Charles Schwab’s Roth IRA Fund Options

The Charles Schwab Corp. (SCHW) is a financial services provider that offers wealth and asset management, securities brokerage, banking, custodial and advisory services. Founded in 1971 by Charles R. Schwab, the firm had over $8 trillion in assets under management (AUM) as of mid-2023.

Its family of funds includes more than 50 mutual funds with no fees or transaction fees and more than 25 low-cost exchange-traded funds (ETFs).

Schwab is, among other things, a full-service brokerage firm that earns commissions for providing investment management, research and analysis services to its clients. It also offers online trading, including commission-free trading, through its Schwab.com website.

Charles Schwab Fund for Retirement Savers

Whether you have access to a 401(k) plan or similar tax-efficient savings plan through your employer or are opening an Individual Retirement Account (IRA) on your own, you may very well have Charles Schwab Funds as an option.

You may also have the choice between a Roth account and a traditional IRA or 401(k) account. The main difference is when your money is taxed. The money you put into a Roth account is after-tax money. In other words, taxes on that income are due that year. Taxes are deferred on money paid into a traditional account until you withdraw the money, likely after you retire.

Either way, savers with an IRA have a wide choice of funds and other assets in which to invest their money for the long term. Investors who rely on a 401(k) plan only have the choices their employers give them. These choices may include Schwab funds.

Below, we take a closer look at one of Schwab’s broad-based equity funds and one of its broad-based bond funds. Figures are as of July 22, 2023.

Schwab Total Stock Market Index Fund (SWTSX)

• Expense ratio: 0.03%
• Assets under management: $19.1 billion
• One-year annualized return: 17.89%
• Ten-year annualized return: 12.19%
• Date of creation: June 1, 1999

(All figures as of July 22, 2023.)

SWTSX is a mutual fund that aims to track the performance of the US stock market, as measured by the fund’s index: the Dow Jones US Total Stock Market Index. The fund is managed by Ferian Juwono, Sabya Sinha, Christopher Bliss and Jeremy Brown. Their tenures on the fund range from 2.9 to 8.9 years.

Of the fund’s 3,472 holdings, 24.8% are in information technology, 14% in healthcare, 13.4% in financials and 10.42% in consumer discretionary. The rest of the portfolio is split between industrials, communications, consumer staples, energy, real estate, materials and utilities.

A broad-based equity fund like SWTSX carries a certain degree of risk, but it also offers investors some pretty strong growth opportunities.

For many investors, this mutual fund can serve as the foundation for a well-diversified investment portfolio. However, for those with a very low tolerance for risk or nearing retirement, a more income-oriented portfolio may be a better option.

• Expense ratio: 0.03%
• Assets under management: $7.1 billion
• One-year total return: -1.75%
• Total return over 10 years: 1.45%
• Creation date: July 14, 2011

(All figures as of July 22, 2023.)

SCHZ is an ETF that seeks to track the performance of the Bloomberg US Aggregate Bond Index, which is a broad benchmark used to gauge the performance of the US investment grade taxable bond market.

The fund invests at least 90% of its net assets in bonds included in the index.

It is managed by Matthew Hastings, Steven Hung, Mark McKissick and Alfonso Portillo. Their tenure on the fund ranges from 4.8 to 10.6 years.

Of the ETF’s 3,739 holdings, 41.2% are US Treasuries, 23.8% are US corporate bonds and 26.6% are mortgage-backed securities. The remaining choices include non-US corporate bonds, secured mortgage bonds (CMOs), cash, non-US government debt, municipal bonds, US agency bonds, and asset-backed securities (ABS).

All of the fund’s holdings are rated investment grade, with a rating of BB or better.

A broad-based bond or fixed-income fund like SCHZ is generally less risky than an equity fund. However, bond funds don’t offer the same growth potential, which usually means lower returns.

A bond fund is a good choice for risk-averse investors or for any investor as part of a portfolio diversification strategy. Consistent with modern portfolio theory, risk-averse investors will find that investing in both a bond fund and a broad-based equity fund provides diversification. This approach tends to maximize returns while minimizing risk.

The essential

A Roth IRA offers investors certain tax advantages. Roth IRAs are unique in that they are funded with after-tax dollars and are not taxed when the funds are withdrawn at a later date. In short, funds invested in a Roth IRA can grow tax-free. After opening a Roth IRA, the types of investments chosen will depend on the individual investor’s risk tolerance and the amount of time and energy they have to research various investments.

For investors in this category, one option is to opt for a few large diversified funds, allocating some of their money to a broad-based equity fund and some to a broad-based bond fund. These large, diversified funds can also create a solid foundation for many investors who have the extra time and energy to evaluate other, sometimes riskier, investment options involving investments in individual companies or specific market niches.