Roth IRA Fund Options from Charles Schwab

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

Its family of funds includes more than 50 no-load, no-transaction-fee mutual funds and more than 25 low-cost exchange-traded funds (ETFs).

Schwab is, among other things, a full-service broker 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 Funds for Retirement Savers

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

You may also have a choice between a Roth and a traditional IRA or 401(k) account. The main difference lies in when your money is taxed. The money you pay into a Roth account is post-tax money. That is, the taxes on that income are due in that year. Taxes are deferred on the money paid into a traditional account until you withdraw the money, presumably after retiring.

In any case, savers with an IRA have a vast choice of funds and other assets in which to invest their money for the long term. Savers who rely on a 401(k) plan have only the choices their employers offer them. Those choices may include Schwab funds.

Below, we take a closer look at one of Schwab’s broad-based stock funds and one of its broad-based bond funds. Numbers 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%
• Inception Date: June 1, 1999

(All numbers as of July 22, 2023.)

SWTSX is a mutual fund that aims to track the performance of the U.S. stock market, as measured by the fund’s index: the Dow Jones U.S. 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% are in healthcare, 13.4% are in the financial sector, and 10.42% are consumer discretionary stocks. The remainder of the portfolio is spread among 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 provides investors with fairly strong growth opportunities.

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

• Expense Ratio: 0.03%
• Assets Under Management: $7.1 billion
• One-Year Trailing Total Return: -1.75%
• 10-Year Total Return: 1.45%
• Inception Date: July 14, 2011

(All numbers as of July 22, 2023.)

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

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

It’s 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 U.S. Treasury bonds, 23.8% are U.S. corporate bonds, and 26.6% are mortgage-backed securities. The remaining choices include non-U.S. corporate bonds, collateralized mortgage obligations (CMOs), cash, non-U.S. government debt, municipal bonds, U.S. agency bonds, and asset-backed securities (ABS).

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

A broad-based bond or fixed-income fund like SCHZ is generally less risky than an equity fund. However, bond funds don’t provide the same growth potential, which means generally 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. That approach tends to maximize returns while minimizing risks.

The Bottom Line

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 that they have to research various investments.

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