is the so-called three-fund portfolio. Arguably the simplest strategy for long-term investing, this approach recommends a total US market fund, a total international fund and a total bond market fund. A portfolio constructed in this way will be extremely simple but will still largely track overall market growth.

Other investors may choose more nuanced approaches to meet more specific investment goals. Those closer to retirement, for example, may find high-yield equity and REIT funds more appealing for their ability to deliver larger streams of income.

Younger investors with long time horizons, by contrast, may be able to take more risk by investing in high-growth funds with the potential to deliver slightly better returns than the overall market.

Building an investment portfolio is extremely personal, and each investor will have slightly different goals, resources and risk tolerances. Thanks to the number of different funds available today, though, most investors will have little difficulty constructing a portfolio that meets their goals while providing diversification and low-cost management.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.