Most people know Charles Schwab because of its standing among America’s top retirement account providers. But you don’t need a Schwab account for “Chuck” to help you save for retirement.
That’s because one of Charles Schwab’s other noteworthy products—mutual funds—can be held in most individual retirement accounts (IRAs), no matter where you invest.
Schwab is among the largest providers of mutual funds, giving it the prerequisite scale to charge low fees on those products, indexed and actively managed alike. Better still, most of Schwab’s funds are cheap on a nominal basis, requiring just one dollar when you initially invest. However, to get the most out of some Schwab funds, you’ll want to hold them in an individual retirement account (IRA) or another tax-advantaged account, where you can benefit from their sound strategies without having to worry about the IRS holding out its hand from year to year.
Ready to meet these Schwab mutual funds? Read on. I’ll look at some of the best Schwab retirement funds for IRAs, across the risk spectrum, with each product representing a different long-term investing objective. These funds are best held in an IRA because of the tax consequences, which means they’re also appropriate for other tax-advantaged accounts such as 401(k)s and health savings accounts (HSAs).
Editor’s Note: Tabular data presented in this article is up-to-date as of April 14, 2026.
Disclaimer: This article does not constitute individualized investment advice. Individual securities, funds, and/or other investments appear for your consideration and not as personalized investment recommendations. Act at your own discretion.
Table of Contents
What Should You Want in a Retirement Fund?
Once you’re ready to invest your retirement savings and put that money to work in mutual funds, you’ll want to consider these critical factors:
— Diversification: A robust retirement portfolio should hold various asset classes. It’s recommended that most people diversify across at least stocks and bonds, though sometimes alternative asset classes (such as real estate or commodities) are appropriate, too. Diversifying your retirement portfolio across these asset classes can help defray your risk and smooth your returns. There’s also diversification within each fund. Some products hold dozens of stocks while others hold thousands. Some funds invest heavily in their biggest stocks while others spread their assets out more evenly. Always consider how diversified a fund really is, as well as whether that level of diversification suits your needs.
— Costs. Every dollar spent on fees and expenses is a dollar no longer available to grow and compound over time, so keeping expenses cut to the bone is vital. Good news there: The best Schwab retirement funds will generally have some of the lowest fees and expenses in the business.
— Taxes. A taxable account, like a standard brokerage account, is better suited to take advantage of certain tax-advantaged investments, such as municipal bonds. For tax-advantaged accounts, such as IRAs, some of the best investments include bond funds and actively managed stock funds. (I’ll explain why when we get to those funds.)
— Interest and dividend income. Stocks can regularly experience nasty corrections and bear markets, but a good income fund can provide for your living expenses without forcing you to sell at an inopportune time.
What Kinds of Funds Are Available in IRAs?
IRAs generally act very similar to taxable brokerage accounts, insofar as they’re typically self-directed and extremely flexible. You can usually own individual stocks and bonds, as well as just about any type of investment fund—mutual funds, exchange-traded funds (ETFs), and even closed-end funds (CEFs).
ETFs typically beat both mutual funds and CEFs on fees, sometimes by a considerable margin. But there are a few reasons to consider Schwab mutual funds in an IRA:
— They’re cheap, for one. Schwab mutual funds typically offer very low fees—in many cases lower than even many ETFs with a similar strategy.
— Schwab has some of the lowest initial investment minimums in the industry; you can spend as little as $1 to get started.
— Also, some of Schwab’s mutual funds are actively managed, which as I mentioned above is more efficiently held within an IRA. And you very well might prefer to have a human manager overseeing certain strategies rather than buy a fund that simply follows an index.
The biggest difference between an IRA and a brokerage account is their tax treatment. You’re taxed on capital gains, dividends, interest income, and other gains year-in and year-out in a brokerage account. But, generally speaking, the only taxes you’ll ever need to worry about with an IRA is income tax on your withdrawals in retirement.
On that count: Some Schwab mutual funds have more significant tax consequences than others. Some produce a significant amount of interest income, while others trade heavily and, as a result, make short-term capital gains distributions—both of which are taxed at ordinary income rates. In a taxable account, these would be taxable events that you’d pay for each year. But money stashed in tax-advantaged accounts like an IRA grows tax-free, so you get all of the performance of these funds without the year-to-year tax hits.
What Is a Mutual Fund?
A mutual fund is an investment company that pools money from many investors to buy stocks, bonds or other securities. The investors get the benefits of professional management and certain economies of scale. A pool of potentially millions or even billions of dollars is large enough to diversify and might have access to investments that would be impractical for an individual investor to own.
Here’s an example: An investor wanting to mimic the S&P 500 Index (an index made up of 500 large, U.S.-listed companies) would generally have a hard time buying and managing a portfolio of 500 individual stocks, especially in the exact proportions of the S&P 500 Index. Another example: An investor wanting a diversified bond portfolio might have a hard time building one when individual bond issues can have minimum purchase sizes of thousands (or tens of thousands!) of dollars.
Equity funds or bond funds will generally be a far more practical solution.
To invest in a mutual fund, you’ll need to open an account with the fund sponsor or open an investment account with a broker that has a selling agreement in place with the fund sponsor. As a general rule, most large, popular mutual funds will be available at most brokers, so if you open any traditional investment account (like a brokerage or IRA), you’ll have access to most of the mutual funds you’d ever want to invest in.
Related: Best Schwab Retirement Funds for a 401(k) Plan
Why Buy Mutual Funds From Schwab?
Charles Schwab is a U.S.-based brokerage and banking company founded in 1971 as a traditional brokerage company and then as a discount brokerage service in 1974. It is headquartered in San Francisco, California, and operates primarily throughout the United States, but also has international operations.
The firm is the largest publicly traded investment services firm with more than $12 trillion in client assets. Schwab offers a wide range of financial services, such as investment advice and management, trading services, financial planning, banking services, workplace and individual retirement plans, annuities, and more.
On the product side, Schwab features more than 100 funds—it’s known for its active products and seasoned management teams, but it’s also one of the largest providers of indexed mutual funds. Moreover, Schwab’s products feature no load or transaction fees, and below-industry-average annual expenses.
In short: Schwab’s best mutual funds for retirement are generally going to be among your top options period, and they generally won’t make a dent in your wallet.
Do you want to get serious about saving and planning for retirement? Sign up for Retire With Riley, Young and the Invested’s free retirement planning newsletter.
The Best Schwab Retirement Funds for IRAs
These Schwab retirement funds are listed by their overall Morningstar Portfolio Risk Score, from the most conservative to the most aggressive. Here are the risk levels each score range represents:
— 0-23: Conservative
— 24-47: Moderate
— 48-78: Aggressive
— 79-99: Very aggressive
— 100+: Extreme
These scores are a general gauge of risk compared to all other investments. For example, a bond fund with a score of 20 might be considered a conservative strategy overall, but it could simultaneously be riskier than a number of other bond funds.
With all that out of the way, let’s dig into some of the best Schwab retirement funds you can consider holding in an IRA.
Related: Best Schwab Funds to Hold in an HSA
1. Schwab U.S. Treasury Money Fund Investor Shares
— Style: Money market
— Management: Active
— Assets under management: $41.2 billion
— SEC yield: 3.4%*
— Expense ratio: 0.34%**, or $3.40 per year for every $1,000 invested
— Morningstar Portfolio Risk Score: N/A
I’ll go ahead and start with one of the lowest-risk investments you can stuff into an IRA (or just about any investing account, really).
Money market funds are mutual funds that invest in very short-term investments, such as cash, U.S. Treasury or agency securities with extremely short-term to maturity, commercial paper, or floating-rate securities. While there can be credit risk to the extent the fund owns securities not guaranteed by the government, losses in money market funds are extremely rare.
They’re also unique among mutual funds in that they specifically target a net asset value of $1 per share. Any earnings that cause the net asset value to go higher than $1 get distributed as dividends. This means that, unless you reinvest your dividends, the value of your money market mutual fund will not grow over time. You’re really just collecting yield.
Related: 8 Best-in-Class Bond Funds to Buy
And among money market funds, few are going to be safer than the Schwab U.S. Treasury Money Fund Investor Shares (SNSXX), which owns a portfolio of Treasury securities backed by the full faith and credit of the U.S. government. That’s it. No corporate or agency securities. No repo agreements or derivatives. This is as safe as money market funds get. (Don’t mind the lack of a Morningstar Portfolio Risk Score—they’re not awarded to money market funds.)
The weighted average maturity of SNSXX’s holdings is just 49 days, meaning you have virtually no interest-rate risk. And yet, you’re still receiving a very competitive yield of well more than 3% as I write this.
I mentioned that money market funds’ prices are generally insulated from outside forces, but their yield are very sensitive to Federal Reserve policy moves. Before 2022, money market funds offered virtually nothing in yield. That changed in 2022 when the Fed launched an aggressive string of rate hikes; rates have come down across the past couple of years, but Schwab U.S. Treasury Money Fund remains a legitimate income fund with a yield well north of 3%. But if you require a certain level of income, you’ll want to keep a close eye on the Fed.
Related: 9 Best Vanguard Retirement Funds [Start Saving in 2026]
Until then, low risk and a competitive yield make SNSXX one of the very best Schwab retirement funds period, though it’s best off in an HSA or other tax-advantaged account. That’s because money market funds are effectively bond funds, with interest income the predominant source of returns. Interest income is taxed as ordinary income—if you’re in the 37% federal tax bracket, then you’re losing 37% of your bond interest to taxes—making bond funds (and money market funds) extremely tax-inefficient.
* 7-day SEC yield reflects the annualized daily income distributions made over the previous seven days. This is a standard measure for money market funds.
** 0.35% gross expense ratio is reduced with a 1-basis-point fee waiver for as long as Charles Schwab Investment Management serves as adviser to the fund. (A basis point is one one-hundredth of a percentage point.) The agreement can only be amended or terminated with approval of the fund’s board of trustees.
Related: The 16 Best ETFs to Buy for a Prosperous 2026
2. Schwab U.S. Aggregate Bond Index Fund
— Style: U.S. intermediate-term bond
— Management: Index
— Assets under management: $8.0 billion
— SEC yield: 4.3%
— Expense ratio: 0.04%, or 40¢ per year for every $1,000 invested
— Morningstar Portfolio Risk Score: 16 (Conservative)
If you’re willing to take on a little more risk for a little more potential reward, you could move up from a short-term bond to something with more intermediate-term maturities.
The Schwab U.S. Aggregate Bond Index Fund (SWAGX), for instance, is a diversified option that covers a wide swath of the bond market. SWAGX, which holds a whopping 11,500 debt issues, is categorized by Morningstar as an “Intermediate Core Bond” fund, which very broadly means two things:
1. It invests primarily in investment-grade U.S. fixed-income issues, and
2. Its duration (a measure of interest-rate sensitivity) usually ranges between 75% and 125% of the three-year average of the Morningstar Cor Bond Index’s effective duration.
Don’t worry. I’ll explain.
Related: The 12 Best Vanguard ETFs for 2026 [Build a Low-Cost Portfolio]
To the first part: Every bond that SWAGX currently holds enjoys an “investment-grade” rating, which basically means the credit ratings agencies believe the bond’s issuer has a low risk of default. These bonds are considered relatively safer than (but as a result yield less than) similarly dated below-investment-grade securities, aka high-yield bonds, aka junk. Currently, the largest portion of assets (45%) is invested in U.S. government and agency bonds, while another half of assets is split evenly between mortgage-backed securities (MBSes) and corporate bonds. The rest is peppered across other government-related bonds, municipal bonds, and other debt.
To the second? Intermediate-term bonds are those with remaining maturities of between three and 10 years; that makes up the majority (55%) of SWAGX’s holdings. Another quarter of assets are invested in short-term bonds (three years or below), and the remainder is invested in long-term bonds (10 years or more). That, combined with credit quality, educates the fund’s duration, which currently sits at 5.8 years. While the actual calculation is much more complex, this basically implies that for every 1-percentage-point increase in interest rates, Schwab U.S. Aggregate Bond Index Fund would decline by 5.8% in the short term, and vice versa.
It’s a moderate amount of risk. This means SWAGX definitely has more room for price appreciation (and losses) than any money market fund, but you can still expect less volatility than you’d get out of a stock fund. Meanwhile, you’re getting almost a percentage point more in yield than the aforementioned SNSXX.
And like SNSXX, the lion’s share of returns will come from interest income, so this Schwab fund is best held in an IRA or another tax-advantaged account.
Make Young and the Invested your preferred news source on Google
Simply go to your preferences page and select the ✓ box for Young and the Invested. Once you’ve made this update, you’ll see Young and the Invested show up more often in Google’s “Top Stories” feed, as well as in a dedicated “From Your Sources” section on Google’s search results page.
3. Schwab Balanced Fund
— Style: Moderate allocation
— Management: Active
— Assets under management: $743.0 million
— Dividend yield: 2.0%
— Expense ratio: 0.51%*, or $5.10 per year for every $1,000 invested
— Morningstar Portfolio Risk Score: 40 (Moderate)
We’ll climb the risk ladder a little by moving on to balanced funds, aka allocation funds, aka portfolios in a can.
Whatever you choose to call them, products like Schwab Balanced Fund (SWOBX) are designed to give you exposure to the two primary asset classes—stocks and bonds—in a single holding. More specifically, SWOBX is a “moderate” allocation fund that provides a roughly 60/40 blend of equity and debt (the latter of which also includes a small percentage in cash).
While allocation funds are often built with individual stocks and bonds, SWOBX managers Zifan Tang and Patrick Kwok have constructed their portfolio with a small collection of other Schwab mutual funds. Roughly half of the fund’s assets are currently invested in U.S. equities; another 10% is allocated to international stocks. Meanwhile, virtually all of its bond holdings come from Schwab U.S. Aggregate Bond Index Fund, meaning you’re getting exposure to U.S. government bonds, investment-grade corporate debt, MBSes, and anything else SWAGX owns.
Related: The 10 Best Dividend ETFs [Get Income + Diversify]
Allocation funds like Schwab Balanced are an ultra-simple way to get stock and bond coverage in the click of a button. In fact, if you really wanted it to, SWOBX could act as your entire portfolio—but only if its stock/bond allocations make sense for achieving your financial goals. SWOBX alone might be too conservative for most investors, and instead makes sense as part of a more broadly diversified holdings set.
From a tax standpoint, we want to consider two factors: turnover and income. Schwab Balanced Fund’s turnover (how much a fund buys and sell holdings) is actually pretty restrained, at around 10%. Why does this matter? High turnover can generate significant capital gains, which are distributed to shareholders each year … and those distributions are taxable. From that perspective, SWOBX is fairly tax-efficient. However, like the aforementioned bond funds, Schwab Balanced generates a decent amount of interest income from the debt portfolio, so an IRA or other tax-advantaged account would still make a fitting home.
* 0.53% gross expense ratio is reduced with a 2-basis-point fee waiver for as long as Charles Schwab Investment Management serves as adviser to the fund. The agreement can only be amended or terminated with approval of the fund’s board of trustees.
Related: 9 Best Fidelity Index Funds to Buy for 2026
4. Schwab Target-Date Funds
— Style: Target-date
— Management: Active
— Expense ratio: Schwab Target Funds: 0.25%-0.58%*, or $2.50-$5.80 per year for every $1,000 invested; Schwab Target Index Funds: 0.08%, or 80¢ per year for every $1,000 invested
— Morningstar Portfolio Risk Score: 26-67 (Moderate-Aggressive)
Target-date funds are similar to allocation funds, but they take an extra step that makes them extremely useful for long-term buy-and-holders.
One of the challenges in retirement planning is getting the asset allocation right, or having an asset class mix that is appropriate for an investor at your age and stage of life. An ideal portfolio for a 20-year-old is likely going to be very different from that of a 40-year-old, and both those portfolios will be different from what’s ideal for a 60-year-old.
Related: Beginner’s Guide to Fidelity Target-Date Funds
An allocation fund will generally keep the same blend of stocks and bonds for as long as the fund exists. However, target-date funds (also called life-cycle funds) are a type of allocation fund that are designed to change their asset allocation over time. Target-date funds start out invested heavily in stocks, then slowly reduce their stock exposure and replace it with bond exposure as they approach their target retirement date, following a glide path.
The target retirement dates are intended to be estimates; they don’t have to be super precise. Generally, most mutual fund families will create target-date funds in five-year increments (say, 2025, 2030, 2035, etc.).
Given the hyper-specific focus on retirement, target-date funds tend to be a mainstay of 401(k) plans. But they’re also at home in other retirement accounts, such as IRAs.
Schwab offers two target-date fund series, both of which hold various funds to provide exposure to U.S. and international stocks and bonds:
— Schwab Target Funds: These hold a collection of actively managed and index funds. While most of Schwab Target Funds’ holdings are other Schwab mutual funds, they will also hold funds from outside providers, including Dodge & Cox and Baird.
— Schwab Target Index Funds: These primarily hold Schwab ETFs.
In general, both of Schwab’s target-date fund series are economical, but the Schwab Target Index Funds are flat-out cheap, at just 0.08% in annual expenses. And at least as far as Morningstar Medalist ratings go, the Target Index series is considered the better of the two, earning a Bronze rating.
Also worth noting is that Schwab Target Index Funds, despite the name, do have human managers: Kwok and Tang, mentioned before as managers of SWOBX.
* Schwab Target Funds have temporary fee waivers to limit operating expenses. These waivers will remain as long as Schwab Asset Management serves as the adviser to the funds. The agreement can only be amended or terminated with the approval of the fund’s Board of Trustees.
Related: Beginner’s Guide to Vanguard Target-Date Funds
5. Schwab Global Real Estate Fund
— Style: Global real estate
— Management: Active
— Assets under management: $286.5 million
— Dividend yield: 3.4%
— Expense ratio: 0.72%, or $7.20 per year for every $1,000 invested
— Morningstar Portfolio Risk Score: 76 (Aggressive)
Real estate has been a preferred asset class since the dawn of human civilization. And today, real estate investment trusts (REITs) offer the potential for both high yield and respectable capital gains.
REITs enjoy a special tax status that allows them to avoid corporate taxation so long as they distribute at least 90% of their net profits as dividends. Because of REITs’ tax incentive, the real estate sector tends to be among the highest-yielding, and thus a perennial favorite among income investors.
Related: Tax-Loss Harvesting: How Investors Can Cut Their Tax Bill
The problem? A large percentage of the total return comes from taxable dividends, which makes REITs very tax-inefficient. What’s more, REIT dividends are generally not classified as “qualified dividends.” Qualified dividends are taxed at the long-term capital gains rate (0%, 15% or 20% depending on your tax bracket). Non-qualified dividends are taxed as ordinary income, like bond interest, and can face rates as high as 37%, depending on your bracket. Thus, it makes more sense to hold REITs and REIT funds in a tax-advantaged fund such as an IRA rather than a taxable brokerage account.
Schwab investors looking for real estate exposure could consider the Schwab Global Real Estate Fund (SWASX). The fund is a diversified REIT fund with a global presence. Approximately 55% of the fund is invested in American REITs, with the rest scattered across Europe, Asia, Australia, and Canada. The portfolio has minimal exposure to the office sector, which has been affected by work-from-home policies, and is most heavily allocated to diversified, retail, and industrial properties.
Related: 7 High-Quality, High-Yield Dividend Stocks
This is a growth-focused real estate fund that focuses on total return, including both capital gains and income. But its 3%-plus current yield is mighty competitive in a world in which the S&P 500 yields barely above 1%.
Another reason to consider SWASX is its high turnover. There is no precise, universally accepted threshold for what constitutes “a lot” of active trading, but I would consider any fund with portfolio turnover over 30% or so to be fairly tax-inefficient. The higher that number goes, the more inefficient the fund. Schwab Global Real Estate has annual turnover of about 85%, which means it could distribute a lot of short-term capital gains. Between that and the aforementioned non-qualified dividends, and you’re looking at a lot of taxable returns.
Fortunately, you can avoid immediate tax consequences by holding Schwab Global Real Estate in a tax-deferred account like an IRA.
Related: The 7 Best Mutual Funds for Beginners
Do you want to get serious about saving and planning for retirement? Sign up for Retire With Riley, Young and the Invested’s free retirement planning newsletter.
6. Schwab Select Large Cap Growth Fund
— Style: U.S. large-cap growth stock
— Management: Active
— Assets under management: $2.1 billion
— Dividend yield: N/A
— Expense ratio: 0.73%, or $7.30 per year for every $1,000 invested
— Morningstar Portfolio Risk Score: 85 (Very aggressive)
An old Wall Street maxim says “you never go broke taking a profit.”
There is a lot of wisdom in that quote. As a general rule, buying and holding good stocks or good funds and allowing them to compound over years or even decades is the way to go. But having at least part of your portfolio in actively traded strategies can also make sense, particularly in bear markets. Actively traded strategies have their stretches when they outperform passive index strategies, and they can potentially help you to avoid major declines.
Related: IRA Contribution Limits for 2026
Take, for example, the Schwab Select Large Cap Growth Fund (LGILX), which is sub-advised by American Century Investment Management and JPMorgan Investment Management. Being a growth fund, LGILX is extremely heavy in technology and tech-adjacent stocks; it includes Nvidia (NVDA), Google parent Alphabet (GOOGL), Apple (AAPL), and Microsoft (MSFT), as well as most of the rest of the large-cap growth stocks you would expect to see.
Smart management has resulted in outperformance of LGILX’s category average across most meaningful time frames. However, this high performance occasionally comes at the cost of a lot of active trading. The most recent turnover reading is 26%, but I’ve seen it much higher (above 60%). And regardless of the turnover figure from one year to the next, Schwab Select Large Cap Growth has a history of making sizable capital-gains distributions in most years.
In a standard brokerage account, that represents a large potential tax liability. Thus, LGILX is exactly the kind of actively managed fund best held in a retirement account like an IRA. The tax deferral neutralizes the negative impacts of active trading, allowing us to enjoy the full benefits of the trading gains.
Related: 6 Best Money Market Funds [Protect Your Savings in 2026]
7. Schwab Small-Cap Equity Fund
— Style: U.S. small-cap stock
— Management: Active
— Assets under management: $685.0 million
— Dividend yield: 0.1%
— Expense ratio: 1.09%, or $10.90 per year for every $1,000 invested
— Morningstar Portfolio Risk Score: 87 (Very aggressive)
As I mentioned before, actively managed funds will almost always have significantly higher turnover than passive index funds, meaning they potentially create more taxable capital gains.
This phenomenon can be especially pronounced in the world of small-cap equities. Because smaller companies are often younger companies, the small-cap space tends to move quickly. Successful companies “graduate” to mid- or even large-cap status, and those that are unsuccessful often disappear altogether. This often results in a lot of changes to a portfolio’s holdings.
Related: 5 Best Stock Recommendation Services [Stock Tips + Picks]
In other words: If actively managed funds in general are best held in a tax-deferred account, this is even truer for actively managed small-cap funds.
Case in point, check out Schwab Small Cap Equity Fund (SWSCX), managed by Wei Li, Iain Clayton, and Holly Emerson. Their 340-stock portfolio has a turnover of 108%, effectively meaning that each year, on average, the entire portfolio turns over (and then a little more on top). Capital-gains distributions have historically been meaningful in size.
Small-cap stocks showed some energy in 2025’s second half and have outperformed their large-cap peers in 2026, too. But zooming out to the past few years, they’ve lagged while the market has been dominated by the “Magnificent Seven” mega-cap stocks. Still, SWSCX has managed to return an annualized 10.1% since inception, and that’s not too shabby. Also, while the strategy itself is pretty aggressive compared to other strategies, it actually presents pretty average-level risk among small-cap blend funds.
Related: Best Schwab Funds to Hold in an HSA
Learn More About These and Other Funds With Morningstar Investor
If you’re buying a fund you plan on holding for years (if not forever), you want to know you’re making the right selection. And Morningstar Investor can help you do that.
Morningstar Investor provides a wealth of information and comparable data points about mutual funds and ETFs—fees, risk, portfolio composition, performance, distributions, and more. Morningstar experts also provide detailed explanations and analysis of many of the funds the site covers.
With Morningstar Investor, you’ll enjoy a wealth of features, including Morningstar Portfolio X-Ray®, stock and fund watchlists, news and commentary, screeners, and more. And you can try it before you buy it. Right now, Morningstar Investor is offering a free seven-day trial and a discount on your first year’s subscription when you use our exclusive link.
What Is the Minimum Investment Amount on Schwab Mutual Funds?
Schwab is one of the most friendly fund companies for beginners. That’s not just because both its mutual funds and ETFs sport below-industry-average expense ratios, but because you don’t need much money to invest in them in the first place. Most Schwab mutual funds have the barest of investment bare minimums—you can literally start with as little as $1.
That’s extremely beneficial in self-directed accounts like an IRA. Many mutual funds from other providers require high minimums in the thousands of dollars, hamstringing investors with little capital to work with.
Related: 7 Best Fidelity Retirement Funds to Hold in an IRA
What Is an Index Fund?
There are two kinds of funds: actively managed funds and index funds.
With an actively managed fund, one or more managers are in charge of selecting all of the fund’s holdings. They’ll likely have a specific strategy to adhere to, and they’ll be tasked with beating a benchmark index, but they’ll be given a lot of discretion about how to achieve that. These managers will identify opportunities, conduct research, and ultimately buy and sell a fund’s stocks, bonds, commodities, and so on.
Related: The 9 Best ETFs for Beginners
An index fund, on the other hand, is effectively run by algorithm. The fund will attempt to track an index, which is just a group of assets that are selected by a series of rules. The S&P 500 and Dow Jones Industrial Average? Those are indexes with their own selection rules. Index funds that track these indexes will generally hold the same stocks, in the same proportions, giving you equal exposure and performance (minus fees) to those indexes.
If you guessed that it’s more expensive to pay a conference room full of fund managers than it is a computer that tracks an index, you’d be right. That’s why actively managed funds tend to cost much more in fees than index funds.
And that’s why ETFs are generally cheaper. Most (but not all) mutual funds are actively managed, while most (but not all) ETFs are index funds.
Related: The 7 Best Mutual Funds for Beginners
What Is an Exchange-Traded Fund?
Exchange-traded funds are actually very similar to mutual funds but feature a handful of significant differences that may make them superior in certain situations.
Like traditional index mutual funds, an ETF will hold a basket of stocks, bonds and other securities. These can be broad and benchmarked to a major index like the S&P 500, or they can be exceptionally narrow and focus on a specific sector or even a specific trading strategy. For the most part, anything that can be held in an exchange-traded fund can also be held in a mutual fund.
However, unlike mutual funds, ETFs trade on major exchanges—such as the New York Stock Exchange or Nasdaq—like a stock. If you want to buy shares, you don’t send the manager money; you just buy shares from another investor on the open market.
The need to buy shares can be problematic when dollar-cost averaging. As an example, let’s say you have exactly $100 to invest, but the shares of the ETF trade for $65. You can only buy one share, and you’re stuck with $35 in cash uninvested.
Related: 9 Best Fidelity ETFs for 2026 [Invest Tactically]
But ETFs have their own advantages. For one, they have intraday liquidity—that is, if you want to buy or sell in the middle of the trading day (or multiple times throughout the trading day), you can.
The second advantage is tax efficiency. In a traditional mutual fund, redemptions by investors can generate selling by the manager that creates taxable capital gains for the remaining investors who didn’t sell. This doesn’t happen with ETFs, as the manager isn’t forced to buy or sell anything when an investor sells their shares.
Like we said, many investors use “ETF” and “index fund” interchangeably. That’s because most exchange-traded funds are index funds—but not all. Some are actively managed.
As is the case with Schwab mutual index funds, Schwab ETFs—most of which are indexed—tend to have some of the lowest costs in the business in terms of fees and expenses.
Related: 8 Best Schwab Index Funds for Thrifty Investors
Do you want to get serious about saving and planning for retirement? Sign up for Retire With Riley, Young and the Invested’s free retirement planning newsletter.
Why Does a Fund’s Expense Ratio Matter So Much?
Every dollar you pay in expenses is a dollar that comes directly out of your returns. So, it is absolutely in your best interests to keep your expense ratios to an absolute minimum.
The expense ratio is the percentage of your investment lost each year to management fees, trading expenses and other fund expenses. Because index funds are passively managed and don’t have large staffs of portfolio managers and analysts to pay, they tend to have some of the lowest expense ratios of all mutual funds.
This matters because every dollar not lost to expenses is a dollar that is available to grow and compound. And over an investing lifetime, even a half a percent can have a huge impact. If you invest just $1,000 in a fund generating 5% per year after fees, over a 30-year horizon, it will grow to $4,116. However, if you invested $1,000 in the same fund, but it had an additional 50 basis points in fees (so it only generated 4.5% per year in returns), it would grow to only $3,584 over the same period.
Like Young and the Invested’s content? Be sure to follow us.
Want to talk more about your financial goals or concerns? Our services include comprehensive financial planning, investment management, estate planning, taxes, and more! Schedule a call with Riley to discuss what you need, and what we can do for you.
Related: The 10 Best-Rated Dividend Aristocrats Right Now
Dividend growth puts more cash in our pockets and signals that the company we’re invested in is confident in its ability to keep churning out profits. And there’s no more heralded group of dividend growers than the Dividend Aristocrats, which are companies that have paid higher cash distributions each year for at least a quarter-century.
But even Aristocrats aren’t created equally. Check out which dividend growers Wall Street loves the best right now in our list of the top-rated Dividend Aristocrats.
Related: 7 Mega-Yielding Funds You’ve Never Heard Of
You’ve assuredly heard of mutual funds and exchange-traded funds (ETFs). But how much do you know about closed-end funds (CEFs)?
If the answer is “not much,” don’t worry—they get a fraction of the attention of those other investment funds. But you should also learn more about them. That’s because CEFs have a host of enticing characteristics, including that they frequently pay mammoth yields. Check out our list of the best CEFs, many of which pay in the high-single and even double digits.
Please Don’t Forget to Like, Follow and Comment
Did you find this article helpful? We’d love to hear your thoughts! Leave a comment with the box on the left-hand side of the screen and share your thoughts.
Also, do you want to stay up-to-date on our latest content?
1. Follow us by clicking the [+ Follow] button above,
2. Subscribe to Retire With Riley, our free weekly retirement planning newsletter, and
3. Give the article a Thumbs Up on the top-left side of the screen.
4. And lastly, if you think this information would benefit your friends and family, don’t hesitate to share it with them!
