The 5 Best Schwab Index Funds | The Motley Fool (2024)

This article was updated on Feb. 7, 2017 and originally published Jun 22, 2016.

For a quick and dirty primer on index funds, click here.

Charles Schwab has quickly become a competitor in the world of index funds, creating low-fee funds that are priced to steal assets from the competition. Here are 5 of Schwab's best index funds that offer good performance and low expense ratios. Below, I'll lay out the case for making each index fund a part of your portfolio.

Data source: Charles Schwab. Expense ratios for Schwab's S&P 500 Index and Small Cap Index Fund reflect previously announced reductions in expenses that take effect on March 1, 2017. Fund minimum investments of $100 may also be eliminated, according to Feb. 2, 2017 press release.

1. Schwab S&P 500 Index Fund

This fund doesn't need much of an introduction. When you buy the Schwab 500 Index Fund you're basically buying part of the 500 largest stocks listed on American exchanges. This fund is designed to produce returns that mirror that of the S&P 500 Index, minus a tiny annual fee.

The allure of S&P 500 index funds is that they are downright cheap, and cover a majority of the stock market by market value. S&P 500 constituents make up about 80% of the value of all American-listed companies. Owning this group at a price of just $3 per year for every $10,000 invested is an incredible deal -- it's just that simple.

2. Schwab Total Stock Market Index

Where S&P 500 Index funds invest in roughly 500 companies that make up 80% of the stock market's value, Schwab'sTotal Stock Market fund invests in nearly 2,500 companies that make up virtually all of the market's value.

The key advantage is that the Total Stock Market Index includes small- and micro cap stocks that are excluded from other index funds that focus on larger stocks. Thus, this fund will beat the S&P 500 when small company stocks outperform large companies, and vice versa. Small and microcap stocks make up 7.1% and 2.5% of the fund's assets, respectively.

3. Schwab 1000 Index Fund

This fund technically tracks the Schwab 1000 index, which is essentially a Schwab-branded copycat of the Russell 1000 Index. This fund uses a simple filter for picking stocks: It invests in the 1,000 largest stocks on American markets, weighting them by market cap.

As a result of its portfolio construction, this fund is more heavily weighted toward midcap stocks, which made up about 19% of the fund's assets at the time of update, compared to about 13% for its S&P 500 fund, and 19% for the Total Stock Market Index fund.

Given its higher expense ratio, though, you'd likely be better suited with the Total Stock Market Index, which comes at a fraction of the cost of the Schwab 1000 index fund. Where this fund has lagged the S&P 500 over the last 10 years, Schwab's Total Stock Market Index fund has outperformed the S&P 500. The difference in performance is due in no small part to the fee differential between these two funds.

4. Schwab Small Cap Index Fund

This fund generally tracks the performance of the Russell 2000 Index, which includes the 2,000 smallest stocks in the Russell 3000 index. Due to subtle differences in how it allocates its portfolio, this Schwab index fund actually beat the Russell 2000 index over the 10-year and 15-year periods beginning in Feb. 2007 and Feb. 2002, respectively.

There isn't much more to say about this fund other than that it is an excellent way to inexpensively buy and hold small-cap stocks listed in the United States. The fund carries an annual expense ratio of 0.17%, and was broadly diversified across 1,962 stocks at the time of update.

5. Schwab International Index Fund

Following the theme of inexpensive funds with low turnover and broad diversification, Schwab's international index fund ticks the boxes perfectly. The fund seeks to track the MSCI EAFE index, and has done it exceptionally well.

The fund generally invests in large companies that trade on markets outside the United States. It primarily invests in developed markets, having more than 99% of its assets in stocks listed in developed markets, according to Morningstar. Stocks listed in Japan, the United Kingdom, and France made up about 24%, 18%, and 10% of the fund's assets at the end of 2016, respectively.

With an annual expense ratio of just 0.19% of assets annually, this Schwab fund is a great way to conveniently own more than 900 stocks that you won't find in American-centric index funds.