We believe in the power of indexing.

An easy and efficient way to invest.

Charles Schwab explains how index funds can help you build a diversified portfolio.

What Are Index Funds

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Charles Schwab
Chairman of the Board and Founder, Charles Schwab & Co., Inc.

"It's a very simple decision; 'Do I have enough money each month to put aside and where should I put it?' My recommendation is to put it in index funds, particularly as a younger starting investor. 

One of the great features of index funds and broad based ETFs is that you get the advantage of broad diversification, you get many stocks. 

So if you...let's say invest in an index fund or some with S&P 500 there'd be 500 companies, they represent about 70% of American's value of stocks, we have a fund called the Schwab 1000, it's 1,000 stocks, represents about 85% of the companies value in the United States. That is, of course, very broad diversification. And so if there's one industry that goes up, oil for instance, and another going down, utilities going down, you have an investment in every major sector of the economy."

Text: What is an Index Fund? 

Voice over: "In the first video in this series, we looked at the importance of looking at stocks to grow your wealth. But choosing the companies and industries that will deliver the best earnings growth is a real challenge.

Competitive trends, management's ability to execute on their plans, and unpredictable events make it very hard to forecast results with success and consistency. 

Most people just don't have the interest, time or expertise to pick individual stocks well. Multiply that effort by the many individual stocks you'll likely need for a well-rounded portfolio and the complexity adds up quickly. 

Research shows how difficult it is, even for the pros, to actively buy and sell individual securities and match the market. So to get the best chances for building a portfolio that is designed to grow and to get invested in as many different companies in as many different sectors as you need to be well diversified, what do you do?

One of the easiest and low cost ways to get invested in as many companies as possible is to invest in a mutual fund or an Exchange Traded Fund (an ETF) to own a basket of companies. And a smart approach to that is index investing which provides two important advantages: Diversification and minimizing costs.

You're probably already familiar with indexes such as the S&P 500, the Dow Jones or the NASDAQ. In fact, when people talk about the stock market, they're usually thinking about an index. And while you can't invest directly in an index, many mutual funds and ETFs track these indexes simply holding the same stocks in the same proportion as are in the index. 

Index funds can give you broad exposure to the market. Some are so broad in fact, that buying them means you own a tiny piece of almost every public company in America with just one investment.

Index investing can be a useful tool for both experienced and in-experienced investors to form the core of a well-diversified portfolio." 

Text: What will it cost?

Voice over: "When it comes to investing, controlling costs is important. In fact, it's one of the few things you can control. Index funds are typically low cost compared to either buying stocks individually, where you pay a commission for each purchase or sale, or investing in managed funds, which pay managers to choose stocks and make trades. 

And with the advent of ETFs costs drop dramatically. Now you can get access to the entire US Broad Stock Market for an annual fee of .03%. That means that on a $10,000 investment, you would pay a fee of $3 a year to own about 2,000 stocks. Lower costs means more money stays working in your portfolio and over time this can have a big impact on your outcome. 

Charles Schwab: "To me there's lots of confusion in a discussion about investing and you want to make it simple. Some parts of the industry make it too complicated. Look for the firms, look for people who make it simple for you."

Close

An easy and efficient way to invest.

You've probably heard indexing referred to as passive investing. In reality, index mutual funds and exchange-traded funds (ETFs) provide efficient access to a wide swath of our dynamic markets—often at lower costs than actively managed funds.

The advantages of indexing.

Not every investor has the time or expertise to research individual investments. Take individual stocks, for example. Investing in mutual funds and ETFs allows you to own multiple companies without regularly choosing which ones to buy or sell. And investing in index funds—whether mutual funds or ETFs—can be an efficient strategy, offering the following benefits:

Performance

Performance

By definition, index funds aim simply to track their benchmark indexes before fees and expenses. Active funds, on the other hand, may well aim for outperformance—but research shows that remarkably few achieve it over time, making index funds the better performers on average.1

Most active managers fall short of market indexes over time. Over the 5- and 10-year periods ending December 31, 2020, the average active equity fund manager lagged the broader market, as represented by the Schwab 1000 Index®.

Annualized returns - Average actively managed fund return, 5 years: 12.65%. Schwab 1000 Index, 5 years: 15.49%. Average actively managed fund return, 10 years: 11.46%. Schwab 1000 Index, 10 years: 13.91%.

Source: Charles Schwab Investment Advisory (CSIA) with data from Morningstar, Inc. Fund return is the weighted average time-weighted return of all active funds in the following Morningstar categories: US Fund Large Blend. Each fund is represented by its oldest share class. US market index returns are represented by the Schwab 1000 Index. Index returns assume reinvestment of dividends and interest. Indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance is no indication of future results.

Diversification

Diversification

The spreading out of risk is a key tenet of investing. Mutual funds and ETFs, including index funds, can provide portfolio diversification. Some index funds provide exposure to thousands of stocks—or almost the entire investable equity universe.

Diversification spreads the risk of a portfolio. The more stocks in a portfolio, the lower the chance that one stock could cause a significant decline in portfolio value.

Source: Schwab Center for Financial Research. This example shows the mathematical probability of losing money in a single year when the market return is 6% if the investor selects stocks at random (i.e., has no stock selection skill). Calculations include standard deviation assumptions of 11%, 8%, and 6.5% for the 5-, 20-, and 40-stock portfolios, respectively, and assume a normal distribution of returns. Analysis assumes that a randomly selected stock returns 6% annually, has a standard deviation of 20%, and is 10% correlated with every other stock in the market.

Tax efficiency

Tax efficiency

Index mutual funds and ETFs tend to have lower turnover than actively managed funds—meaning they buy and sell securities less frequently—potentially generating fewer capital gains.

Over time, returns lost to taxes add up. In this hypothetical example, $100,000 invested in an active equity fund would have lost over $6,700 more to taxes over 10 years compared to an index equity fund.

Charles Schwab Investment Advisory (CSIA) gathered data on all of the unique equity mutual funds in the Morningstar Direct database as of 02/19/2020 (3,741 funds). The average 10-year tax cost ratio was calculated for the index funds and the non-index funds in that group. Tax cost ratio is a Morningstar measure of how much an investor in the highest bracket would have lost each year to federal income taxes due to fund distributions. The tax cost ratio for each fund type (index and non-index) was subtracted from the S&P 500's average return over that time period (13.56% per year), and that net-of-tax-loss return was used to calculate how much $100,000 would have grown over the 10-year period.

Low fees

Low fees

With active management, you're paying for the possibility of outperformance. The average actively managed mutual fund charges 0.67% in annual fees, versus 0.15% for index funds.2

Expenses erode returns over time. There are fees associated with any investment. But over time, the fees you pay can really add up, which is why low-cost index investing can leave more of your money invested for growth. 

 

Source: For illustrative purposes only. These projections assume a 5% rate of return, are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Fees will impact your portfolio even during periods of negative market performance. The chart does not reflect all fees that may be charged and is not representative of any actual investment, product, or fee structure.

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Over 25 years of leadership in indexing

In 1991, Charles Schwab & Co. launched the Schwab 1000 Index®, which was designed to measure—as accurately and consistently as possible—the long-term performance of America's largest companies. Shortly thereafter, Charles Schwab Investment Management launched the Schwab 1000 Index® Fund to help investors capture that growth potential. 

Of course investing has evolved since then. What hasn't changed is Schwab's ongoing commitment to indexing. Through years of innovation, Schwab has continued providing clients new ways to access efficient, cost-effective, index-based investments.

A leader in index mutual funds and ETFs

Charles Schwab Investment Management (CSIM) offers a comprehensive range of foundational investment solutions through Schwab Funds and Schwab ETFs—which have costs that are among the lowest in the industry.

With a long history and deep understanding of index investing that began in 1991, CSIM is one of the largest providers of index funds and ETFs today.

ETF Rankings

  • $340.8 billion

    Schwab Index Mutual Funds and Schwab ETFs assets under management

  • 3rd

    largest provider of index mutual funds

  • 25+

    years of managing index assets

Data source: All rankings based on assets under management (AUM) as of March 31, 2021.

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Everyone gets low-cost market cap index mutual funds with no minimums.

Pay the same low cost for Schwab market cap index mutual funds whether you have $5 or $5 million to invest.

Everyone gets low-cost market cap index mutual funds with no minimums.

Comparison of Schwab market cap index funds

U.S. Equities
Lipper Category Schwab Vanguard
Multi Cap Core Schwab Total Stock Market Index Fund® Vanguard Total Stock Market Index Fund
$3K Investment SWTSX 0.03% VTSAX 0.04%
$5M Investment SWTSX 0.03% VITSX 0.03%
S&P 500® Index Schwab S&P 500 Index Fund
Vanguard 500 Index Fund
$3K Investment SWPPX
0.02%
VFIAX 0.04%
$5M Investment SWPPX
0.02%
VINIX 0.035%4
Large-Cap Core Schwab 1000 Index® Fund Vanguard Large-Cap Index Fund
$3K Investment SNXFX
0.05%
VLCAX 0.05%
$5M Investment SNXFX
0.05%
VLISX 0.04%
Large-Cap Value Schwab U.S. Large-Cap Value Index Fund Vanguard Value Index Fund
$3K Investment SWLVX
0.035%
VVIAX 0.05%
$5M Investment SWLVX
0.035%
VIVIX 0.04%
Large-Cap Growth Schwab U.S. Large-Cap Growth Index Fund Vanguard Growth Index Fund
$3K Investment SWLGX
0.035%
VIGAX 0.05%
$5M Investment SWLGX
0.035%
VIGIX 0.04%
Mid-Cap Core Schwab U.S. Mid-Cap Index Fund Vanguard Mid-Cap Index Fund
$3K Investment SWMCX
0.04%
VSMAX 0.05%
$5M Investment SWMCX
0.04%
VMCIX 0.04%
Small-Cap Core  Schwab Small-Cap Index Fund® Vanguard Small-Cap Index Fund
$3K Investment SWSSX
0.04%
VSMAX 0.05%
$5M Investment SWSSX
0.04%
VSCIX 0.04%

Comparison of Schwab market cap index funds

International Multi-Cap Core
Lipper Category Schwab Vanguard
International Multi-Cap Core  Schwab International Index Fund® Vanguard Developed Markets Index Fund
$3K Investment SWISX
0.06%
VTMGX 0.07%
$5M Investment SWISX
0.06%
VTMNX 0.05%

Comparison of Schwab market cap index funds

U.S. Fixed Income
Lipper Category Schwab Vanguard
Core Bond Schwab U.S. Aggregate Bond Index Fund Vanguard Total Bond Market Index Fund
$3K Investment SWAGX
0.04%
VBTLX 0.05%
$5M Investment SWAGX
0.04%
VBTIX 0.035%
Short Investment Grade  Schwab Short-Term Bond Index Fund Vanguard Short-Term Bond Index Fund
$3K Investment SWSBX
0.06%
VBIRX 0.07%
$5M Investment SWSBX
0.06%
VBITX 0.05%
Inflation-Protected  Schwab Treasury Inflation Protected Securities Index Fund Vanguard Short-Term Inflation-Protected Securities Index Fund
$3K Investment SWRSX
0.05%
VTAPX 0.06%
$5M Investment SWRSX
0.05%
VTSPX 0.04%

About this chart


3. Competitor share class used for each investment amount scenario: $3,000—Admiral; $5,000,000—Institutional.

Certain Vanguard Institutional clients may meet the minimum investment for Vanguard Institutional share class by aggregating separate accounts within the same Fund; aggregation policy may not apply to financial intermediaries. Other exceptions may also apply for certain investors with respect to minimum investment requirements.

The table is based on net expense ratio data comparisons between Schwab market cap index mutual funds and Vanguard market cap index mutual funds. OERs and investment minimums are as reported from prospectuses and Strategic Insight Simfund, as reflected on April 2021. The Vanguard funds represent the lowest operating expense ratio (OER) within the $3,000 minimum share class of their fund family in the respective Lipper category. Vanguard may offer additional share classes not shown that offer lower expense ratios than the share classes shown, but typically with a higher investment minimum. Securities in market cap index mutual funds are selected and weighted based on the size of their market capitalization. Funds in the same Lipper category may track different indexes, have differences in holdings, and show different performance. Expense ratios are subject to change.

4. The Vanguard Institutional Index Fund - Institutional class with an OER of 0.035% - is a separate fund from the Vanguard 500 Index Fund, but is designed to track the S&P 500 Index.


Schwab market cap index ETFs have among the lowest expenses in the industry.

Here's how Schwab market cap index fund costs compare.³

See how the costs of Schwab market cap index ETFs™ compare.5

Domestic Equity ETFs
Morningstar Institutional Category Schwab Vanguard iShares
Large Core SCHB 0.03% VV 0.04% ITOT 0.03%
Large Core SCHK 0.05% VV 0.04% ITOT 0.03%
Large Core SCHX 0.03% VV 0.04% ITOT 0.03%
Large Core Growth SCHG 0.04%
VUG 0.04% IUSG 0.04%
Large Deep Value SCHV 0.04% VONV 0.08% IUSV 0.04%
Giant Value SCHD 0.06% VYM 0.06% ILCV 0.04%
Mid Core SCHM 0.04% VO 0.04% IJH 0.05%
Small Core SCHA 0.04% VTWO 0.10% IJR 0.06%
Domestic Real Estate SCHH 0.07% VNQ 0.12% USRT 0.08%

See how the costs of Schwab market cap index ETFs compare.5

International Equity ETFs
Morningstar Institutional Category Schwab Vanguard iShares
Foreign Large Core SCHF 0.06% VEA 0.05% IDEV 0.05%
Foreign Small/Mid Core SCHC 0.11% VSS 0.11% ISCF 0.40%
Foreign Large Value SCHY 0.14% VYMI 0.28%  IVLU 0.30%
Diversified Emerging Markets SCHE 0.11% VWO 0.10% IEMG 0.11%

See how the costs of Schwab market cap index ETFs™ compare.5

Fixed Income ETFs
Morningstar Institutional Category Schwab Vanguard iShares
Core Bond SCHZ 0.04% BND 0.035% AGG 0.05%
Inflation Protected Bond SCHP 0.05% VTIP 0.05% STIP 0.05%
Short-term Government SCHO 0.04% N/A SHY 0.15%
Intermediate Government (4-6) SCHR 0.04% VGIT 0.05% GOVT 0.05%
Long Government (>6) SCHQ 0.04% VGLT 0.05% IBTJ 0.07%
Short/Intermediate Investment Grade (2.5-4) SCHJ 0.04% N/A SUSB 0.12%
Long Investment Grade (>6) SCHI 0.04% VGLT 0.05% ILTB 0.06%

About this chart


5. The table is based on prospectus net expense ratio data comparisons between Schwab market-cap index ETFs and non-Schwab market-cap index ETFs. The non-Schwab ETFs shown represent Vanguard and iShares ETFs with the lowest expense ratio within their fund family in their respective Morningstar Institutional category. Schwab operating expense ratios (OERs) listed reflect OERs as of April 2021. Competitor OERs obtained from prospectuses and Morningstar Direct, as reflected on April 2021. ETFs in the same Morningstar Institutional category may track different indices, have differences in holdings, and show different performance. Competitors may offer more than one ETF in a Morningstar Institutional category, including ETFs that are not market cap index mutual ETFs. Expense ratios are subject to change. For current expense ratio and any potential expense waivers, see current competitor fund prospectus or website.


Access to thousands of funds from Schwab and other providers.

  • 2,000+ index mutual funds and ETF

    Choose from over 2,000 index funds and ETFs from Charles Schwab Investment Management (CSIM) and other providers.

  • $0 commission online index listed ETFs and index mutual funds

    Choose from more than 200 index mutual funds with no transaction fees and $0 commission on all index ETFs from Charles Schwab Investment Management and third-party providers.6

  • Ranked #1 in Low-Cost/Free listed ETF Trading

    Schwab ranked #1 in Low-Cost/Free listed ETF Trading in the 2019 Investor’s Business Daily Best of the Online Brokers Survey.7

How to take advantage of Schwab's expertise in indexing

  • Find funds using our easy tools and expert picks

    Use our Fund Finder tool to screen and compare mutual funds and ETFs.

    Use our Select List to choose from a list of Schwab's expert picks for ETFs and mutual funds.

  • Build a portfolio

    Personalized Portfolio Builder The Personalized Portfolio Builder tool simplifies the selection process to help you create a diversified portfolio of mutual funds or ETFs that meets your needs.

  • Get a professionally managed portfolio from Schwab

    Schwab Intelligent Portfolios® Invest in a portfolio of exchange-traded funds. Our robo-advisor builds, monitors, and automatically rebalances a diversified portfolio based on your goals.

    See all investment advice options offered through Schwab.

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Index investing is the practice of investing in a fund—whether a mutual fund or an ETF—with a portfolio of securities that track a particular index. It is a straightforward way to participate in the potential growth of the economy over time. 

Methods of index construction vary widely. The securities may be chosen by a committee based on pre-defined criteria, or the criteria may completely prescribe the securities to be included (for example, the 1000 largest companies). Then, the components of the index are weighted to determine their representation. Most of the broadly used stock indexes are capitalization-weighted, meaning that a company’s size (in terms of its market capitalization, or the total value of its outstanding shares) determines its weight in the index.

However, there are other ways to weight the components of an index, including various "smart beta" strategies.

The methodologies describing how index portfolios are selected and weighted are available to the public. This differs from actively managed funds, where the weighting and selection of securities is usually a proprietary process. (Because the success of an active strategy depends on the fund manager's expertise, the specific methodology is unlikely to be advertised.)

Although both aim to track indexes, index mutual funds and ETFs differ in how they are structured, bought and sold.

ETFs, which can only be purchased through a brokerage account, trade like stocks continuously throughout the day. When you buy or sell an ETF, you do so from another market participant, not the fund company. The other buyer or seller may be an individual investor like you—but is more often a firm that specializes in buying and selling ETFs (known as a market maker).

Since ETFs are not purchased directly from the fund company, the price at which they trade may differ from their net asset value (NAV). Most large and well-known ETFs trade at prices very close to NAV, but smaller and less-liquid ETFs may have market prices that temporarily deviate from their NAV.

Mutual funds, on the other hand, are purchased directly from fund companies and are priced just once daily—when their net asset value is determined after markets close.

Due to their different structure, there are different costs associated with trading ETFs versus mutual funds, including, potentially, trading commissions and bid-ask spreads.

Which is right for you depends largely on your investment schedule and strategy.

Indexes are not investment products, but rather intellectual property (similar to the difference between a house and the blueprints necessary to build a house). While indexes describe how to construct a portfolio, it’s the job of the fund manager to actually build and manage the portfolio.

Tracking difference and tracking error are used to measure how well an index product is replicating its index. Most index-tracking ETFs and mutual funds do a fine job of matching their indexes; however, there are always exceptions to any rule.

Investors in an index mutual fund or ETF participate in the growth of the market segment represented by the index, but markets don't always rise. And when the market is in decline, "owning the market" means participating in the full decline. Market outperformance—which index investments cannot and do not aim for—isn't just about maximizing gains; it's also about minimizing losses during a downturn.

It's also possible that owning an index investment could give an investor a false sense of diversification based on the sheer number of securities included in a particular index. Investing in just one index fund, even if it is based on an index with hundreds of securities, doesn't mean a portfolio is completely diversified. Portfolio diversification ideally involves multiple asset classes and geographical markets, minimizing the correlations between holdings. This can be achieved with index funds, actively managed funds or a combination of both.

Actively managed funds offer the potential to beat the market—and may help reduce downside risk and volatility. So they can indeed play a valuable role in your diversified portfolio. When you're paying for active management, however, you may want to consider the active manager's tenure, the fund objective, and that the fund isn't a closet indexer.

Charles Schwab Investment Management is able to offer these products at competitive costs because we are committed to operating our business through client's eyes and sharing the benefits of our scale and efficiency with investors.