How to Use Schwab Bond Index Funds to Build Your Conservative Portfolio

Overview of the Schwab Bond Index Funds

It is all about your hard-earned sweat! Am I right? You count on them for all your personal goals, retirement, or second career! Now you should treat it seriously more than ever. Yes! I am talking about building up your investment portfolio.

If you are now planning conservative portfolios, bond index funds are necessary choices on the way forward. It provides stable income streams and serves as the hedge against fluctuations of other investments like stocks and options.

 

What is a Bond Index Fund?

A bond index fund is investing by mimicking most of the components from a bond index like Bloomberg Barclays US Aggregate Bond Index. It is a passive-managed investment model. In other words, if you invest in a bond index, you invest in thousands of government and corporate bonds at the same time.

Apart from the vast exposure to the bond market, it has the following benefits:

1. Diversification

As mentioned earlier, broad exposure reduces the risks of just holding a few bonds in your portfolio when one or two companies fail. You may not be worried you will lose some of your nest-eggs and, meanwhile, grow your assets. 

2. Research

Investing involves time on research, collection, and analysis of data before you make the final decision. Index fund covers almost the whole market or sector, so you can save it and focus on other objectives in your life.

3. Performance

There are two types of investing styles: active-managed and passive-managed ones. According to research, the managers of active-managed funds actively seek to win the bets, but few beat the market index. Passive-managed funds invest by modeling against the market index and represent the market.

4. Tax efficiency

As bond index funds track a market index’s components, securities turnover is less than an actively-managed fund. Therefore, index funds rarely pay more tax than active ones—the probability of a higher return increases due to tax savings.

5. Lower fees

Index funds have lower expenses like research, active trading costs, administration loads than active ones. As a result, lower costs transform into savings and increase the return. 

 

Index Mutual Funds vs. ETFs

You should know the differences between the two types of funds before making the right choice. 

  • Index mutual funds: There is only one price quote(net asset value per unit) from a mutual fund company after markets close. The buyer must be a mutual fund company.
  • Index ETFs: Like stock, they are traded on the stock exchanges through brokerages. The prices are continuous and various during trading hours. The market price of an ETF is different but close to NAV(net asset value). Buyers for an ETF can be an individual or an institution.

Read more: Index Fund vs. ETF: What’s the Difference?

 

About Schwab Bond Index Funds

Charles Schwab offers a series of quality mutual funds and ETFs to investors. The products are suitable for investors in planning for their retirement or steady income streams. Investors avoiding exposure to fluctuating assets like stocks are likely to put them into their portfolios. However, you should talk to financial advisors before investing. The following table consists of the fund information:

Fund Product Type Net Expense Ratio Investing Objectives
Schwab California Tax-Free Bond Fund(SWCAX) Mutual Funds 0.49% The fund seeks high current income exempt from federal and California personal income tax consistent with capital preservation.
Schwab High Yield Municipal Bond Fund(SWHYX) Mutual Funds 0.60% The fund seeks to generate interest income that is not subject to federal income tax.
Schwab Short-Term Bond Index Fund(SWSBX) Mutual Funds 0.06% The fund’s goal is to track as closely as possible, before fees and expenses, the total return of an index composed of U.S. investment-grade government-related and corporate bonds with maturities between 1-5 years.
Schwab Tax-Free Bond Fund(SWNTX) Mutual Funds 0.49% The fund seeks high current income that is exempt from federal income tax, consistent with capital preservation.
Schwab Treasury Inflation-Protected Securities Index Fund(SWRSX) Mutual Funds 0.05% Objective: The fund’s goal is to track as closely as possible, before fees and expenses, the price and yield performance of the Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L)SM.
Schwab US Aggregate Bond Index Fund(SWAGX) Mutual Funds 0.04% The fund’s goal is to track as closely as possible, before fees and expenses, the total return of an index composed of the total U.S. investment-grade bond market.
Schwab 1-5 Corporate Bond(SCHJ) ETFs 0.05% The fund’s goal is to track as closely as possible, before fees and expenses, the total return of an index that measures the performance of the short-term U.S. corporate bond market.
Schwab 5-10 Corporate Bond(SCHI) ETFs 0.05% The fund’s goal is to track as closely as possible, before fees and expenses, the total return of an index that measures the performance of the intermediate-term U.S. corporate bond market.
Schwab Intermediate-Term US Treasury ETF(SCHR) ETFs 0.05% The fund’s goal is to track as closely as possible, before fees and expenses, the total return of the Bloomberg Barclays US Treasury 3-10 Year Index.
Schwab Long-Term US Treasury ETF(SCHQ) ETFs 0.05% The fund’s goal is to track as closely as possible, before fees and expenses, the total return of an index that measures the long-term U.S. Treasury bond market’s performance.
Schwab Short-Term US Treasury ETF(SCHO) ETFs 0.05% The fund’s goal is to track as closely as possible, before fees and expenses, the total return of the Bloomberg Barclays US Treasury 1-3 Year Index.
Schwab US Aggregate Bond ETF(SCHZ) ETFs 0.04% The fund’s goal is to track as closely as possible, before fees and expenses, the Bloomberg Barclays US Aggregate Bond Index’s total return.
Schwab US Tips ETF(SCHP) ETFs 0.05% The fund’s goal is to track as closely as possible, before fees and expenses, the total return of the Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L).

 

Schwab Bond Index Funds

Charles Schwab offers two index funds based on the same index: Bloomberg Barclays US Aggregate Bond Index. One is a mutual fund(SWAGX), the other is an ETF(SCHZ). They are the fund products very suitable for inclusion into a conservative portfolio because both invest in the US Government and corporate investment-grade bonds.

Let us see their similarities and differences:

Types as of January 31, 2021 Schwab US Aggregate Index Bond Fund(SWAGX) Schwab US Aggregate Bond ETF(SCHZ)
Performance over one year -0.75% -0.68%
Past three month return 0.37% 0.61%
Distribution yield 2.31% 2.44%
Expense ratio 0.04% 0.04%
Assets under Management as of February 25, 2021 US 5 Billion US 8.6 Billion
Inception date February 27, 2017 July 14, 2011

 

How to Build your Conservative Portfolio using Schwab Bond Index Funds

You want to preserve your portfolio’s value because you will need it very soon or cannot afford to lose as the market goes down. No matter the reasons, you may still earn some small but better than banking’s return on your investments.

Conservative investors can use the two funds (SWAGX, SCHZ) to build up their portfolios and achieve their aims. How is that? The two funds the following advantages for conservative strategies:

  • Risk: You can see, from the table above, the price swings are small(within one percent), whether it is three-month or one year. It is fit for cautious investors unwilling to see huge asset ups and downs.
  • Performance: The two index bond funds provide a very stable income stream of two percent plus each year. It is a good deal if you want to preserve capital and earn a reasonable income.
  • Low fees: The cost is less than most bond index funds. The expense ratios are as low as 0.04%!

In a word, I would suggest any one of these two funds should make up at least eighty percent of your portfolio, whether they consist of your banking assets or brokerage accounts at the end of the day. You can hit two birds with a stone!

 

Things to Consider Before Investing in Schwab Bond Index Funds

Like what I say above, a clear picture of what Schwab bond index funds can create as an essential component of your portfolio is vital to reaching your goals. Regarding your low tolerance of risk, fund performance like minimum asset price fluctuations, and lower fees, the two Schwab bond index funds are appropriate to your choice in structuring your conservative portfolio.

 

Final Words

Besides the three factors, rebalancing your portfolio is also vital to your success. Though eighty percent is a rule of thumb in adjusting your investing strategies, you should review your portfolio regularly to ensure you are on your way to your financial goals.

Besides discussing your financial advisor’s financial goals, you should look for more information and professional analysis to understand your investments and financial markets. 

Investoralist is an excellent place for you to have in-depth knowledge about mutual funds, ETFs, stocks, and bonds. Subscribe to our newsletter to stay on top of your investment strategy this 2021!

Fidelity vs. Vanguard: Which is Best for You?

Fidelity vs. Vanguard Which is Best for You

Fidelity has over 32 million clients and 8.3 trillion dollars of assets under management as of June 2020; Vanguard has over 30 million customers and manages over 6.2 trillion dollars of assets globally as of June 2020.

They both offer stock, bond trading service, mutual funds, and ETFs services. They are also the primary retirement and savings plan sponsors in the US. 

Fidelity offers more sophisticated services for advanced investors, while clients like Vanguard’s simple trading system interface for making easy buy-and-hold investing.

Here are the similarities and differences of the two investing institutions and show both brokers’ advantages and drawbacks.

 

Fidelity vs. Vanguard: an Overview


1. Fidelity

Fidelity is a name for outstanding and well-known aspects in investing business.

  • Its research offers more than 20 third-party analyses to clients. The notable companies include Thomson Reuters, Standard & Poor’s, Recognia and Ned Davis, and McLean Capital Management. Fidelity provides a page “ Equity Summary Score,” which evaluates independent research firms’ accuracy for clients’ reference. More than that, if clients are overwhelmed by the number of research outputs, they can take a small test to see which analysis fits their preferences and styles.
  • Fidelity provides multiple screeners for various investment tools like stocks, bonds, ETFs, mutual funds, and options for investors to choose from easily and conveniently.
  • Technology is Fidelity’s edge here. The “FullView” system lets you pull your assets outside Fidelity into the interface for analysis and limited financial consultation. Clients can get advice like asset allocation and risk tolerance through the system. It also shows information like account balance, buyer power, and internal rate of return.

2. Vanguard

  • Vanguard is named most for the number of its index mutual funds and ETFs. The expense ratio is low for most of its funds. Suppose you are a buy-and-hold investor and need occasional adjustments to your portfolio. Vanguard is your ideal candidate.
  • Vanguard’s corporate structure is quite different from others. What makes it so unique is the company is owned by its funds and subsequently the funds held by investors. Therefore, the investors are the real owner. The advantages are costs are lower than general corporations, and the savings ultimately return to investors.

 

Fees and Commissions

I must state both are excellent investing brokerages and retirement plan participating sponsors. The table below compares details of their services:

Items Fidelity Vanguard
Account Minimum $0
  • $0 
  • a minimum of $1000 for funds
Account fees (Inactivity, Annual, Transfer) $0
  • $0
  • $20 annual fee for accounts without sign-up for e-statements
Research Free and comprehensive
  • Free
  • average quality
Equity trading cost $0 $0
Options trade
  • $0
  • $0.65 per contract
  • $0+$1 per contract
  • account balance with $1 million or more gets 25 trades free each year
  • account balance with $5 million or more gets 100 trades free each year
No of mutual funds without transaction-fee More than 3,400
  • More than 3,100 from outside providers
  • 120 or more from Vanguard
No of ETFs without commissions All All
Types of securities for trade
  • ETFs, Mutual Funds, Options, Stocks, Bonds, Fractional Shares.
  • ETFs, Mutual Funds, Options, Stocks, Bonds, CDs
Mobile App Advanced features
  • Trades for Stocks, Mutual Funds, ETFs.
  • Manage account activities and performance
  • Follow market news and analysis.
Trading Platform
  • Fidelity.com
  • Active Trading Pro – Free
Basic
Customer Service Call, email, and live chat 24/7 a day Call support from Monday- Friday 8 am to 9 pm and e-mail support.

 

Investment Selection


Fidelity

  1. Fidelity is one of the low-cost commission advocates. It cancels all commissions for stocks, ETFs, options, and account fees. It also adds zero expense mutual funds, e.g., the Fidelity Zero Extended Market Index Fund, the Fidelity Zero International Index Fund, the Fidelity Zero Total Market Index Fund, and the Fidelity Zero Large Cap Index Fund.
  2. You can use those funds above to build up a portfolio expense-free! Fidelity has over 3400 no-transaction-fee mutual funds and over 700 mutual funds and ETFs with as low as a 0.05% expense ratio. The funds come from Fidelity and outside companies. Besides, it has no minimum requirement for fund investments.
  3. Fidelity provides a stock-shorting service of more than 3000. Investors can buy penny stock on OTCBB. The products also cover bonds, single-leg, multi-leg options, forex, international investments, and fractional shares.

Vanguard

  1. Vanguard is a pioneer of low-cost funds. John Bogle, the founder of the company, created the concept of an index fund. Today most financial institutions embrace Vanguard’s index mutual funds and exchange-traded funds(ETF) into their portfolios.
  2. Vanguard also founds two socially conscious mutual funds and three ETFs to cater to investors’ needs. According to Morningstar, Vanguard’s funds and ETFs have the lowest expense ratios in the industry. The average expense ratio for Vanguard is 0.10%, while the industry average is 0.45%. The 0.35% difference makes a massive impact on your savings when it accumulates year over year!
  3. You may not have noticed the company offers 3100 funds to customers. Of them, 120 or more are from Vanguard. The unique point is they have no transaction fees. Vanguard does not actively use incentives to promote business; they think the cost saved should be used to reduce expenses of running funds. That ultimately benefits fund investors by enhancing returns.
  4. Admiral shares: You will be surprised Vanguard has another lower class of fund shares to investors than its already expense-low funds. The admiral class is 41% cheaper than other standard classes in cost. But you have to subscribe to a threshold for a fund to enjoy the benefit. The threshold varies subject to the fund itself.
  5. Vanguard will automatically transfer your idle cash into Vanguard Federal Money Market Fund – a high yield but low expense ratio fund.
  6. If you don’t know how to choose a fund for your goals, Vanguard offers one “all-in-one-fund” service. It will guide you on how to select a balanced fund based on your objective, time horizon. The beautiful thing is once you invest in the fund, it will automatically rebalance the asset mix appropriate to your age and time to goals. The index funds are well-diversified, professionally managed by experts, and also low-cost. 
  7. The “all-in-one” funds offered include Vanguard Target Retirement Fund, Vanguard LifeStrategy® Fund, The Vanguard College Savings Plan. You should consult your financial consultant before making any decision.

 

Online Advisors and Educational Offerings


Fidelity

• Online Advisor

Fidelity Go, like a Robo-advising service, is an online advising service offered by Fidelity investment professionals. Once you input your financial goals, age, risk profile, and contribution amounts, Fidelity will perform analysis and recommend investment portfolios suitable for your risk tolerance level. 

More than that, they will manage your portfolio on a day-by-day basis. Your activities with Fidelity all take place online, like communications, performance reports, and consulting services. Low-cost investments like funds will be the primary tools to maximize profits.

The fee for Fidelity Go is progressive based on the account balances:

$0-$9,999 $10,000-$49,999 $50,000 or above
$0 $3/per month 0.35% per year


Educational Offerings

Fidelity’s online learning center posts more than 600 articles about investments such as options, bonds, and stocks and shows how to use fundamental or technical analysis in investing. It also explores life topics like retirement, education, and target planning in savings.

Besides in-house staff, they also invite field experts to produce much information using articles, infographics, videos, live and recorded webinars to promote wealth accumulations.They hold weekly online coaching sessions to explore investment topics like options and technical analysis.

Regarding the mobile app, Fidelity uses the “Learning Program” to educate people about investing. The company also launches the Fidelity Spire to help young adults on planning for their financial goals. The app allows users to link up two goals to their respective accounts. 

One is a short-term goal linked to the Fidelity Cash Management Account. Fidelity will not charge this type of account and even reimburse the ATM fee. Another is a long-term goal linked to the “Fidelity Go” and aims for long-term asset growth. They shall open a brokerage account with Fidelity if they accept recommendations from the “Fidelity Go.”

Moreover, the “Moments Page” is created to tell life planning stages like childbirth, education, marriage, and retirement and coach savers towards life goals using Fidelity’s tools.

Vanguard

Online Advisor

Vanguard also offers a digital advisor service. Like other investment management functions, Vanguard Digital Advisor can handle personal accounts like IRAs, Roth IRAs, rollover IRAs. You can use the system to connect non-Vanguard plans for accurate projections of financial situations. 

The fee is 0.15% for assets managed. The account minimum is $3,000, and the low-cost ETFs are the primary products for investments in clients’ accounts.

Educational Offerings

Vanguard wrote about 250 articles on its website in 2019. The focus is on helping investors on the way to achieving their financial goals. The offerings are primary in blogs, podcasts, research papers discussing economics, retirement planning, and Vanguard’s products. Others as live webinars/events and youtube are rare.

 

Online and Mobile Experiences


Fidelity

  • Fidelity offers two kinds of online trading platforms. Investors can use the official web-based platform or downloadable software to trade stocks and options. The interface is easy to use and navigate. 

For buy-and-hold investors, the web-based platform covers more than enough for transactions. A well-designed interface provides corporate news, quotes, charts, watchlist on a screen in an organized way but does not overwhelm beginners.

Furthermore, The “Position” page in the system also allows investors to read the latest research while lets investors stay on a screen of their portfolio.

More than that, investors can perform “buy and sell” functions simultaneously without being forced to leave the same page. New investors can even have a help menu inside to walk through the system on an all-in-one screen.

  • “Active Trader Pro” is downloadable software for active and experienced investors to engage in trading activities. Apart from the web-based platform’s essential functions, it is a customizable program for creating a tailor-made workspace as per an individual’s needs. 

It monitors and alerts on relevant news and technical signals such as highs and lows and a ticker’s latest stock market position.

Moreover, traders will find it convenient to look for a target company’s financial information like market size, PE ratio, dividend yield, and ratings on the news and research tab.

You have more choices to set your defaults like market or limit orders, time, size, types, and even place a trade in a chart on the program. It also provides a probability calculator, options analytics, and related technical measures to execute the trades. The “ Active Trader Pro” has more to offer than an active actor needs in investing.

  • Mobile experience: The mobile app handles most types of investment vehicles except fixed-income products. Though the trade functions are more limited than the desktop and the “Active Trader Pro,” it is still more superior to other apps of the same nature.

Vanguard

As to the online and mobile trade experience, Vanguard’s technology is outdated, data and trades are delayed. The user interface cannot show updated information. It also lacks functions to carry sophisticated transactions and multi-tasks. However, less active traders are still comfortable using it. Vanguard also offers “Vanguard Personal Advisors” –a hybrid robot-advisor service. It provides personal financial planning and asset allocation services but charges 0.13% with a minimum account balance of $50,000.   

 

Fidelity vs. Vanguard: Which One is Right for You?

  • Fidelity offers advanced technology, whether it is an online platform or sophisticated software, to make investors trade more conveniently and quickly. Besides writing blogs, the company holds frequent and regular webinars and podcasts, and live events to help investors, particularly young adults, in financial planning. A lot of research information is available for new and experienced investors to understand various investment markets.
  • Vanguard emphasizes its products of low-cost mutual funds and exchange-traded funds(ETF). The expense ratios for most of the products are lower than most companies.
  • Fidelity is ideal for active investors requiring premium research and advanced technology and mutual funds and ETFs of various investment options. Vanguard is fit for long-term and buy-and-hold investors, who are busy or may not focus on their portfolios for a long time, looking for low-cost mutual funds and ETFs as well.

 

Investing Tips

If you are an active investor who likes using sophisticated technology and trading skills, you will also likely comb through resources before making a judgment. Fidelity is fit for you because it offers advanced technology like web-based, mobile, and software platforms to cater to an investor’s needs. It also provides plenty of research and education resources to aid investors.

If you are an investor of a long-term vision and do not bother with the short-term ups and downs of markets, besides, you are busy with other things in life other than your investments; Vanguard is ideal for you. It offers a wide array of mutual funds and ETFs covering major global markets and industrial sectors with average expense ratios of as low as 0.06%. I suggest you should consult your financial advisor before deciding which is best for your objectives.

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