The Schwab Broad Market ETF (NYSEMKT:SCHB) is a low-cost exchange-traded fund that is designed to allow investors to passively invest in the entire stock market through a single investment vehicle. The fund can be a smart choice for investors who want to benefit from the long-term compounding power of stocks, or investors who want to form a "base" to their portfolio before branching out to individual stocks.
With that in mind, here's an overview of the ETF's investment strategy, the costs associated with it, and whether it could be a smart investment for your portfolio.
What is the Schwab Broad Market ETF?
As the name implies, the Schwab Broad Market ETF is an exchange-traded fund that is designed to give investors exposure to the U.S. stock market.
Specifically, the fund tracks the Dow Jones U.S. Broad Stock Market Index, which includes a variety of both small- and large-cap stocks. At the end of the third quarter of 2018, the fund owned 2,429 different stocks.
The index is market-cap weighted, just like the S&P 500 and most other market-tracking indexes. This means that larger companies make up a larger proportion of the portfolio. So it shouldn't be much of a surprise that top holdings of the fund include Apple, Microsoft, Amazon, and other large U.S. companies.
Why should an investor consider the Schwab Broad Market ETF?
The stock market as a whole has generated annualized total returns of about 10% over long periods of time. Investors who simply want to sit back and let the long-term compounding power of the market do all of the heavy lifting can do just that by investing in index funds, especially those that track the performance of broader-market indexes.
And the Schwab Broad Market ETF tracks the stock market's performance at a bare minimum of expense to investors. Mutual fund and ETF ongoing fees are known as the expense ratio, which is the fund's management and administrative fees expressed as a percentage of the fund's overall assets. For example, a 1% expense ratio is about the average for an actively managed mutual fund, and means that you'll pay $100 in fees for every $10,000 invested, each year.
The Schwab Broad Market ETF has a minuscule 0.03% expense ratio, meaning that for every $10,000 you have invested in the fund, your annual expenses are a mere $3. When you consider that these types of market-tracking funds have historically produced annualized returns in the 10% ballpark, this is virtually nothing.
In other words, the Schwab Broad Market ETF can help you track the stock market's performance without giving up much of your returns in the form of fees. In other words, if the Dow Jones U.S. Broad Stock Market Index's total return is say, 8% this year, you can expect that your investment's total return will be 8% as well.
Is the Schwab Broad Market ETF a good choice for you?
As far as passive index funds go, the Schwab Broad Market ETF is one of the best products on the market. It should do an excellent job of tracking the overall performance of the stock market over time, and will do so at a bare minimum of expense, so investors will get to keep most of the gains.
As Warren Buffett has said many times, the best way for the majority of people to invest is through low-cost index funds. Don't misunderstand this -- if you have the time, knowledge, and desire to research and invest through individual stocks, it's entirely possible to generate excellent returns over time. However, if you don't have all of those characteristics, index fund investing is probably the way to go. And if you do choose to invest through index funds, the Schwab Broad Market ETF is an excellent index fund to consider.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Matthew Frankel, CFP owns shares of Apple. The Motley Fool owns shares of and recommends Amazon and Apple. The Motley Fool owns shares of Microsoft and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.