Roth IRA Fund Options From Charles Schwab – Investopedia

The Charles Schwab Corp. (SCHW) is a financial services provider that, through its subsidiaries, offers wealth and asset management, securities brokerage, banking, custody, and advisory services. The company, which was founded in 1971 by Charles R. Schwab, has about $7.8 trillion in assets under management (AUM), as of the end of January 2022. Its family of funds includes more than 50 no-load, no-transaction-fee mutual funds and over 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 on behalf of its clients. However, the company also offers discount brokerage services, including commission-free trading.

Investors in the U.S. have access to several tax-advantaged saving plans, including 401(k)s, individual retirement accounts (IRAs), and Roth IRAs. The main difference between a Roth IRA and a traditional IRA is that the former is funded with after-tax dollars. That means that contributions to Roth IRAs are not tax-deductible, where they are with traditional IRAs. But unlike a traditional IRA where withdrawn funds are taxed, a Roth IRA allows investors to withdraw funds tax free.

Below, we take a closer look at one of Schwab’s broad-based stock funds and one of its broad-based bond funds. Most of the data in the bullet points below for each fund are from YCharts, as of Feb. 18, 2022. However, the figure for the 1-year trailing total return for SHCZ is from ETF Database, as of Feb. 18, 2022, and the figure for the distribution yield for SCHZ is from Charles Schwab, as of Jan. 31, 2022.

Schwab Total Stock Market Index Fund (SWTSX)

• Expense Ratio: 0.03%
• Assets Under Management: $17.5 billion
• 1-Year Trailing Total Return: 8.1%
• 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 is managed by Ferian Juwono, Sabya Sinha, Christopher Bliss, and Jeremy Brown. Their tenures on the fund range from 2.9 and 8.9 years. Of the fund’s 3,472 holdings, 41.6% are of mega cap companies, 30.5% are large cap, 19.1% are mid cap, 6.4% are small cap, and 2.4% are micro cap. About 99% of its holdings are domiciled within the U.S., with the other 1% in a variety of other developed and emerging market economies.

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: 0.04%
• Assets Under Management: $8.6 billion
• 1-Year Trailing Total Return: -3.9%
• Distribution Yield: 2.21%
• Inception Date: July 14, 2011

SCHZ is an ETF that seeks to track the performance of the Bloomberg Barclays 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 securities 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, 45.6% are U.S. Treasury bonds, 21.7% are U.S. corporate bonds, and 16.7% are mortgage pass-through securities. The remaining 16% of securities 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 considered 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. They can be useful tools both for risk-average investors and 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 its 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 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.