Discount brokers provide mutual funds and ETFs that are a good addition to retirement portfolios.
Charles Schwab (ticker: SCHW) provides retirement and investment accounts for both do-it-yourself investors and people whose money is managed by financial advisors. Investors can choose from equity and bond mutual funds that are actively managed or based on benchmark indexes. Schwab has $6.9 trillion in client assets, 31.5 million active brokerage accounts and 2.1 million corporate retirement plan participants as of Feb. 28. “For decades, Americans had not been conditioned to worry about retirement savings,” says Robert Johnson, a finance professor at Creighton University’s Heider College of Business. “Over the past few decades, there has been a shift from defined benefit to defined contribution pension plans. I believe there is a misconception among many Americans that Social Security will provide for their retirement.” Here are a few recommended Schwab mutual funds and exchange-traded funds, or ETFs, for your retirement account.
Schwab U.S. Small-Cap ETF (SCHA)
The Schwab U.S. Small-Cap ETF provides exposure to 1,800 up-and-coming companies for a minuscule fee of 0.04%, says Todd Rosenbluth, head of ETF and mutual fund research at CFRA, a New York financial research company. The fund tracks the total return of the Dow Jones U.S. Small-Cap Total Stock Market Index. Small-cap stocks generate earnings domestically, and while they can produce more volatile returns, they provide diversification and can help investors keep pace with inflation. “As the U.S. economy strengthens in 2021, small companies are poised to benefit significantly,” he says. “This ETF gives investors the option to avoid attempting to pick the leaders and ending up with the laggards.”
Schwab S&P 500 Index Fund (SWPPX)
The Schwab S&P 500 Index Fund is a good addition to diversify a portfolio with the top 500 stocks. Schwab’s fund offers market exposure for a 0.02% expense ratio and gives the same market capitalization weight to stocks in the index. “ETFs can be a good way to invest broadly in an overall index with relatively low fees,” says Daren Blonski, managing principal of Sonoma Wealth Advisors. “Index ETFs offer the transparency of holdings and trade during the market open hours rather than once a day like mutual funds. There are many ETFs to choose from, allowing an investor to identify either investments in the broad market or niche areas.”
Schwab Total Stock Market Index Fund (SWTSX)
Retail investors often prefer index or balanced funds to provide diversification and avoid having to choose individual stocks in their portfolios. Another option to capture the broader market is to invest in a total stock market fund. The Schwab Total Stock Market Index Fund has a low expense ratio of 0.03%, a 15% three-year return and a 35% one-year return. This fund tracks the total return of the entire U.S. stock market as measured by the Wilshire 5000 index. “It is market capitalization weighted, so large-cap stocks have a much greater weight, but it does give the investor exposure to a much wider universe of securities,” Johnson says. “This low expense ratio means that more of an investor’s money is invested rather than eaten up by fees.”
Schwab Fundamental U.S. Large Company Index ETF (FNDX)
This fund is a large-cap value fund and holds U.S. companies in the FTSE Global Total Cap Index. The ETF invests a minimum of 90% of its net assets in the Russell RAFI U.S. Large Company Index. FNDX has consistently produced above-index returns since its inception and benefits a diversified portfolio, says Stuart Michelson, a finance professor at Stetson University. The expense ratio is only 0.25%, the three-year return is 12% and the one-year return is 32%. When an investor considers one sector mutual fund, the return may be higher, but the risk is also increased, he says. “As part of a diversified portfolio, sector mutual funds and ETFs are a wonderful addition, potentially increasing return while minimizing risk because of portfolio diversification created by adding assets with low correlation,” Michelson says.
Schwab 1000 Index Fund (SNXFX)
The Schwab 1000 Index Fund invests in the top 1,000 stocks based on a company’s market capitalization and can be considered as an option for a core holding in a retirement portfolio. This fund is considered a large-blend fund and generated steady growth over the past 10 years, Michelson says. The fund has a 0.05% expense ratio, a five-year return of 17% and a three-year return of 15%. “I find that Schwab sector mutual funds and sector ETFs are similar to Fidelity and Vanguard in terms of expense ratio and performance,” he says. “The primary difference is that there are fewer Schwab sector mutual funds and ETFs available and more selection when investing with Fidelity and Vanguard.”
Schwab Health Care Fund (SWHFX)
The Schwab Health Care Fund focuses on the health care sector and has more than 100 stocks. Investing in a sector increases volatility and risk but also adds diversification in a portfolio, Michelson says. The top holdings include a 6.5% stake in UnitedHealth Group (UNH), followed by a 5.3% stake in Johnson & Johnson (JNJ) and 4.6% in Merck (MRK). The fund has beaten the performance of a benchmark index, Dow Jones Global Health Care Index, for the past 10 years. The expense ratio is 0.8%, and the fund generated a 10.3% three-year return and a 21.2% one-year return. “The 0.8% expense ratio is low for a sector fund,” he says.
Schwab Fundamental International Large Company Index Fund (SFNNX)
This fund is the developed international sibling of the Schwab Fundamental U.S. Large Company Index Fund (SFLNX) and uses similar financial profile screens. The mutual fund provides exposure to Japan, the U.K., France, Switzerland and South Korea to round out an equity portfolio with well-known multinational companies such as Samsung, Royal Dutch Shell (RDSA) and Toyota (TM), Rosenbluth says. The fund also charges a below-average expense ratio of 0.25% relative to its international equity peers, which charge 1.1%. The fund’s three-year return is 4%, while the one-year return is 25%.
Best Schwab mutual funds for retirement:
— Schwab U.S. Small-Cap ETF (SCHA)
— Schwab S&P 500 Index Fund (SWPPX)
— Schwab Total Stock Market Index Fund (SWTSX)
— Schwab Fundamental U.S. Large Company Index ETF (FNDX)
— Schwab 1000 Index Fund (SNXFX)
— Schwab Health Care Fund (SWHFX)
— Schwab Fundamental International Large Company Index Fund (SFNNX)