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 $8.52 trillion in assets under management (AUM) as of Dec. 31, 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.

Schwab Total Stock Market Index Fund (SWTSX)

• Expense Ratio: 0.03%
• Assets Under Management: $20.6 billion (as of Jan. 17, 2024)
• One-Year Trailing Total Return: 19.33% (as of Jan. 17, 2024)
• Trailing Twelve-Month (TTM) Yield: 1.41% (as of Jan. 18, 2024)
• Inception Date: June 1, 1999

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 has 3,403 holdings as of Dec. 31, 2023. The sector breakdown as of Sept. 30, 2023, is 26.16% in information technology, 13.25% in financials, 13.19% in healthcare, and 10.79% in consumer discretionary. 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.

Schwab U.S. Aggregate Bond ETF (SCHZ)

• Expense Ratio: 0.03% (as of Dec. 31, 2023)
• Assets Under Management: $7.4 billion (as of Jan. 17, 2024)
• One-Year Trailing Total Return: 1.49% (as of Jan. 17, 2024)
• Trailing Twelve-Month (TTM) Yield: 3.28% (as of Jan. 17, 2024)
• Inception Date: July 14, 2011

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.

The ETF has 9,969 holdings as of Dec. 31, 2023. The sector breakdown as of Jan. 17, 2024, is 35.1% U.S. Treasury bonds, 24.4% mortgage pass-throughs, and 17.1% U.S. corporate bonds. The remaining sectors include non-U.S. corporate bonds, collateralized mortgage obligations (CMOs), cash, non-U.S. government debt, municipal bonds, and U.S. agency bonds.

The majority of the fund’s holdings are rated investment grade, with a BBB rating or higher. Only 0.2% of bonds are below investment grade at BB.

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 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

Roth IRAs are funded with after-tax dollars and are not taxed when the funds are withdrawn at a later date. Once opening the IRA, an investor can determine where to allocate funds. A good option for investors is choosing both broad-based equity and bond funds for diversification and without the hassle of having to analyze individual stocks and bonds.