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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:
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.
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.
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:
|Net Expense Ratio
|Schwab California Tax-Free Bond Fund(SWCAX)
|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)
|The fund seeks to generate interest income that is not subject to federal income tax.
|Schwab Short-Term Bond Index Fund(SWSBX)
|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)
|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)
|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)
|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)
|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)
|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)
|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)
|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)
|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)
|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)
|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
|Past three month return
|Assets under Management as of February 25, 2021
|US 5 Billion
|US 8.6 Billion
|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.
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.
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