The Schwab Total Market Index Fund (SWTSX) is a benchmark fund for seasoned and new investors alike. While it isn’t as exciting as investing in individual stocks, putting money into a fund like SWTSX can give you an excellent start as an investor. Here’s what you should know about SWTSX and its investment potential.
What Kind of Fund is SWTSX?
SWTSX is a broad and diversified fund that tracks the entire US equity market. The fund mirrors the Dow Jones US Total Stock Market Index. In so doing, the SWTSX fund tracks the overall return of the American market. Needless to say, SWTSX is one of the most diversified funds you could invest in.
SWTSX is also a passively managed fund. As a result, it features a low expense ratio of just 0.03% and isn’t subject to “over-concentration” in any one area. As the market capitalizations of its constituent companies change, the fund automatically adjusts to track them on a weighted basis.
One of the major advantages of SWTSX is that the fund has no investment minimum. As such, it’s very enticing for investors who are just starting out and may not have much money to put into the market. These investors can also benefit disproportionately from broad-based passive funds since they make it simple to create a diversified portfolio.
Is SWTSX an ETF?
Although similar to comparable ETFs in both composition and fees, SWTSX is not traded on the open market. The fund is actually a low-cost mutual fund.
One of the most similar ETFs to the SWTSX fund is Vanguard’s total market index, VTI.
Schwab Total Stock Market Index Holdings
The Schwab Total Stock Market Index holds shares of every investable stock traded on the US stock market. This includes all large-cap, mid-cap and small-cap companies.
Thanks to its weighting system, the SWTSX fund tilts in favor of large-cap companies. The medium-sized and small-cap holdings, however, provide an important balance and can even help to bolster returns when smaller companies are doing well in the overall market.
As of the end of 2021, SWTSX included 3.478 individual assets. Its top five holdings were Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Alphabet Class A (NASDAQ:GOOGL) and Tesla (NASDAQ:TSLA). The fund’s total holdings are valued at $17.67 billion, with 233.4 million shares outstanding.
Schwab Total Stock Market Index Fees
Like other low-cost mutual funds and ETFs, SWTSX charges a management fee, called an expense ratio, based on an investor’s total holdings.
As of the time of this writing, the fee is 0.03 percent. For every $100,000 you hold in this fund, you would pay $30 in fees.
Does Schwab Total Stock Market Index Pay Dividends?
Because of its broad holdings, the Schwab Total Stock Market Index includes many dividend-paying instruments. As of the time of this writing, the fund yields 1.28 percent in dividends annually.
Because it tracks all US stocks, the fund’s yield can vary considerably over time as individual companies change their dividend payouts.
Schwab Total Stock Market Index vs. S&P 500
One obvious alternative to a fund like SWTSX is the benchmark S&P 500 index. On a 10-year basis, the SWTSX has returned an annual average of 14.62 percent. For the same period, the SPDR S&P 500 ETF (SPY) returned 14.71 percent. Based on these metrics, the SWTSX is a competitive alternative to S&P 500 index funds from a track record perspective.
In terms of dividends, the S&P 500 does perform slightly better. Compared to 1.28 percent for SWTSX, the S&P 500 yields 1.34 percent at the time of this writing. Given this almost negligible difference, however, it’s difficult to argue for buying the S&P 500 purely for dividend yield.
Where the Schwab Total Stock Market Index fund does shine in comparison to the S&P 500 is in terms of diversification. The fund contains more than 3,400 individual holdings.
Because it tracks the entire US market, these holdings are spread across sectors and industries. While the large-cap concentration does weight the fund in favor of tech stocks, the total holdings are very diverse.
With that said, the S&P 500’s historical performance is difficult to discount. The index stands as one of the best long-term investments for those looking to build wealth. However, as a total market fund, SWTSX contains all of the companies listed in the S&P 500.
The difference is that it also contains all other US stocks, giving it a broader base that goes well beyond large-cap companies. Since it does tilt toward larger companies, though, expect the returns of SWTSX and the returns of the S&P 500 to follow each other fairly closely.
Is SWTSX a Good Investment?
Overall, there’s a strong argument to be made for investing in SWTSX. Automatic diversification and very low fees both make the fund a good choice for passive investors. With no investment minimum, the fund is also a good choice for younger investors or those with limited budgets.
In terms of performance, SWTSX competes reasonably well with the S&P 500 index. The fund successfully captures:
- high growth from tech stocks,
- stable performance from more traditional sectors and
- occasional outsized gains from small-cap companies.
At the same time, sectors that perform poorly are balanced off against those that are doing well at any given time.
While there are certainly higher-yielding instruments out there, SWTSX even delivers a fairly decent amount of dividend income.
Investing in SWTSX over a long period of time can help you create a portfolio that produces a regular stream of cash. Though its dividends are a bit less predictable than those of individual stocks, the lack of reliance on any one company for income makes up for the volatility.
If you need higher yields, you can also balance out your portfolio with high-yield ETFs that produce larger income streams.
The best use of SWTSX in a portfolio is likely as a long-term holding. Although it produces stable returns, passive investing doesn’t allow you to outperform the market.
Over time, though, the effects of compounding interest can turn regular investments into funds like SWTSX into very large sums of money. This also makes SWTSX a strong candidate for retirement savings.
If you’re looking for a good total market fund, SWTSX has a great deal to recommend it. The fund is simple, diversified, produces strong returns and costs very little. SWTSX can act as a strong foundation for a portfolio, especially if you’re just getting into investing.
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