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, 2017, the average active equity fund manager lagged the broader market, as represented by the Schwab 1000 Index®.

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.

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.

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. 

 

Take advantage of indexing at Schwab.

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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

  • $255.8 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:

Take advantage of indexing at Schwab.

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.

U.S. Equities
International Multi-Cap Core
U.S. Fixed Income

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

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

Domestic Equity ETFs
International Equity ETFs
Fixed Income ETFs

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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 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.7

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

    Schwab ranked #1 in Low-Cost/Free ETF Trading in the 2019 Investor’s Business Daily Best of the Online Brokers Survey.8

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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