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The Rise of Index Investing: A Q&A with Marie Chandoha

For almost half a century, individual and institutional investors have been pouring money into mutual funds that track an index, like the Russell 2000® or the S&P 500®. Today, other investment vehicles such as exchange-traded funds (ETFs) have made it even easier to participate in the market. In fact, some $5.1 trillion in assets are invested in index mutual funds and ETFs in the U.S. alone.1

For its part, Charles Schwab Investment Management (CSIM) oversees $315 billion in assets under management2 and is the nation's third-largest provider of index mutual funds and the fifth-largest provider of ETFs.3 We sat down with CSIM President and Chief Executive Officer Marie Chandoha to discuss the rise of index funds and what to know about these game-changing investment vehicles.

Why are index funds so popular?

Index funds offer a level of diversification that would be incredibly difficult for any single investor to achieve on her or his own. After all, some of these vehicles invest in hundreds or even thousands of securities. And they tend to be less expensive than actively managed funds because they don’t require a team of managers to make specific buy and sell decisions or actively monitor existing investments.

Are there areas of the market that index funds don’t cover?

Index funds are now so ubiquitous that investors can use them to access nearly any part of the financial markets—from large-cap U.S. companies to emerging-market bonds to Asian real estate. It’s really quite astounding how much of the investable world can be accessed through the use of index funds.

What should investors consider when researching index funds?

First, know which part of the market the fund tracks and how it fits into your overall asset-allocation strategy. In some cases, an index might appear to offer broad exposure when it’s actually dominated by just a handful of companies. Next, pay close attention to fees, which can vary widely, even among funds that track the same index. Operating expense ratios can really add up over time! Some fund companies even offer lower expenses to institutional investors, while individuals pay full freight. We don’t do that at CSIM. We believe that everyone deserves the same great pricing.

Do small differences in expenses really matter?

Absolutely! Every penny that goes toward expenses is a penny that can’t compound over time. And when you’re investing tens or hundreds of thousands of dollars, even seemingly trivial expenses can significantly diminish the eventual size of your portfolio.

Going forward, where do you see opportunities for innovation in index funds?

At CSIM, we’re not looking to innovate by creating more-complicated or niche products. Our focus is on creating foundational products, and our goal is to simplify investing and drive down costs. Most investors don’t need 50 different flavors of vanilla. What they need are high-quality products that provide great value, helping their portfolios to flourish over time.

Growth spurt

Index mutual funds saw a record $197 billion in inflows in 2016.

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Source: 2017 Investment Company Fact Book, Investment Company Institute.

12017 Investment Company Fact Book, Investment Company Institute. $2.6 trillion are invested in index mutual funds and $2.5 trillion are invested in ETFs.

2Charles Schwab Investment Management, as of 03/31/2017.

3Strategic Insight. Rankings based on assets under management as of 03/31/2017.

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Important Disclosures

Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges and expenses. Please read it carefully before investing.

Investment returns will fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares of ETFs are bought and sold at market price, which may be higher or lower than the net asset value (NAV).

Diversification strategies do not ensure a profit and do not protect against losses in declining markets. Investing involves risk, including loss of principal.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Charles Schwab Investment Management, Inc. (CSIM) is an affiliate of Charles Schwab & Co., Inc. and a subsidiary of The Charles Schwab Corporation.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.

The S&P 500 Index is a market capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation.

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