dOI Fa14 1 TOC - Charles Schwab Corporation · PDF fileSTRATEGIES & IDEAS FOR THE CHARLES...

STRATEGIES & IDEAS FOR THE CHARLES SCHWAB COMMUNITY • FALL 2014

OnInvesting

Adapt Trading in Uncertain Times

PAGE 16

Common ETF Misconceptions

PAGE 13

Are You Really Diversifi ed?

PAGE 24

DIVERSE BY NATUREHow index funds can help you diversify and participate in the long-term growth of marketsPAGE 19

Take Our Reader Survey! Share your thoughts on page 26 or at schwab.com/survey.

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On Investing (ISSN 1523-5327) is published quarterly. This publication is mailed at Standard A postal rates.

If you prefer not to receive On Investing, please call 888-484-5340.

POSTMASTER: Send address changes to On Investing, Charles Schwab & Co., Inc., P.O. Box 52114, Phoenix, AZ 85072–2114. On Investing does not assume any liability resulting from actions taken based on the information included in this magazine. Mention of a company or security does not constitute endorsement. Some contributors to On Investing may have active positions in securities or companies discussed in this issue. NWS73442Q314

19 THE ELEGANCE OF INDEXING

Index funds can help investors participate in the long-term growth of markets.

24 ARE YOU REALLY DIVERSIFIED?

Stock prices are moving in lockstep, and that could impact your portfolio.

28 THREE TIPS FOR MUTUAL FUND INVESTING

What to look for when selecting funds for your portfolio.

3 CEO’s NoteAdvocates for you.By Walt Bettinger

4 The Bottom LineTraditional media stocks, simplifying bond buying and more.

8 Ask CarrieDo you have money smarts?By Carrie Schwab-Pomerantz

10 PerspectivesRetirement PlanningStructuring your retirement portfolio for your income needs.By Rob Williams

13 Comparing ETFsCommon misconceptions about exchange-traded funds.By Michael Iachini

16 TradingTailor your trading in volatile markets.By Randy Frederick

31 SpotlightThe latest products and services from Schwab.

35 ResearchSchwab Mutual Fund OneSource Select List®

44 Schwab Income Mutual Fund Select List®

46 Schwab ETF Select List®

50 Argus Research Is the consumer tapped out? By John M. Eade

52 On Your SideWhy I believe in index investing.By Charles R. Schwab

CONTENTS

19

DEPARTMENTS

FE ATURES

8

TAKE OUR READER SURVEY!Turn to page 26 or visitschwab.com/surveyto share your thoughts.

schwab.com/emailus

@charlesschwabfacebook.com/charlesschwab

schwab.com888-484-5340CONNECT WITH US

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Board of advisors

Jonathan CraigExecutive vice President

Chief Marketing Officer

Mark W. Riepe, CFAsenior vice President

schwab Center for financial research

Helen Lohsenior vice President

Content & Client Marketing

Larry Hanbackvice President

Marketing strategy & operations

Editor in ChiEf

Tamar Dorsey

Managing Editor

Jennifer Newton

assoCiatE Managing Editor

Jeremy Hartley

trading Editor

Stephanie May

ContriButors

Walt BettingerJohn M. Eade

Randy FrederickMichael Iachini

Charles R. SchwabCarrie Schwab-Pomerantz

Rob Williams

oninvesting

iMPortant disClosurEsFixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks, including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. (p. 6, 10–12)

Since sector- and commodity-specific funds are not diversified and focus their investments entirely in a single sector, commodity or basket of commodities, the funds will involve a greater degree of risk than an investment in other diversified fund types. (p. 24–27)

Some specialized exchange-traded funds can be subject to additional market risks. Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price, which may be higher or lower than the net asset value. (p. 13–15)

Investing involves risks, including loss of principal. (p. 4, 6, 10–12)

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. (p. 3)

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation. (p. 4, 5, 6, 10–12, 16–18, 24–27, 50–51)

The Schwab 1000 Index is a market-capitalization-weighted index comprising stocks from the largest 1,000 publicly traded companies in the United States. The index is designed to be a measure of the performance of large- and mid-cap U.S. stocks. (p. 19–23, 52)

Dow UBS Commodity Index comprises commodities traded on U.S. exchanges, with the exception of aluminum, nickel and zinc. (p. 24–27)

The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. (p. 19–23)

Indexes are unmanaged, do not incur management fees, costs or expenses, and cannot be invested in directly. (p. 4, 10–12, 19–23, 24–27)

All expressions of opinion are subject to change without notice in reaction to shifting market, economic or geopolitical conditions. (p. 5, 6, 19–23, 24–27, 50–51)

Examples provided are for illustrative purposes only and are not representative of intended results that a client should expect to achieve. (p. 24–27)

Data herein is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. (p. 5)

Asset allocation strategies do not ensure a profit and do not protect against losses in declining markets. (p. 10–12)

Diversification strategies do not ensure a profit and do not protect against losses in declining markets. (p. 3, 19–23, 24–27, 28–30, 32–33, 52)

Commissions, taxes and transaction costs are not included in this discussion, but can affect final outcome and should be considered. Please contact a tax advisor for the tax implications involved in these strategies. (p. 16–18)

Investments in managed accounts should be considered in view of a larger, more diversified investment portfolio. (p. 32–33)

Portfolio management is provided by ThomasPartners, Inc., a registered investment advisor and an affiliate of Charles Schwab & Co., Inc. (p. 32–33)

The ThomasPartners Dividend Growth Strategy is available through managed account programs sponsored by Schwab. Program fees may vary. There are two versions of the ThomasPartners Dividend Growth Strategy. ThomasPartners Dividend Growth Strategy (K-1 Generating) has direct exposure to master limited partnerships (MLPs) and generates IRS Schedule K-1 tax forms. The other version, ThomasPartners Dividend Growth Strategy (Non-K-1 Generating), uses exchange-traded funds (ETFs) to provide exposure to MLPs and therefore does not generate IRS Schedule K-1 tax forms. Please read Schwab’s applicable disclosure brochure for important information and disclosures. Schwab makes available other equity strategies in its managed account programs that focus on dividend-paying stocks, including strategies that are managed by firms that are unaffiliated with Schwab. Because Schwab and ThomasPartners are affiliates, Schwab and its affiliates generate more combined revenue if you choose ThomasPartners than if you choose an unaffiliated manager with a similar strategy. (p. 32–33)

Charles Schwab Investment Advisory, Inc., is an affiliate of Charles Schwab & Co., Inc. (p. 13–15, 19–23, 24–27, 28–30)

Schwab and/or affiliates may publish or otherwise express other viewpoints or opinions that also may be different from certain of the viewpoints or opinions expressed in these materials. (p. 50–51)

Charles Schwab & Co., Inc., a licensed insurance agency, distributes certain life insurance and annuity contracts that are issued by non-affiliated insurance companies. Not all products are available in all states. (p. 10–12)

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc. (p. 4, 6, 10–12, 16–18, 19–23, 24–27)

The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities mentioned may not be suitable for everyone. Each investor should review a security transaction for his or her own particular situation. (p. 10–12, 13–15, 16–18, 19–23, 24–27, 50–51)

The information provided is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends that you consult with a qualified tax advisor, CPA, financial planner or investment manager. (p. 5, 7, 8–9, 28–30)

©2014 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0814-3769)

aWe will always strive to meet your needs and support your goals.

a t Schwab, our experts spend hours each day interpreting market and economic

events, and we share our perspective on these developments to help you achieve your investing goals. If you’re familiar with Schwab’s commentary, you may have noticed that we often offer new ways of thinking about your investments.

Take index funds, for example. On page 19, we discuss why we believe this popular, low-cost investment vehicle doesn’t make sense just as of your portfolio, but also can be right as the of a diversified portfolio. While index funds have been around for more than 40 years, they remain one of the best ways to diversify with lower costs and greater tax efficiency.

We recognize that many investors don’t subscribe to the belief that these “passive” investments can help them achieve the long-term outcomes they desire. Some investors seek to outperform the market or more strategically protect their portfolios in a downturn, and therefore choose to invest in individual stocks or actively managed mutual funds. We offer these investors a broad array of actively managed solutions to help them implement this approach.

See page 2 for important information.For funds, investors should carefully consider information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by visiting schwab.com or calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. (0814-3145)

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Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks, including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. (p. 6, 10–12)

Since sector- and commodity-specific funds are not diversified and focus their investments entirely in a single sector, commodity or basket of commodities, the funds will involve a greater degree of risk than an investment in other diversified fund types. (p. 24–27)

Some specialized exchange-traded funds can be subject to additional market risks. Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price, which may be higher or lower than the net asset value. (p. 13–15)

Investing involves risks, including loss of principal. (p. 4, 6, 10–12)

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. (p. 3)

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation. (p. 4, 5, 6, 10–12, 16–18, 24–27, 50–51)

The Schwab 1000 Index is a market-capitalization-weighted index comprising stocks from the largest 1,000 publicly traded companies in the United States. The index is designed to be a measure of the performance of large- and mid-cap U.S. stocks. (p. 19–23, 52)

Dow UBS Commodity Index comprises commodities traded on U.S. exchanges, with the exception of aluminum, nickel and zinc. (p. 24–27)

The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. (p. 19–23)

Indexes are unmanaged, do not incur management fees, costs or expenses, and cannot be invested in directly. (p. 4, 10–12, 19–23, 24–27)

All expressions of opinion are subject to change without notice in reaction to shifting market, economic or geopolitical conditions. (p. 5, 6, 19–23, 24–27, 50–51)

Examples provided are for illustrative purposes only and are not representative of intended results that a client should expect to achieve. (p. 24–27)

Data herein is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. (p. 5)

Asset allocation strategies do not ensure a profit and do not protect against losses in declining markets. (p. 10–12)

Diversification strategies do not ensure a profit and do not protect against losses in declining markets. (p. 3, 19–23, 24–27, 28–30, 32–33, 52)

Commissions, taxes and transaction costs are not included in this discussion, but can affect final outcome and should be considered. Please contact a tax advisor for the tax implications involved in these strategies. (p. 16–18)

Investments in managed accounts should be considered in view of a larger, more diversified investment portfolio. (p. 32–33)

Portfolio management is provided by ThomasPartners, Inc., a registered investment advisor and an affiliate of Charles Schwab & Co., Inc. (p. 32–33)

The ThomasPartners Dividend Growth Strategy is available through managed account programs sponsored by Schwab. Program fees may vary. There are two versions of the ThomasPartners Dividend Growth Strategy. ThomasPartners Dividend Growth Strategy (K-1 Generating) has direct exposure to master limited partnerships (MLPs) and generates IRS Schedule K-1 tax forms. The other version, ThomasPartners Dividend Growth Strategy (Non-K-1 Generating), uses exchange-traded funds (ETFs) to provide exposure to MLPs and therefore does not generate IRS Schedule K-1 tax forms. Please read Schwab’s applicable disclosure brochure for important information and disclosures. Schwab makes available other equity strategies in its managed account programs that focus on dividend-paying stocks, including strategies that are managed by firms that are unaffiliated with Schwab. Because Schwab and ThomasPartners are affiliates, Schwab and its affiliates generate more combined revenue if you choose ThomasPartners than if you choose an unaffiliated manager with a similar strategy. (p. 32–33)

Charles Schwab Investment Advisory, Inc., is an affiliate of Charles Schwab & Co., Inc. (p. 13–15, 19–23, 24–27, 28–30)

Schwab and/or affiliates may publish or otherwise express other viewpoints or opinions that also may be different from certain of the viewpoints or opinions expressed in these materials. (p. 50–51)

Charles Schwab & Co., Inc., a licensed insurance agency, distributes certain life insurance and annuity contracts that are issued by non-affiliated insurance companies. Not all products are available in all states. (p. 10–12)

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc. (p. 4, 6, 10–12, 16–18, 19–23, 24–27)

The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities mentioned may not be suitable for everyone. Each investor should review a security transaction for his or her own particular situation. (p. 10–12, 13–15, 16–18, 19–23, 24–27, 50–51)

The information provided is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends that you consult with a qualified tax advisor, CPA, financial planner or investment manager. (p. 5, 7, 8–9, 28–30)

©2014 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (TKTK-TKTK)

advocates for YouWe will always strive to meet your needs and support your goals.

“If you’re familiar with Schwab’s commentary, you may have noticed that we often offer new ways of thinking about your investments.”

a t Schwab, our experts spend hours each day interpreting market and economic

events, and we share our perspective on these developments to help you achieve your investing goals. If you’re familiar with Schwab’s commentary, you may have noticed that we often offer new ways of thinking about your investments.

Take index funds, for example. On page 19, we discuss why we believe this popular, low-cost investment vehicle doesn’t make sense just as part of your portfolio, but also can be right as the core of a diversified portfolio. While index funds have been around for more than 40 years, they remain one of the best ways to diversify with lower costs and greater tax efficiency.

We recognize that many investors don’t subscribe to the belief that these “passive” investments can help them achieve the long-term outcomes they desire. Some investors seek to outperform the market or more strategically protect their portfolios in a downturn, and therefore choose to invest in individual stocks or actively managed mutual funds. We offer these investors a broad array of actively managed solutions to help them implement this approach.

Another approach we encourage you to explore is the next evolution in indexing—fundamental index funds. Funds based on fundamental indexes combine the benefits of traditional indexing with more active management. That means screening, choosing and weighting stocks based on a variety of factors—such as a company’s adjusted sales, cash flow, and dividends plus buybacks—instead of just its market capitalization.

Of course, no two investors are alike—different goals and risk appetites require diverse investment strategies and solutions. Regardless of which path you choose, we will always be dedicated to supporting you. We may argue for or against an investing strategy from time to time, but at our core we are advocates for you.

Sincerely,

Walt BettingerPresident & CEO

See page 2 for important information.For funds, investors should carefully consider information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by visiting schwab.com or calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. (0814-3145)

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Cutting the Cord on Traditional Media Stocks?Finding a place in your portfolio for old and new media.

T he digital revolution may be shaking up the media business, but you would be hard-pressed to find a media stock of any kind

that hasn’t been performing well. As of mid-March, this consumer discretionary subsector had gained 30% over the previous 12 months, compared to the 19% rise in the S&P 500® Index. The outperformance was broad-based, elevating advertisers, broadcasters, publishers, and cable and satellite companies alike.

For all of the stories about consumers digesting media digitally, traditional media companies, such as those in the TV business, still deserve a place in investors’ portfolios, says Brad Sorensen, Director of Market and Sector Analysis at the Schwab Center for Financial Research. Why? “It’s all about access,” Brad says.

According to Nielsen, the number of televisions in American households continues to rise,1 and TV remains the largest ad-spending medium in the

country.2 “That gives traditional media companies an automatic in, when many upstarts are fighting for eyeballs,” Brad says. “Traditional media gets slammed so often but, at the end of the day, access to consumers counts for a lot.”

One unknown that could impact many media companies is how regulations will affect the future of internet access. Currently, access is free to all providers under so-called net neutrality, but regulators could approve a system in which providers must pay for faster internet transmission speeds. Given their superior cash flows and established customer bases, traditional media companies would likely have an easier time than newer competitors in absorbing such costs.

For investors interested in media stocks—whether those from established industry names or burgeoning upstarts—Brad suggests researching earnings reports for signs of customer attrition, trends in advertising rates, and the success or failure of digital initiatives. “We are consuming more media than ever—the key is finding the investable places within the sector that are still holding their own.” -

Do The ReSeaRCh

Log in to schwab.com/

oIsectors and select

“Consumer Discretionary,”

and then “Media,” to

begin searching for media stocks.

1Nielsen, “Nielsen Estimates 115.6 Million TV Homes in the U.S., Up 1.2%,” May 7, 2013. 2Marketing Charts, “Data Dive: U.S. TV Ad Spend and Influence,” December 23, 2013.

See page 2 for important information.Past performance is no guarantee of future results.

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The Recession Predictor?Shedding light on the Leading Economic Index®.

E ach month, The Conference Board releases the Leading Economic Index (LEI), a composite of 10 economic data points

that are meant to reveal the direction of the overall economy. The LEI—which tracks metrics such as the S&P 500® Index and the spread between 10-year Treasury rates and the federal funds rate—is often used to gauge the likelihood of a recession. Several consecutive monthly declines in the index may indicate economic contraction (versus economic growth), and prolonged contraction often leads to a recession. But how useful is the LEI to individual investors?

“Very,” says Liz Ann Sonders, Senior Vice President and Chief Investment Strategist at Charles Schwab & Co., Inc. “Investors should place a high value on the LEI and other leading indicators because they have predictive abilities,” Liz Ann says. “But it’s also important to apply some subjectivity here. Just because the indicators are turning downward doesn’t necessarily mean a recession is imminent.” In fact, even when the index has correctly predicted a recession, it has taken up to 21 months for the economy to actually contract, although the median has been 11 months.

Liz Ann says investors should pay particular attention to the index components that provide “powerful signals” as to where the economy might be headed, such as the S&P 500, initial jobless claims and manufacturers’ new orders. She also suggests comparing the LEI results against The Conference Board’s Coincident Economic Index®, a composite measure of current economic conditions. If both indexes show consistent declines, a recession could be close at hand. -

See page 2 for important information.(0814-2537)

“That gives traditional media companies an automatic in, when many upstarts are fighting for eyeballs,” Brad says. “Traditional media gets slammed so often but, at the end of the day, access to consumers counts for a lot.”

One unknown that could impact many media companies is how regulations will affect the future of internet access. Currently, access is free to all providers under so-called net neutrality, but regulators could approve a system in which providers must pay for faster internet transmission speeds. Given their superior cash flows and established customer bases, traditional media companies would likely have an easier time than newer competitors in absorbing such costs.

For investors interested in media stocks—whether those from established industry names or burgeoning upstarts—Brad suggests researching earnings reports for signs of customer attrition, trends in advertising rates, and the success or failure of digital initiatives. “We are consuming more media than ever—the key is finding the investable places within the sector that are still holding their own.”


NExT STEPSNeed help estimating your annual distributions? Log in to schwab.com/OIRMD to access our handy RMD Calculator, or call Schwab at 888-484-5340 to discuss your situation.

Demystifying RMDsUnderstanding the withdrawal rules for retirement accounts can help you avoid tax penalties.

O nce you reach a certain age, the IRS requires you to withdraw a minimum amount of money, called a required minimum distribution (RMD), from many retirement accounts, including

traditional IRAs, SIMPLE IRAs and most employer-sponsored retirement plans. The rules around RMDs are complex, but the following apply to most account types, assuming you’re the original owner.

NExT STEPSLearn more from Liz Ann about leading economic indicators at schwab.com/OIindicatorsvideo.

1 You do not need to take RMDs from a Roth IRA if

you’re the original owner, but you do need to take them from Roth 401(k) plans.

2 You have until April 1 of the year after you turn 70½

to take your first distribution. All subsequent distributions for each year must be taken by December 31. NOTE: If you choose to delay your first RMD until April, you will still need to take your second distribution by December 31—meaning you would take two distributions in one year, potentially increasing your taxable income for the year.

3 If you’re still working and contributing to

your employer-sponsored retirement plan, and you own less than 5% of the company, you can delay your first RMD until April 1 following the year you retire. After that, standard RMD rules apply.

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4 If you have multiple retirement accounts, you

must calculate RMDs for each one individually, although you can choose to take your full RMD amount from a single account or a combination of the accounts. NOTE: Consolidating your retirement accounts to a single firm could help simplify the calculation and withdrawal process.

5 The penalty for failure to take your RMDs on time

is hefty: a 50% excise tax on any funds that should have been withdrawn. For example, if your RMD is $15,000 and you only withdraw $10,000 on time, the tax will apply to the shortfall ($5,000), meaning you end up paying a $2,500 penalty.

If you inherit a retirement savings account, RMD rules will vary depending on account type and your relation to the deceased. For more information, visit schwab.com/OIbeneficiaryRMDs. -

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Winter’s ChillIs weather just a scapegoat for disappointing earnings reports?

Over the years, bad weather has been a handy scapegoat for companies that miss their earnings forecasts.

But, in the case of last January and February, the harsh winter undoubtedly played a role in lackluster economic reports, from labor figures to housing starts.1 Winter weather was even referenced in the Federal Reserve Bank of Dallas’ monthly manufacturing outlook survey for Texas.2

Is there anything investors can do to insulate their portfolios from winter’s chill? Brad Sorensen, Director of Market and Sector Analysis at the Schwab Center for Financial Research, says it might not be worth the trouble. While some investment funds reportedly cut back their exposure to

subsectors such as automakers, glassmakers and home builders during the cold months, Brad points out that the S&P 500® Index gained 4.3% in February,3 when winter weather was at its worst.

“Investors kind of shrugged off the weak economic reports as temporary in nature,” Brad says. Part of the reason is that bad weather was blamed for delaying major purchases. “Despite the weather, people in the market for a new car are still going to buy one.”

However, some economic sectors might not recover in the months ahead. Airlines and hospitality companies, for instance, won’t be able to recoup all of the losses from canceled travel. The same is true for restaurants and other service companies that lost business due to closures.

Investors should still be leery when companies continually blame weather for bad results. “Strangely enough, those companies are awfully quiet about the weather when their results are good,” Brad says. -

Simplifying Bond BuyingThree steps to help find the right bond at the right price.

T he bond market is complex, which can make for a perplexing bond-buying experience. Unlike stocks,

which usually trade on a centralized market via stock exchanges, the vast majority of bonds trade “over the counter,” meaning the transaction takes place between two parties, such as an investor and a dealer. Because of this, bonds may be more susceptible to high transaction costs and hidden markups. And, quite often, the same bond will be priced differently from firm to firm.

A number of factors, including changing interest rates, credit ratings and liquidity, can impact a bond’s price. In addition, certain fees and costs—such as the bid-ask spread, mark-ups, commissions and concessions—may be included in the price you’ll pay.

See page 2 for important information.Schwab reserves the right to act as principal on any bond transaction. In secondary market principal transactions, the price will be subject to our standard mark-up in the case of purchases and mark-down in the case of sales, and also may include a profit or loss to Schwab in the form of a bid-ask spread.

When trading as principal, Schwab may also be holding the security in its own account prior to selling it to you and, therefore, may make (or lose) money depending on whether the price of the security has risen or fallen while Schwab has held it.

(0814-2849)

1Alexandra Scaggs and Dan Strumpf, “Big Chill Presenting a Quandary for Investors,” The Wall Street Journal, February 20, 2014. 2Federal Reserve Bank of Dallas, “Texas Manufacturing Picks Up Again But Less Optimism in Outlook,” February 24, 2014. 3Standard & Poor’s.


(0814-2573)

Learn MOreRead Brad’s biweekly view on sector performance at schwab.com/OIsectorviews.

CaLL USBefore buying a bond at another firm, call a Schwab Fixed Income Specialist at 866-893-6699 to see how our bond prices compare. Schwab connects with hundreds of dealers to simplify the shopping process and help ensure you’re getting the best price available to us.

Schwab suggests that investors follow a three-step process to help ensure they are buying the right bond at the right price.

1 Define your goals. Those could include capital preservation,

portfolio diversification and/or income generation.

2 Search for bonds. Research which bonds are

appropriate for your goals.

3 Shop around. Fees vary widely from firm to firm, so make sure

you do your homework. -

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7FA LL 2014 • ON INVESTING

NEXT STEPSLearn more about timing your Social Security benefi ts at schwab.com/OISocialSecurity.

WHEN SHOULD YOU TAKE SOCIAL SECURITY?

1Social Security benefi ts are based on up to 35 years of earnings. The example represents a rough calculation based on a current salary of $100,000.

Benefi ts estimates based on data from ssa.gov, shown in today’s dollars, using SSA’s Quick Calculator as of 6/4/2014, for someone born January 2, 1953, and making $100,000. Retirement date is on his birthday and the accumulated annual benefi ts for each age refl ect a full 12 months of benefi ts. No cost of living adjustment is included. Time value of money is not considered in the example.


TIMING YOUR BENEFITS TO SUIT YOUR NEEDS.

THE BASICSIf you collect early, your monthly payout will be lower, but you’ll receive more checks over your lifetime.

If you take Social Security later, you forgo the income for several years but are rewarded with an increased monthly benefi t.

20–30% The amount a person’s benefi ts could be reduced if he chooses to collect at age 62 instead of full retirement age.

8%Annual increase in benefi ts for each year after full retirement age (until age 70) that a person delays collecting benefi ts.

Delayed retirement at age 70

Bob is in good health and has adequate savings

to cover his everyday expenses after he stops working, so he chooses to delay his benefi ts.

MONTHLY BENEFIT:

$3,038

Full retirement at age 66

Bob is in good health and decides to continue

working until age 66, when he will be eligible for full

retirement benefi ts.

MONTHLY BENEFIT:

$2,235

Early retirement (62) Full retirement (66) Delayed retirement (70)

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2 3Early

retirement at age 62

Bob has had some health issues that have required him

to retire earlier than anticipated. He chooses to collect benefi ts early to help make ends meet.

MONTHLY BENEFIT:

$1,621

1

$600,000

$500,000

$400,000

$300,000

$200,000

$100,000

062 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85

Early retirement means less money over time.

WHEN SHOULD YOU COLLECT?It depends on how much income you think you will need,

whether you will continue working, and your health and life expectancy.

Take Bob, for example. He turns 62 next year and currently makes $100,000.1 Let’s look at how three hypothetical retirement scenarios would impact his monthly benefi ts.

62 63 64 65 66 67 68 69 70AGE

HOW RETIREMENT BENEFITS STACK UPHere’s how Bob’s annual retirement benefi ts would accrue over time for each of the three scenarios above.

dOI_FA14_7_infographic_v2.indd 7 7/3/14 4:16 PM

Myth

1 A will is the best way to ensure that your estate will be distributed the

way you want.We were surprised to learn that 91% of respondents agreed with this statement. While a will is a great way to ensure that certain aspects of your estate are distributed correctly, the reality is that if there are discrepancies between the beneficiaries named on your insurance policies or retirement accounts and what you’ve indicated in your will, the beneficiary designations will prevail.

Myth

2 Every adult should have life insurance.It seems that the insurance industry has done a very good

job marketing its products, because 78% of respondents agreed with this statement. But from a financial perspective, life insurance isn’t for everyone. If you don’t

have dependents or business reasons to own a policy, life insurance may be a waste of money.

Myth

3 you should start taking Social Security as soon as you’re eligible.

Fifty-two percent of respondents agreed with this potentially expensive misconception. Unfortunately, many people leave money on the table because they file too early. In fact, if you wait until you’re 70 to start collecting benefits, your check will be significantly higher than if you file at age 62. Of course, it’s essential that you consider your life expectancy, potential spousal benefits and other sources of income before you make a decision. This is one of those times when you have to crunch the numbers, ideally with the help of a professional. (For more, see “When Should You Take Social Security?” on page 7.)

Do you have Money Smarts?Don’t let these five common misconceptions affect your finances.By CArriE SChwAB-PoMErAntz

Survey respondents who identified themselves as very or extremely savvy about personal finance were the most likely to agree with many of the misconceptions.

Myth

4ou should

purchase long- term care insurance when you’re in

your 40s or younger.Forty-nine percent of respondents thought this sounded right. The problem, though, is that if you purchase long-term care insurance when you’re this young, even though your premiums will be lower, you’ll be paying them over a much longer period—and therefore likely shelling out more money over time. If you’re healthy, the optimal time to consider long-term care insurance is between ages 50 and 65.

Myth

5f you need cash while you’re still working, a 401(k) plan is a good

place to turn for a loan or a withdrawal.Thirty-three percent of respondents agreed. But to me, a 401(k) loan should be a last resort. First, you’re reducing your retirement portfolio’s potential for growth because the money you borrow is no longer invested in the market. Second, you’re risking taxes and penalties if you become unable to pay it back on time. Third, if you leave your job for any reason, you’ll need to pay back the loan immediately (typically within 60 days) or face early withdrawal penalties if you’re under age 59½. And finally, regardless of when you pay back the loan, you pay interest with after-tax dollars, which get taxed again when you withdraw the money in retirement.

S eparating fact from fiction is one of the biggest challenges of modern life. Whether we’re exploring current events, researching health information or making financial decisions, we have to wade through a lot of bogus

“facts” to find the truth.The facts are especially important when it comes to handling our money. But

unfortunately, as a recent Schwab “Money Myths” survey revealed, many Americans are operating under misconceptions that could significantly impact their financial security.1

An underlying problem, of course, is that we simply don’t know what we don’t know. In fact, the survey respondents who identified themselves as very or extremely savvy about personal finance were the most likely to agree with many of the misconceptions—especially with respect to Social Security and Medicare. For example, 38% of respondents incorrectly thought that Medicare is free once you turn 65. And 35% didn’t know that your marital status could impact your Social Security benefits.

So, how do you measure up? To compare your knowledge to that of the survey respondents, read on.

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ou should start taking Social Security as soon as you’re eligible.

Fifty-two percent of respondents agreed with this potentially expensive misconception. Unfortunately, many people leave money on the table because they file too early. In fact, if you wait until you’re 70 to start collecting benefits, your check will be significantly higher than if you file at age 62. Of course, it’s essential that you consider your life expectancy, potential spousal benefits and other sources of income before you make a decision. This is one of those times when you have to crunch the numbers, ideally with the help of a professional. (For more, see “When Should You Take Social Security?” on page 7.)

1Survey conducted in January 2014 by Lieberman Research Worldwide on behalf of Charles Schwab. The nationally representative online survey polled 998 respondents ages 30–79 with an annual household income of at least $35,000. The survey has a margin of error of +/– 3.1 percentage points at the 95% confidence level.


Next StepSGet the facts on retirement planning from Carrie’s new book, The Charles Schwab Guide to Finances After Fifty(Crown Business, 2014). Visit schwab.com/OIbook for more details.

Myth

4 you should purchase long- term care insurance when you’re in

your 40s or younger.Forty-nine percent of respondents thought this sounded right. The problem, though, is that if you purchase long-term care insurance when you’re this young, even though your premiums will be lower, you’ll be paying them over a much longer period—and therefore likely shelling out more money over time. If you’re healthy, the optimal time to consider long-term care insurance is between ages 50 and 65.

Myth

5 If you need cash while you’re still working, a 401(k) plan is a good

place to turn for a loan or a withdrawal.Thirty-three percent of respondents agreed. But to me, a 401(k) loan should be a last resort. First, you’re reducing your retirement portfolio’s potential for growth because the money you borrow is no longer invested in the market. Second, you’re risking taxes and penalties if you become unable to pay it back on time. Third, if you leave your job for any reason, you’ll need to pay back the loan immediately (typically within 60 days) or face early withdrawal penalties if you’re under age 59½. And finally, regardless of when you pay back the loan, you pay interest with after-tax dollars, which get taxed again when you withdraw the money in retirement.

eparating fact from fiction is one of the biggest challenges of modern life. Whether we’re exploring current events, researching health information or making financial decisions, we have to wade through a lot of bogus

“facts” to find the truth.The facts are especially important when it comes to handling our money. But

unfortunately, as a recent Schwab “Money Myths” survey revealed, many Americans are operating under misconceptions that could significantly impact their financial security.1

An underlying problem, of course, is that we simply don’t know what we don’t know. In fact, the survey respondents who identified themselves as very or extremely savvy about personal finance were the most likely to agree with many of the misconceptions—especially with respect to Social Security and Medicare. For example, 38% of respondents incorrectly thought that Medicare is free once you turn 65. And 35% didn’t know that your marital status could impact your Social Security benefits.

So, how do you measure up? To compare your knowledge to that of the survey respondents, read on.

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If you found some of these money myths surprising, you’re not alone. The financial world is complex, and it continues to change and challenge all of us. Whenever you’re faced with a financial decision, it’s best to gather your information carefully and seek the help of a professional as needed. -

Carrie Schwab-Pomerantz, CFP®, is President of Charles Schwab Foundation and Senior Vice President of Schwab Community Services at Charles Schwab & Co., Inc.

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Structuring Your Retirement Portfolio for Your Income NeedsThe importance of portfolio allocation.BY RoB WIllIamS

a ccording to the Social Security Administration, the average 65-year-old retiree can expect to live 17–20

years after leaving the workforce.1 However, with advances in health care leading to increasing longevity, it’s widely recommended that you plan for a retirement of 30 years or longer. Therefore, how you invest your savings in retirement is crucial.

In the Summer issue of On Investing, we discussed retirement income planning, the first aspect of our three-pronged approach to generating retirement income. After you’ve completed the planning stage, your next step should be to determine your portfolio allocation. This step is all about choosing the right mix of investments once your plan is in place. Here’s a guide for how to approach portfolio allocation in retirement.

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PeRSPeCtIveS: retirement planning

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“The key is staying invested—and that means having at least part of your portfolio allocated to stocks.”

1 Set aside one year of cashTry to set aside enough cash—minus

any regular income from rental properties, annuities, pensions, Social Security, etc.—to cover a year’s worth of retirement expenses. Ideally, this money would be held in a relatively safe, liquid account, such as an interest-bearing bank account, money market fund or short-term certificate of deposit (CD).

With this cash on hand, you won’t have to worry as much about the markets or a monthly paycheck. Spend from this account and replenish it periodically with funds from your invested portfolio. Then invest the rest of your portfolio sensibly.

2 Create a short-term reserveWithin your main portfolio, create a short-

term reserve to help weather a prolonged market downturn—we recommend two to four years’ worth of living expenses, if you can. This short-term reserve will prevent you from having to sell assets in the event of a down market.

This money can be invested in high-quality, short-term fixed income investments, such as short-term bond funds. Or, if you’d rather manage individual investments, you might want to create a short-term CD or bond ladder—a strategy in which you invest in CDs or bonds with staggered maturity dates so that the proceeds can be collected at regular intervals. When the CDs or bonds mature, you can use the money to replenish your bank account.

3 Invest the rest of your portfolio

When it comes to your main portfolio, remember that your overarching goal is to create a mix of investments that work together to preserve capital, generate income and grow.

Your specific mix of stock, bond and cash investments should be appropriate for your age, income needs, financial goals, time horizon and comfort with risk.

With a year’s worth of cash on hand and a short-term reserve in place, invest the remainder of your portfolio in investments that align with your goals and risk tolerance. For example, it’s perfectly acceptable to focus on growth in the early years of retirement in order to take advantage of potential compounding and boost your savings over time. As you move through retirement, you may want to shift to a more conservative investing approach that seeks to preserve capital and generate income.

What to do if you have an annuityMany retirees use annuities to provide a steady paycheck that they won’t outlive, and to help protect part of their portfolios from market risk. If you have predictable income from an annuity, you may be comfortable reducing the balance in your cash account and short-term reserve, as well as investing the rest of your portfolio in stocks and bonds for growth potential.

Annuity guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company.

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1Social Security Administration, Actuarial Life Table, 2009. The average life expectancy for a person age 65 is 17.51 years for males and 20.19 years for females. 2Schwab Center for Financial Research.


The Russell 2000 Index is a subset of the Russell 3000® Index, and includes approximately 2,000 of the smallest securities based on a combination of their market capitalization and current index membership.

The MSCI EAFE Index is a free float-adjusted market-capitalization-weighted index designed to measure the equity market performance of developed markets, excluding the United States and Canada. Net total return indexes reinvest dividends after the deduction of withholding taxes, using (for international indexes) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties.

The Barclays U.S. Aggregate Bond Index is made up of the Barclays Capital U.S. Government/Corporate Bond Index, Mortgage-Backed Securities Index, and Asset-Backed Securities Index, including securities that are of investment-grade quality or better, have at least one year to maturity and have an outstanding par value of at least $100 million.

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The key is staying invested—and that means having at least part of your portfolio allocated to stocks. Why? Over time, equities have been the best defense against inflation and taxes—even better than bonds and cash.2 However, as you get older, limit your exposure to stocks because there will be less time to recover from a bad year in the market.

We’ll explore the final step of retirement planning—distribute—in a subsequent article. This may sound like a lot of work, but following these three steps—plan, allocate and distribute—will help you plan for your retirement with confidence. -

Rob Williams, CFP®, is Managing Director of Income Planning at the Schwab Center for Financial Research.

Source: Schwab Center for Financial Research with data provided by Morningstar, Inc. The return figures represent the best and worst total returns, as well as the compound average annual total returns, for the hypothetical asset allocation plans. The asset allocation plans are weighted averages of the performance of the indexes used to represent each asset class in the plans and are rebalanced annually. Returns include reinvestment of dividends and interest. The indexes representing each asset class are S&P 500® Index (large-cap stocks), Russell 2000® Index (small-cap stocks), MSCI EAFE® Net of Taxes (international stocks), Barclays U.S. Aggregate Bond Index (bonds), and Citigroup U.S. 3-month Treasury bills (cash investments). The conservative allocation is composed of 15% large-cap stocks, 5% international stocks, 50% bonds and 30% cash investments. The moderately conservative allocation is 25% large-cap stocks, 5% small-cap stocks, 10% international stocks, 50% bonds and 10% cash investments. The moderate allocation is 35% large-cap stocks, 10% small-cap stocks, 15% international stocks, 35% bonds and 5% cash investments. CRSP 6-8 was used for small-cap stocks prior to 1979, Ibbotson Intermediate-Term Government Bond Index was used for bonds prior to 1976, and Ibbotson U.S. 30-day Treasury Bill Index was used for cash investments prior to 1978.

30%

20%

10%

0%

–10%

–20%

23%

8%–5%

27%

9%

–13%

31%

10%

–21%

Best year Worst yearAverage annual return

ConservAtiveAge 80+

ModerAtely ConservAtive

Age 70–79ModerAteAge 60–69

retirees Who Adopted this plAn Would hAve seen the folloWing results in their portfolios froM 1970–2013:

20%

30%50%

ConservAtiveAge 80+

50%40%

10%

ModerAtely ConservAtive

Age 70–79ModerAteAge 60–69

60%

35%

5%

stocks BondsCash/cash investments

AdApt your strAtegy over tiMeHere’s an example of how you might adjust your asset allocation throughout retirement:

next stepsNeed help structuring your portfolio for income? Schwab’s portfolio management services offer ongoing investment advice and a wide range of investing strategies. Call 888-484-5340 or visit schwab.com/oIportfoliomanagement to learn more.

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Clearing Up Common Misconceptions About Exchange-Traded FundsSome rules of thumb could lead you astray.By MiChAEl iAChini

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PErsPECTivEs: comparing etfs

T he universe of exchange-traded funds (ETFs) is huge. With more than 1,300 ETFs on the market in the United States,1 picking the right one for your portfolio can be daunting. And because there are so many ETFs to choose

from, you might be tempted to rely on some rules of thumb about ETFs—but that approach could lead you astray.

Here, I’ll clear up some misconceptions about ETFs so you can approach this investing landscape with clear vision.©

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PersPeCtives: comparing ETFs

Misconception 1 lots of stars means a good etFIndependent research firm Morningstar® is well known for its star ratings. Funds whose risk-adjusted performance has been strong relative to their category peers during the past three, five and 10 years generally receive four- or five-star ratings. Funds whose performance has been weaker receive one- or two-star ratings.

Investors often gravitate toward funds with four and five stars, whether they’re looking at mutual funds or ETFs. But are more stars the sign of a good product?

Well, keep in mind how these star ratings are calculated.

-- Star ratings are based entirely on past performance, with no regard for liquidity or other important factors. This means stars tell you only what a fund has done in the past, not what it could do in the future.

-- Funds must have a track record of at least three years in order to get a rating at all.

-- ETFs are ranked in a big group alongside mutual funds—most of which are actively managed.

This last point merits elaboration. Most ETFs track indexes, meaning they’re trying to replicate the performance of some broad segment of the market. If you see an ETF with a high star rating, this usually means one of two things:

-- Active mutual fund managers (who make up most of the peer group) have struggled to beat the market in this category.

-- The ETF tracks a narrow segment of the market that happens to have performed well recently.

(buy an ETF, hold it for a while, then sell it) you effectively “pay” the entire bid-ask spread.

In the example at left, ETF 1 has operating expenses that are lower than ETF 2 by 0.05% per year, but trading ETF 1 costs more. If you make one round-trip trade per year, ETF 2 is significantly cheaper in total cost. And if you trade more than once per year, the advantage for ETF 2 only grows.

Commissions matter, too—especially if you’re investing only a few hundred or even a few thousand dollars. Say you want to invest $1,000 in an ETF and have to choose between one with a $9 commission and one with no commission at all. Picking the ETF with the $9 commission would saddle you with a trading expense representing 0.90% of your investment. The difference between that and the commission-free choice far exceeds other expense differences in most cases. Of course, if you’re investing $100,000, then the commission represents less than 0.01% of your investment, and probably isn’t worth losing sleep over.

Misconception 3You should always choose a commission-free Yes, I just finished telling you that picking a commission-free ETF can save you a lot of money, especially for smaller investments. But picking the commission-free option isn’t automatically the right choice for every investor in every case.

As with all investments, the right ETF is the one that best fits your portfolio. If you find an ETF that suits your needs but that isn’t available commission-free, it still might be the best option. However, if a very similar commission-free ETF exists, that one might be the better choice.

When selecting an ETF, you should also consider the size of the trade. If you plan to invest a lot of money (tens of thousands of dollars or more) into an ETF, you shouldn’t focus on the trading commission as the main driver of cost, as it becomes less significant the more dollars you invest. The bid-ask spread and OER, meanwhile, continue to matter just as much for large investments.

And while we’re on the subject of OER and bid-ask spreads, it’s worth noting that you should be sure to keep an eye on these elements of cost. If the commission-free option is more expensive when these additional factors are taken into account, then it might

Examples provided are for illustrative purposes only and are not representative of any specific investment or trade.

It’s not uncommon to see ETFs with three-star ratings, meaning that they’ve performed around the middle of the pack. That’s pretty typical for an index product in most market environments. If an ETF focuses on a small niche of the market that performed better than the rest of the category in recent years (such as pharmaceuticals compared to the broad health-care sector, or technology companies within the broader China stock market), it doesn’t necessarily mean the same segment of the market is going to perform well in the future.

Take corporate bond ETFs, for example. None of the 12 rated ETFs in Morningstar’s Corporate Bond category has ratings of five or one.2 This is pretty much what you should expect from ETFs in general.

bottoM line: When it comes to ETFs, stars don’t matter.

Misconception 2 operating expenses are everythingETFs have a well-deserved reputation for low costs, which usually refers to the fund’s operating expense ratio (OER)—the annual percentage of the fund’s assets that the ETF manager spends to keep the fund running. These expenses can be astoundingly low—some as low as 0.04% of your investment per year—although the typical ETF charges about 0.44%.3

Low operating expenses aren’t everything, though, especially if you’re planning to trade a fund regularly. Every time you place a trade, you have to deal with the fund’s bid-ask spread—the price gap between what you’ll have to pay if you want to buy shares (the slightly higher “ask” price) and what you would get if you wanted to sell shares at that same moment (the slightly lower “bid” price). On a round-trip trade

operating expenses

bid-ask spread

round-trip trades/year

total cost/year

etF 1 0.10% + (0.25% x 1) = 0.35%

etF 2 0.15% + (0.05% x 1) = 0.20%


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(buy an ETF, hold it for a while, then sell it) you effectively “pay” the entire bid-ask spread.

In the example at left, ETF 1 has operating expenses that are lower than ETF 2 by 0.05% per year, but trading ETF 1 costs more. If you make one round-trip trade per year, ETF 2 is significantly cheaper in total cost. And if you trade more than once per year, the advantage for ETF 2 only grows.

Commissions matter, too—especially if you’re investing only a few hundred or even a few thousand dollars. Say you want to invest $1,000 in an ETF and have to choose between one with a $9 commission and one with no commission at all. Picking the ETF with the $9 commission would saddle you with a trading expense representing 0.90% of your investment. The difference between that and the commission-free choice far exceeds other expense differences in most cases. Of course, if you’re investing $100,000, then the commission represents less than 0.01% of your investment, and probably isn’t worth losing sleep over.

Bottom line: There’s more to cost than just operating expenses.

misconception 3You should always choose a commission-free etFYes, I just finished telling you that picking a commission-free ETF can save you a lot of money, especially for smaller investments. But picking the commission-free option isn’t automatically the right choice for every investor in every case.

As with all investments, the right ETF is the one that best fits your portfolio. If you find an ETF that suits your needs but that isn’t available commission-free, it still might be the best option. However, if a very similar commission-free ETF exists, that one might be the better choice.

When selecting an ETF, you should also consider the size of the trade. If you plan to invest a lot of money (tens of thousands of dollars or more) into an ETF, you shouldn’t focus on the trading commission as the main driver of cost, as it becomes less significant the more dollars you invest. The bid-ask spread and OER, meanwhile, continue to matter just as much for large investments.

And while we’re on the subject of OER and bid-ask spreads, it’s worth noting that you should be sure to keep an eye on these elements of cost. If the commission-free option is more expensive when these additional factors are taken into account, then it might

1Morningstar Direct, data as of February 28, 2014. 2Data as of February 28, 2014. 3“How to Choose an Exchange-Traded Fund (ETF),” The Wall Street Journal online.

See page 2 for important information.Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.Past performance is no guarantee of future results.

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not save you money in the long run. For instance, if you plan to hold an ETF for many years, the OER can become more important than transaction costs like commissions and bid-ask spreads.

Bottom line: Commissions do matter, but your ETF selection should be based

on more than just these costs. Under certain circumstances, you may need to go outside of the commission-free universe in order to find the ETF that’s right for you.

What to do?When it comes to picking ETFs, remember these guidelines:

- Start by finding ETFs that invest in the markets you’re looking for, whether that’s large-cap U.S. stocks, short-term bonds, commodities or anything else.

- Within that group of ETFs, focus on funds with a significant amount of assets under management (at least $20 million) and low total costs—including operating expenses, bid-ask spreads and commissions.

- Don’t chase performance, whether based on simple past returns or star ratings.

If you don’t get blinded by these misconceptions, making good choices for your ETF investments should be a lot easier. -

Michael Iachini, CFA, CFP®, is Managing Director of ETF Research at Charles Schwab Investment Advisory, Inc.

Do the ReseaRchReady to start comparing ETFs? Log in to schwab.com/oIetFs and click “Compare ETFs” to see a side-by-side breakdown of up to five funds.

This is pretty much what you should expect from ETFs in general.

When it comes to ETFs, stars don’t matter.

Low operating expenses aren’t everything, though,

especially if you’re planning to trade a fund regularly. Every time you place a trade, you have to deal with the fund’s bid-ask spread—the price gap between what you’ll have to pay if you want to buy shares (the slightly higher “ask” price) and what you would get if you wanted to sell shares at that same moment (the slightly lower “bid” price). On a round-trip trade


Tailor Your Trading in Volatile MarketsSeven ways to adapt during periods of uncertainty.BY RandY FRedeRick

W hen markets go on a wild ride, it’s understandable to feel uneasy. As a trader, volatility—how much an asset moves up and down in value—can sometimes be your friend, allowing you to buy and sell stocks at target

prices more quickly. But increased volatility, such as that caused by economic uncertainty, political dysfunction or unexpected events, can dramatically impact the nuts and bolts of your trading.

Take 2013, for example. Overall, it was an exceptional year for “buy-and-hold” investors and traders alike. A combination of factors, including the Federal Reserve’s near-zero interest-rate policy, low inflation, slowly falling unemployment rates, reasonable

equity valuations and the housing market recovery, created a backdrop for stellar market growth. However, even with a nearly 30% increase in the S&P 500 Index, 2013 had a few bumps, as shown in the chart above.

When volatility flares up, it’s important that you don’t let it derail your trading. Here are seven ways to help keep you on track.

Emotions have no place in trading. Decisions regarding which stocks to own should be based on fundamental analysis or other research that examines the financial condition of the underlying companies. When markets get choppy, knowing what to own becomes even more important. Once you have a target list of stocks, employing technical analysis—the study of stock prices and trends—can help you select your entry and exit prices.

Then, monitor your positions carefully. Set realistic profit and loss thresholds and follow them when the stock price moves outside of these bounds. Don’t expect to outperform the broader market each year; even professionals rarely do that.

Also remember that you don’t have to trade your entire portfolio actively—in fact, you shouldn’t. Instead, consider your personal risk tolerance when deciding how much of your portfolio will be used for trading—perhaps something like 20–30%—and

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“Most traders think they have a high tolerance for risk—that is, until they encounter a bear market.”

equity valuations and the housing market recovery, created a backdrop for stellar market growth. However, even with a nearly 30% increase in the S&P 500® Index, 2013 had a few bumps, as shown in the chart above.

When volatility � ares up, it’s important that you don’t let it derail your trading. Here are seven ways to help keep you on track.

1Stay disciplined and stick to your trading planEmotions have no place in trading.

Decisions regarding which stocks to own should be based on fundamental analysis or other research that examines the � nancial condition of the underlying companies. When markets get choppy, knowing what to own becomes even more important. Once you have a target list of stocks, employing technical analysis—the study of stock prices and trends—can help you select your entry and exit prices.

� en, monitor your positions carefully. Set realistic pro� t and loss thresholds and follow them when the stock price moves outside of these bounds. Don’t expect to outperform the broader market each year; even professionals rarely do that.

Also remember that you don’t have to trade your entire portfolio actively—in fact, you shouldn’t. Instead, consider your personal risk tolerance when deciding how much of your portfolio will be used for trading—perhaps something like 20–30%—and

Source: StreetSmart Edge® as of 4/17/2014. Past performance is no guarantee of future results.

1,9201,9001,8801,8601,8401,8201,8001,7801,7601,7401,7201,7001,6801,6601,6401,6201,6001,5801,5601,540

JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY

20142013

then keep the rest of your portfolio as core holdings. With these longer-term investments, be sure to stay diversi� ed and stick to your target asset allocation.

2Maintain your risk tolerance and trade smaller positionsMost traders think they have a high

tolerance for risk—that is, until they encounter a bear market. Before that happens, make sure you understand your capacity to withstand losses. Don’t assume overly large positions to maximize gains if you aren’t comfortable with the risks involved.

When trading, consider scaling in and out of positions by buying the stock in increments as its price � uctuates, or selling in increments when you think it may be getting close to a top. When properly managed, scaling in and out can reduce your overall cost basis and prevent you from owning too much of a position that is moving against you.

3Use limit ordersMarket orders can be appropriate for trading highly liquid securities during

market hours because they let you buy or sell a stock at the best possible price available when the order is received. But market orders leave you vulnerable to market conditions, particularly if you enter them while the market is closed. Plus, you may not obtain your desired price.

SHORT-TERM PULLBACKS IN A LONG-TERM UPTRENDAs seen in 2013, even rumors of policy changes and geopolitical turmoil can create unsettling downturns. Economic and political uncertainty in early 2014 led to similar pullbacks.

S&P 500 INDEX (SPX)

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See page 2 for important information.Schwab does not recommend the use of technical analysis as a sole means of investment research.

Periodic or otherwise staggered investment purchases do not ensure a profit and do not protect against loss in declining markets.

(0814-2767)

Limit orders are more prudent in volatile markets. They allow you to specify the maximum price you’re willing to pay when buying a stock. Conversely, they let you set the minimum price you’re willing to accept when selling a stock. Be aware that while a limit order allows you to specify a price, there is no guarantee of an execution, even if the market moves and reaches your limit price.

4 Use proper risk management techniquesTo help protect unrealized gains or

limit your potential losses during market hours, consider using stop, stop/limit, trailing stop and bracket orders. When you place any of these orders, you have to decide how many points or what percentage below the stock price to place the order. Many traders have a standard policy based on their personal risk tolerance—such as 5% or 10%. For traders who determine the size of each trade based on the dollar amount invested, rather than the share quantity, a point value (for example, $1.00 or $1.50) may be more effective than a percentage.

Regardless of which methodology you use, be careful not to place the stop price too close to the current price, or daily price fluctuations might trigger an execution. Keep in mind, too, that all stop and protective order types have limitations. For instance, once an order is activated, it becomes a market order (which could fill at an unfavorable price) or a limit order (which may not fill at all). In a rapidly falling market, or a market that gaps in price overnight, there is no guarantee that the order will execute, or that the execution price will be the same as the stop price.

Next StepSStay abreast of

the markets with Traders Lunch, a live analysis and

Q&A session about current market action. Join us

every Thursday at 1:30 p.m. Eastern

time. Sign up at schwab.com/

OItraderslunch.

5 trade the trendTrying to pick the top and/or bottom of the market seldom works to your advantage—

it’s usually much easier to follow the direction and momentum of the market than to fight it. If you’re going in one direction while everyone else is going in the other direction, you’ll likely get trampled.

In technical analysis, an uptrend is defined as a series of higher highs and higher lows. Similarly, a downtrend is a series of lower highs and lower lows. The number of occurrences it takes to establish a pattern will vary depending upon your time horizon. Long-term traders may look for trends in weekly or monthly charts, while shorter-term traders may use daily charts.

6 Take some profits off the tableIf you own positions that have increased

substantially in value, selling some of your shares is a good way to protect some of your gains. Plus, you still have the potential for further upside on your remaining position. During times of higher-than-average volatility, a slightly higher cash allocation is often prudent. By taking partial profits on some of your appreciated positions and leaving those proceeds in cash, you can help protect those profits and lower your overall risk.

7 When in doubt, wait it outJust as markets can’t go up forever, they also can’t go down forever. Periods of heightened

volatility come and go, and, more often than not, are short-lived. If you don’t have a good feeling for where the markets might be heading, sometimes just sitting it out isn’t such a bad idea. -

Randy Frederick is Managing Director of Trading and Derivatives at the Schwab Center for Financial Research.

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CharleS SChWab • FALL 2014 18

tradiNg


Elegance

Investors can dIversIfy and partIcIpate In the long-term growth of markets by IncludIng Index funds In theIr portfolIos.ThE

IndExIngof

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Many investors lack the time or the expertise to determine which specific stocks, bonds or other investments they should hold in their portfolio. In addition, they may not have enough money on hand to sufficiently spread out their risk by holding a large number of different securities across

sectors, industries and companies.This spreading out of risk, or diversification, is one of the basic tenets of

modern portfolio theory, which holds that you can reduce the risk (volatility) of the overall portfolio by owning a number of securities that tend to move independently of each other. Diversifying, or introducing more securities, helps reduce the overall risk of a portfolio. The fewer securities you hold, the likelier it is that a decline in one of them could adversely affect the whole portfolio; a larger pool of securities tends to spread that risk.

One way to reap the benefits of diversification is through index investing—the practice of investing in a fund with a portfolio of securities that mirrors a particular index.

Why index funds?Index funds let you participate in the growth of the economy in a very straightforward way: The U.S. market has grown over time, so the indexes that follow it have risen in tandem.

Take as an example the Schwab 1000 Index® Fund, which tracks the Schwab 1000 Index, Schwab’s proprietary index comprising the largest 1,000 U.S. companies. Since it commenced operations in 1991, the fund’s share price has grown an average 9.4% annually. Put another way, a hypothetical $10,000 invested in the Schwab 1000 Index Fund at launch and left untouched would be worth almost $80,000 today, as shown in the chart at right.

Index investing is a straightforward way to track the market. It is also generally a more tax-efficient approach than actively managed mutual funds. Active funds tend to have higher turnover than index funds—their managers continuously buy and sell securities in an attempt to beat the market, rather than invest

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$10,000 invested in the Schwab 1000 Index Fund in 1991 would be worth nearly eight times as much today.

$90,000

$80,000

$70,000

$60,000

$50,000

$40,000

$30,000

$20,000

$10,000

$0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Schwab 1000 Index Fund

Source: Schwab Center for Financial Research. Data from 4/2/1991–3/31/2014. Includes the impact of fees and expenses, as well as reinvestment of dividends and capital gains. Past performance is no guarantee of future results. See schwab.com for the most recent performance information.

according to a set schedule of reconstitution and/or rebalancing. Without that frequent buying and selling, there are fewer occasions to realize capital gains.

Index investing also allows investors to obtain broad exposure to the market even if they do not have large sums to invest.

And � nally, there’s cost. � e typical index fund has lower operating expenses and management fees than an actively managed fund. � e average cost of an actively managed all-equity mutual fund is roughly 0.92% of assets per year.1 Index mutual funds range in cost, but typically charge between 0.10–0.30% of assets. ETFs (which o� en track an index) range in cost from 0.04% for traditional market-cap exposure, to 0.75% for more esoteric strategies. � is gap in fees adds up over the life of an investment. For instance, a $100,000 portfolio growing at 6% annually over 25 years would accumulate almost $58,000 more if the fees were 0.25% instead of 0.90%.

Bottom line, index funds have done well on both an absolute and a relative basis: on an absolute basis over the long term because equity markets have grown over time, and on a relative basis because of their lower cost structures.

Annualized performance: Schwab 1000 Index Fund vs. indexes

As of 3/31/2014.

How an index worksIndex investing o� en is referred to as passive because index funds track the movements of an index, as opposed to actively managed funds, which have an individual manager choosing investments. While accurate, the word passive may suggest a lack of change, and doesn’t fully capture the dynamic nature of index funds. � e fact is, index funds follow a rigorous methodology that periodically alters their composition, enabling investors to participate in important market shi� s.

7.5%21.2%22.0%

7.8%21.7%22.2%

Schwab 1000 Index Fund

Schwab 1000 Index

Russell 1000 TR USD

1 YEAR 5 YEAR 10 YEAR

22.4% 21.6% 7.8%

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To illustrate this point, let’s again consider the Schwab 1000 Index. It screens and ranks all U.S. stocks based on their market capitalization, or the total stock market value of their shares. It builds a portfolio containing the top 1,000 stocks in proportion to their overall value. Then, every year, it rebalances that portfolio to account for stock splits, performance and other corporate actions, and re-ranks the top 1,000, ensuring that investors have exposure to the biggest publicly traded contributors to the U.S. economy. Because the rankings and weightings

Over 22 years, the Schwab 1000 Index has reflected a changing economy

Source: Charles Schwab & Co. Inc. Data as of 12/31/2013. The 1991 industry weightings for the Schwab 1000 Index were determined using the Schwab 1000 Index Fund holdings as of 12/31/1991 and translated into the current Global Industry Classification Standard (GICS). GICS was developed by and is the exclusive property of MSCI and Standard & Poor’s (S&P). GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc.

Consumer Discretionary Health Care Consumer Staples Financials Information Technology Energy Materials Telecommunication Services Utilities Industrials Other

shift according to each company’s market performance, index fund owners are essentially “making the market their manager.”

Over the course of a year, turnover within the index can translate to the entry and exit of about 50 companies. Over longer periods of time, the index’s annual turnover ensures that the portfolio reflects the changing economy and market. As an example, let’s look at how the composition of the Schwab 1000 Index has shifted since its launch.

One significant change is the dramatic growth of the information technology sector. All told, the tech industry has grown from 10% of the Schwab 1000 Index in 1991, to 18% in 2013. In fact, today the five largest tech companies alone are worth more than $1.5 trillion—the equivalent of about 38% of the entire U.S. stock market back in 1991.2

Long-term market performanceWhile some individual stock pickers do beat the market each year, data from the Schwab Center for Financial Research illustrates how difficult it is for actively managed funds to deliver outstanding results year after year. Our evaluation shows that between 2004 and 2013, only one equity mutual fund was able to rank in the top performance quartile for more than seven years.

This is not to suggest that active management doesn’t have a place in a well-diversified portfolio—investors just have to devote a lot of time, energy and research to finding the right managers. A good active manager can adopt a more conservative posture in rough markets and play defense. Active managers have greater flexibility in responding to changing market conditions, and some have demonstrated proficiency in protecting portfolios in difficult markets. As such, there is value in identifying active managers who have exhibited better downside protection.

Indexing 2.0With the increased demand, indexing has evolved beyond the traditional market-capitalization approach to include a number of new and innovative approaches.

Recent innovations in indexing aim to combine the benefits of both traditional indexing and active fund management. One

1991

2013

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12013 Investment Company Fact Book. 2According to World Bank, the total U.S. market capitalization in 1991 was $4.0 trillion.

See page 2 for important information.For funds, investors should carefully consider information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by visiting schwab.com or calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price, which may be higher or lower than the net asset value. All funds are subject to management fees and expenses.

Past performance is no guarantee of future results.

(0614-3395)

Next StepS For help determining how indexing strategies might fit into your portfolio, call us at 888-484-5340 or visit schwab.com/OIbranch to request an appointment at your local branch.

twist is fundamentally weighted indexes, which screen and weight stocks based on a variety of economic factors, such as a company’s adjusted sales, cash flow and dividends plus buybacks.

Fundamental strategies sometimes are referred to as “alternative beta” or “smart beta” because they provide broad-based market exposure (beta), and they weight securities based on fundamental factors rather than simply assigning the greatest weights to the largest capitalized companies.

Fundamentally weighted indexes rely on rules-based disciplines to select and weight securities, removing the potential biases of an active manager who may favor a particular stock because of emotional attachment to the company’s management or a product, for example.

What should investors do? We believe that active management, market-cap and fundamental strategies each have their own investment merits, and that they all deserve a place in a well-diversified portfolio:

-- Active management offers the potential to outperform a given market, and may be particularly useful for potential downside protection.

-- Market-cap index investing offers diversification and cost-effective exposure to virtually every segment of the market.

-- Fundamentally weighted strategies capture many of the positive attributes of both traditional market-capitalization indexing and active management, and can add an additional layer of diversification to a portfolio. -

Index funds follow a

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It used to be that maintaining a diverse mix of stocks—differentiated by factors such as company size, sector and country—would help spread

risk across the equities portion of an investor’s portfolio, helping to weather the market’s ups and downs. But stock prices have begun moving in tandem in recent years, making the traditional approach to diversification less effective than in the past.

At the root of this story is a concept statisticians call “correlation,” which is a measure of how the prices of two types of investments move in relation to each other. When two assets are perfectly correlated, they have a correlation of +1, meaning their price movements are synchronized and react to market forces in the same way. When two assets exhibit a perfectly negative correlation, or a –1 reading, their prices move in opposite directions in response to those same forces.

Most asset correlations—such as the correlation between stocks and bonds—are positive but not perfectly so, meaning they would offer some diversification benefits because their prices don’t move in lockstep when market conditions change. But given the tighter relationships exhibited between and among asset classes—particularly stock sub-asset classes, such as large-cap U.S. stocks and international and emerging markets—investors may need to reassess their portfolio allocations and consider adding different assets to achieve more diversification.

“Having too many highly correlated assets is the equivalent of owning multiple homes in the same neighborhood,” says Tony Davidow, Asset Allocation Strategist at the Schwab Center for Financial Research. “If local real estate conditions sour, all of their prices are going to suffer.”

Stock prices are moving in lockstep— and that could impact your portfolio.

A U.S. lArge-compAny StockS B U.S. SmAll-compAny StockS

c InternAtIonAl lArge-compAny StockS D emergIng-mArket StockS

Lower correlation Greater diversification

Higher correlationLittle diversification

1995–2000

A

B

c

D

A B c D

1

0.62 1

0.69 0.60 1

0.67 0.64 0.71 1

2008–2013

A

B

c

D

A B c D

1

0.95 1

0.91 0.84 1

0.84 0.80 0.91 1

Source: Charles Schwab Investment Advisory, Inc., with data from Morningstar Direct.

equities are becoming increasingly correlated

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What’s different noW?If you examine the history of financial markets, you will find that asset correlations tend to rise in times of crisis. There are two explanations for this. Financially, all assets are linked to economic events and carry some form of risk. Emotionally, investors are generally risk-averse, and tend to pull assets from markets during periods of stress and uncertainty.

We saw this during the 2008 financial crisis, when the prices of most stocks—large- and small-cap, domestic and international alike—plunged. Since then, equity correlations have remained elevated, prompting some investors to seek exposure to non-traditional investments that have historically delivered lower correlations to stocks, such as commodities and real estate.

The elevated correlations among equity classes have been steadily increasing since 1995—not just since the 2008 crisis—indicating that the benefits of diversifying across equity classes aren’t as pronounced as they once were. Tony points to the globalization of the world’s economies as one possible cause. “The world’s economies rely upon one another for trade, and individual companies sell to various market segments,” he says. In fact, during the past 30 years, global trade of merchandise and commercial services has increased by an average of about 7% per year, according to the World Trade Organization.1

Even the correlation between U.S. large-cap and emerging-market stocks is increasing, Tony says. Large U.S. companies like McDonald’s and Starbucks sell products around the globe, and emerging-market companies, such as Korean automaker Kia Motors, sell products in the United States. As a result, the correlation between these equity classes rose from 0.67 in 1995 to 0.84 in 2013. Over the same period, the correlation between international large-cap stocks and their domestic counterparts saw an even bigger increase, from 0.69 to 0.91—a near-perfect correlation.

“It’s a more connected world, and the financial markets are more connected as a result,” Tony says.

One major repercussion of this interconnectivity is that a wider base of investors are exposed to market-moving shocks. When global crises—such as the Japanese tsunami or the government change in Ukraine—occur, investors have little time to digest the news before the markets act on it. This tendency to act on impulse creates momentum in one direction or another and adds to volatility across asset classes, Tony says.

hWith correlations increasing among equity classes, investors may need to reassess their portfolio strategies in order to maintain adequate diversification. If

Commodities have historically shown low correlation to traditional investments. For example, the correlation between the Dow UBS Commodity Index and the S&P 500® Index is 0.49, suggesting that commodities are good candidates for diversification.

Commodities typesCommodities can be grouped broadly by sector—energy, agriculture, industrial metals and precious metals, for example—or isolated individually as discrete holdings, such as gold or oil. Commodity indexes usually track a broad swath of commodity types, but often are highly concentrated in a few areas, such as energy or precious metals.

Individual commodities within each sector may exhibit their own unique risk-and-return characteristics over time due to differences in supply and demand.

adding Commodities to your portfolioThere are several ways for an investor to gain exposure to individual commodities or the commodity market as a whole. Your individual experience will depend on which approach you choose, so carefully evaluate the structural considerations of each option before investing.

- exchange-traded funds (etfs) and mutual funds. With a growing number of commodity ETFs and mutual funds available in the marketplace, investors now have more choices when it comes to adding commodity exposure. Because of this, ETFs and mutual funds tend to be the way most investors choose to invest in commodities.

- physical commodities. While owning commodities in their physical form provides pure exposure, it may be difficult for the average investor to store wheat, corn and other physical goods.

- Commodity-related stocks. Owning a gold mining company is not the same as owning gold. A gold mining company typically exhibits a higher correlation to equities than gold, and may provide a very different return pattern over time.

- futures. These are legally binding contracts to buy or sell a physical commodity or financial instrument on a certain date in the future, but at a price agreed upon today. Futures are often used by professional investors to speculate on future price movements of the underlying asset, and are subject to unique risks that may not be suitable for all investors.

1World Trade Organization, “World Trade Report 2013.”

See page 2 for important information.For funds, investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than the net asset value.


Commodity-related products, including futures, carry a high level of risk and are not suitable for all investors. Commodity-related products may be extremely volatile, illiquid and significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations and economic conditions, regardless of the length of time the investments are held. Investments in commodity-related products may subject the fund to significantly greater volatility than investments in traditional securities and involve substantial risks, including risk of loss of principal.

Schwab introduces its customers interested in trading futures to optionsXpress, Inc. Schwab and optionsXpress, Inc., are affiliates and subsidiaries of The Charles Schwab Corporation. Certain requirements must be met to trade futures. Please read the Risk Disclosure Statement for Futures and Options prior to opening a futures trading account. Call for a copy.

(0814-2985)

a look at commodities

Source: Morningstar Direct with data from 1/1/04–12/31/13. Individual commodity performance is based on the S&P GSCI Spot Index. Returns do not reflect any management fees, transaction costs or expenses. Past performance is no guarantee of future results.

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risk, and for capturing upside potential, but investors may need to evolve their allocation approaches to enjoy the full benefits,” Tony says. -

these trends continue, investors sticking to traditional stock allocations may be missing out on some opportunities for further diversification.

Today’s investors have access to non-traditional asset classes that aren’t as highly correlated with stocks. Some of these might include real estate investment trusts (REITs) and commodities. (For more on commodities, see “A look at commodities” on the previous page.)

“Diversification is a great tool for helping mitigate a portfolio’s downside

“It’s a more connected world, and the financial markets are more connected as a result,” Tony says.

One major repercussion of this interconnectivity is that a wider base of investors are exposed to market-moving shocks. When global crises—such as the Japanese tsunami or the government change in Ukraine—occur, investors have little time to digest the news before the markets act on it. This tendency to act on impulse creates momentum in one direction or another and adds to volatility across asset classes, Tony says.

How to stay diversifiedWith correlations increasing among equity classes, investors may need to reassess their portfolio strategies in order to maintain adequate diversification. If

With a growing number of commodity ETFs and mutual funds available in the marketplace, investors now have more choices when it comes to adding commodity exposure. Because of this, ETFs and mutual funds tend to be the way most investors choose to invest in commodities.

exposure, it may be difficult for the

Owning a gold mining company is not the same as owning gold. A gold mining company typically exhibits a higher correlation to equities than gold, and may provide a very different return pattern over time.

instrument on a certain date in the future, but at a price agreed upon today. Futures are often used by professional investors to speculate on future price movements of the underlying asset, and are subject to unique risks that may not be suitable for all investors.

1World Trade Organization, “World Trade Report 2013.”

See page 2 for important information.For funds, investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than the net asset value.


Commodity-related products, including futures, carry a high level of risk and are not suitable for all investors. Commodity-related products may be extremely volatile, illiquid and significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations and economic conditions, regardless of the length of time the investments are held. Investments in commodity-related products may subject the fund to significantly greater volatility than investments in traditional securities and involve substantial risks, including risk of loss of principal.

Schwab introduces its customers interested in trading futures to optionsXpress, Inc. Schwab and optionsXpress, Inc., are affiliates and subsidiaries of The Charles Schwab Corporation. Certain requirements must be met to trade futures. Please read the Risk Disclosure Statement for Futures and Options prior to opening a futures trading account. Call 800-435-4000 for a copy.

(0814-2985)

Next stePs Use the Schwab ETF Portfolio BuilderTM to design a diversified portfolio of ETFs based on your risk profile. Log in to schwab.com/oIetfPB to get started.

“Given the tighter relationships between asset classes, investors may need to reassess their portfolio allocations.”

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THREE TIPS FOR MUTUAL FUND INVESTINGWhat to look for when selecting funds for your portfolio.

More than 92 million Americans invest in mutual funds,1 making them the most popular investment vehicle in the United States. For many investors, mutual funds represent a simple way to gain broad

market exposure. Because most mutual funds invest in a large number of securities—usually anywhere from 50 to 200 di� erent investments, depending on a fund’s size and focus—they can help reduce portfolio risk through diversi� cation and asset allocation. Mutual funds also enable investors to save time by not having to choose individual investments or manage the buying and selling of individual securities.

When looking at the potential bene� ts, it’s no wonder that mutual funds are so popular among investors. � at popularity, however, makes � nding the right mutual fund more complex. With more than 8,500 funds available in the U.S. marketplace,2 how do you know which ones to choose?

On Investing recently sat down with Jim Peterson, Chief Investment O� cer at Charles Schwab Investment Advisory, Inc., to better understand how he and his team pick funds for the Schwab Mutual Fund OneSource Select List®, a concise list of carefully prescreened mutual funds. “� ere are certain things you can look for to help determine whether a particular mutual fund might be a worthy investment,” Jim says.

Here are his team’s top three tips for researching mutual funds. ©

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Fees are critical, Jim says. � ey come in di� erent forms and sizes and can signi� cantly impact your returns. � e � rst fee to look out for is the “sales load,” or the money paid to a broker on the purchase or sale of the

fund. � ere are three main forms of loads:

- Front load. Fees charged up front or at the time of a fund purchase can be as much as 5% of the amount invested. For example, if a mutual fund carries a 5% front-end load, and you invest $1,000, $50 will be taken out before the remaining $950 is invested.

- Back load. Fees charged when you sell a fund also run as high as 5%, although they may decline over time. In some cases, they may even be reduced to zero, typically a� er you’ve held a fund for � ve or more years.

- No load. Some funds don’t charge expenses up front or when the investment is sold.

Not all funds charge loads, but all have annual operating expenses, which average 0.77% for actively managed equity funds and 0.61% for actively managed bond funds.3 Some funds also charge 12b-1 fees for marketing, distribution and services for shareholders. Other potential charges include exchange fees when shareholders transfer holdings to another fund within the same fund family.

Over the life of an investment, loads and expenses can dilute returns. Consider a fund with a 5% front load and an expense ratio of 2%. If you invest $25,000 and assume a 7% return over 20 years, your investment would grow to about $61,000. But without the load and with expenses of 1%, it would reach around $79,000—allowing for $18,000 more growth than the fund with higher loads and fees.

However, Jim cautions investors not to focus only on the lowest-cost funds. “Sometimes it’ll be worth the extra fees for portfolio managers who can deliver outstanding performance,” he says.

Jim says that while historical performance could help identify those superior managers who are most likely to beat the averages, it doesn’t provide the whole picture. “Strong short-term performance could be more of a function of a fund manager investing in a really hot space,” Jim says. “Sometimes, high returns are more a product of luck than skill.”

Jim says that his group considers a range of factors when determining whether a fund belongs on the Select List—and past performance is only one of them. “� ere’s a long list of quantitative measures, including expenses, cash � ow and assets under management,” he says. “And there are crucial qualitative measures too, such as how long the fund’s portfolio manager has been on board and whether the fund’s investment strategy has remained consistent over time.”

DON’T FOCUS ON THE PAST

PAY ATTENTION TO FEES

OI-Fa14-Q3-29



1Investment Company Institute, “2013 Investment Company Fact Book.”2,3Ibid.See page 2 for important information. Investors should carefully consider information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by visiting schwab.com or calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.Investment returns will fl uctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost.

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Investors might not factor in a fund’s tax e� ciency when thinking about mutual funds, but taxes can matter. Funds must make capital gains distributions to shareholders if they make net pro� ts from selling securities. Investors, in turn, are required to pay capital gains tax on the amount they receive.

Many investors look at a fund’s turnover rate—found in the prospectus—as an indicator of tax e� ciency. Typically, the lower the turnover rate, or trading frequency, the lower the capital gains distribution, and therefore, the lower the tax liability. It might, however, be more useful to look at a fund’s “tax cost ratio”—a measurement by the fund research � rm Morningstar, Inc., that

CONSIDER TAX EFFICIENCIES

DO THE RESEARCHScreen for mutual funds by loads, expenses, performance and more. Log in to schwab.com/OIfundscreener to get started. You can also view our experts’ picks on the Mutual Fund OneSource Select List, available at schwab.com/OIselectlist.

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shows how much a fund’s annualized return is reduced by the taxes investors pay on dividends.

Jim also points out that most fund managers aren’t managing their portfolios for tax e� ciencies, and that index funds—which are designed to track broad market indexes—tend to be the most tax-e� cient. (For more about index funds, read “� e Elegance of Indexing” on page 19.)

AFTER YOU BUYFinally, Jim says that investors should check their funds at least once a year to make sure the investments are performing as expected. “Sometimes fund managers might step out of their expertise and chase riskier investments in an attempt to boost returns,” Jim says. “Investors may want to check their fund’s quarterly � lings to see if any unusual holdings have cropped up.” He also says that some funds simply get too big and have too many assets to deploy nimbly.

“It’s a good idea to evaluate all of your investments from time to time—and that certainly applies to mutual funds.” -

OI-Fa14-Q3-30



See page 2 for important information.Schwab Personal Referral Program: Terms and Conditions for Referral Bonus Offer To earn your $100 (“Bonus Award”), open an eligible account and make a qualifying net deposit of at least $10,000 within 45 days of enrolling in the offer.

This offer is valid for new clients who do not have a Schwab brokerage account and who open a retail brokerage account and enroll in the offer. Net deposits are assets deposited into the account minus assets withdrawn from the account and transferred out of Schwab. Only outside assets new to Schwab qualify; assets transferred from affiliates other than Schwab Retirement Plan Services, Inc., and Schwab Retirement Plan Services Company are excluded. The Bonus Award will be credited to the enrolled account within approximately one week of your qualifying net deposit. For taxable accounts, you must maintain the net deposit amount (less any market losses) at Schwab for at least one year or Schwab may charge back the value of the Bonus Award.

Please note that Schwab reserves the right to change the offer terms or terminate the offer at any time without notice. This offer is limited to one per account, with a maximum of one account enrolled per client. It does not apply to accounts managed by independent investment advisors, the Schwab Global Account™, ERISA-covered retirement plans, certain tax-qualified retirement plans and accounts, or education savings accounts. The Bonus Award, when combined with the value received from all other offers in the last 12 months, may not exceed $5,000 per household, as defined in the Charles Schwab Pricing Guide for Individual Investors. This offer is not transferable, saleable, or valid in conjunction with certain other offers and is available to U.S. residents only. Employees, contractors or persons similarly associated with Schwab or a Schwab affiliate; or their spouses; and employees of any securities regulatory organization or exchange are not eligible. Other restrictions may apply.

Consult with your tax advisor about the appropriate tax treatment of the Bonus Award before enrolling in this offer. Any related taxes are your responsibility. For taxable accounts, the value of all Schwab offers received will be reported as Other Income on your Form 1099-MISC if, when combined with Other Income earned, the value totals $600 or more during the calendar year.

(0814-3246)

Next StepS To unlock your personal referral code, call 877-480-0120 or log in to schwab.com/OIreferafriend.

Share It ForwardIntroduce Schwab to someone you care about.

A t certain points in life, everyone can use a little extra financial guidance and planning help. As a valued

Schwab client, you can pass along Schwab’s help and unlock a special referral bonus offer for your friends and family.

Being a personally referred client comes with great benefits. Invite your loved ones to learn more about Schwab so they can take advantage of:

- One-on-one financial guidance to discuss their goals and help them plan.

- New Client Concierge to assist with paperwork, account funding and more.

Special Bonus AwardPlus, people you refer may be eligible to earn a $100 Bonus Award in their account when they make a $10,000 qualifying net deposit. See the terms and conditions below for more information.

OI-Fa14-Q3-31

FA LL 2014 • ON iNveStiNg 31

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dOI_Fa14_31-33_SpotLight.indd 31 7/7/14 1:32 PM

Investing for Income and Growth With Dividend-Paying StocksA new Schwab tool makes it easier to research dividend-focused investments.

Today’s low interest rates have eroded some of the traditional advantages of fi xed income investments, making it more

diffi cult for investors to secure steady income streams. As a result, many investors are turning to dividend-paying stocks—which distribute a portion of a company’s income to shareholders—to help satisfy their income needs.

Building a portfolio of dividend-paying stocks can help deliver regular cash payments to savers and retirees. While some stocks in this category pay dividends on an annual basis, most distribute funds each quarter, which could make them an attractive option for investors seeking a more regular source of income. By way of comparison, bonds, while generally considered to be less risky than stocks, typically pay interest just twice a year.

But dividend-paying stocks aren’t just for investors looking for regular income. In fact, investors who reinvest their dividend payments could potentially enjoy higher returns over time, thanks to the power of compounding. For example, investors who use their dividend income to buy more dividend-paying shares could gradually expand both the overall size of their portfolios and the amount of dividend income they receive. Of course, pursuing such a strategy could increase the weighting of equities in your portfolio, potentially adding to your risk. Investors who reinvest their dividend income in shares may eventually need to reallocate to ensure their portfolios refl ect their risk appetites.

As with any investment approach, research is essential. Knowing what portion of its earnings a company pays out can help investors determine whether it makes sense to execute a trade. Remember to research all aspects of a stock prior to trading, as the dividend-payment history is just one component to consider.

For Schwab clients, identifying such factors has never been easier. Our new online dividend research capability gives investors a powerful new tool to examine a company’s dividend-payment history in detail.

See page 2 for important information.Please refer to ThomasPartners Form ADV, Part 2A, for more information. Past performance is no guarantee of future results; the value of investments and the income derived from them can go down as well as up. Future returns are not guaranteed, and a loss of principal may occur.

There are risks associated with investing in dividend-paying stocks, including but not limited to the risk that stocks in the strategy may reduce or stop paying dividends, affecting the strategy’s ability to generate income.

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OI-Fa14-Q3-32



fi xed income investments, making it more diffi cult for investors to secure steady income streams. As a result, many investors are turning to dividend-paying stocks—which distribute a portion of a company’s income to shareholders—to help satisfy their income needs.

Building a portfolio of dividend-paying stocks can help deliver regular cash payments to savers and retirees. While some stocks in this category pay dividends on an annual basis, most distribute funds each quarter, which could make them an attractive option for investors seeking a more regular source of income. By way of comparison, bonds, while generally considered to be less risky than stocks, typically pay interest just twice a year.

But dividend-paying stocks aren’t just for investors looking for regular income. In fact, investors who reinvest their dividend payments could potentially enjoy higher returns over time, thanks to the power of compounding. For example, investors who use their dividend income to buy more dividend-paying shares could gradually expand both the overall size of their portfolios and the amount of dividend income they receive. Of course, pursuing such a strategy could increase the weighting of equities in your portfolio, potentially adding to your risk. Investors who reinvest their dividend income in shares may eventually need to reallocate to ensure their portfolios refl ect their risk appetites.

As with any investment approach, research

earnings a company pays out can help investors determine whether it makes sense to execute a trade. Remember to research all aspects of a stock prior to trading, as the dividend-payment history is just one component to consider.

For Schwab clients, identifying such factors has never been easier. Our new online dividend research capability gives investors a powerful new tool to examine a company’s dividend-

See page 2 for important information.Please refer to ThomasPartners Form ADV, Part 2A, for more information. Past performance is no guarantee of future results; the value of investments and the income derived from them can go down as well as up. Future returns are not guaranteed, and a loss of principal may occur.

There are risks associated with investing in dividend-paying stocks, including but not limited to the risk that stocks in the strategy may reduce or stop paying dividends, affecting the strategy’s ability to generate income.

(0814-3796)

The example shown in the chart is provided for illustrative purposes only. It is not intended to represent a recommendation for any specifi c investment product. Dividends shown on this page are historical. Please note that some descriptive statistics, such as the annual dividend rate and annual dividend yield, use the most recent quarter’s or sum of past year’s dividends paid to estimate future rates and yields. There is no guarantee these dividends paid will continue or be increased in the future.

See how a company’s dividend payments stack up by logging in to schwab.com/OIresearch and searching for its ticker symbol. There, under the Dividends tab, you will fi nd detailed information about an individual stock’s dividend-payment history, yields, payment trends and other statistics. You can also see how a stock’s dividend yield compares with that of its industry peers.

The Dividends tab also features interactive charts that allow you to drill down into the details of a stock’s dividend profi le.

If you’re interested in dividend investing, the ThomasPartners

Dividend Growth Strategy may be right for you. The strategy invests in companies that pay dividends and is designed to provide monthly income—whether the market goes up or down.

NEXT STEPS To learn more about the ThomasPartners Dividend Growth Strategy, visit schwab.com/OIThomasPartners.

Invest in the power of dividend growth with ThomasPartners®

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Procter & Gamble Co PG: NYSEHousehold Products

Last Price Today’s Change Bid/Size Ask/Size Today’s Volume$80.06 -0.09 (-0.11%) $80.10/1 $80.15/2 7,448,933 Above Avg.As of 12:48 PM ET, 08/12/2014

Schwab Equity Rating®Data as of 08/08/2014*

Fourth Quarter EarningsAnnouncement Expected

Margin Requirements

Dividends page user guide.

Show Yearly Growth | Hide Yearly Growth

■Regular Dividend ■Special Dividend ■Extra Dividend _ Stock Price

Ci

Trade

Summary News Charts Ratings Earnings Statements Peers Ratios Dividends Reports Options PreferredsDividends

Calendar Year Dividend Payments by Ex-Date as of 8/11/2014

Upcoming Dividend

As of 06/10/2014 an upcoming dividend has notbeen announced for PG. Upcoming ex and pay

dates will be posted here once declared.

Dividend Rate

Annual Dividend Rate (IAD)as of 06/11/2014

Annual Dividend Yield

Yearly | Interim

1.21 12%

1.55

2.062.11

2014 (YTD)20132012201120102009200820072006

Calendar Year Dividend Payments by Ex-Date Open All?

?

?

2014 Dividends

Announce Date Ex-Dividend Date Payment Date Dividend Type Amount

April 07, 2014 April 23, 2014 May 15, 2014 Regular $0.6436

Jan 14, 2014 Jan 22, 2014 Feb 18, 2014 Regular $0.6015

2013 Dividends $2.37

2012 Dividends $2.21

-

+

+

$2.57

3.21%

1.25

$90.00

80.00

70.00

60.00

50.00

40.00

1.38

2.37

14%11%

7%7%

$80.10 $80.15 7,448,933 Above Avg.

Summary News Charts Ratings Earnings Statements Peers Ratios Dividends Reports Options Preferreds

Calendar Year Dividend Payments by Ex-Date as of 8/11/2014

1.5514%14%14%11%

Dividend Total

Total of all dividends with an ex-date in 2009

$1.72Dividend Type Amount Ex-Date Year

■Regular $1.72 2009

New online dividends research tool

OI-Fa14-Q3-33



Past performance is no guarantee of future results. For current month end and standardized returns visit www.blackrock.com/ga. Before investing, carefully consider the fund’s investment objectives, risks, charges, and expenses. Call 1-800-435-4000 or visit www.schwab.com for a prospectus containing this and other information. Read it carefully. *Source: Morningstar as of 12/31/13. There are 179 10-year rolling periods (using monthly returns) from inception (2/28/89) to 12/31/13, and the lowest cumulative return was 104% for Investor A shares (not including sales charge).Prepared by BlackRock Investments, LLC. ©2014 BlackRock, Inc. All rights reserved. BLACKROCK, INVESTING FOR A NEW WORLD and SO WHAT DO I DO WITH MY MONEY are registered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. USR-3246. Charles Schwab & Co., Inc., member SIPC, receives remuneration from fund companies and/or their affiliates in the Mutual Fund OneSource®

service for record keeping, shareholder services and other administrative services. Charles Schwab & Co., Inc. Member SIPC. (0214-0406)

BLESSED WITH LONG LIFE.HIT BY LOW YIELDS. TIME TO MAKE A CHANGE.

“SO WHAT DO I DO WITH MYMONEY?®”

Today, the chance of outliving your money has never been more real. A globally diversified investment strategy with a 25-year history of protecting and growing assets can change the odds in your favor.

BlackRock GlobalAllocation Fund (MDLOX) has doubled your money over any 10-year period.*

See for yourself at gachart.com/growth

Value Line AssetAllocation Fund (VLAAX)

Included on the

Q3 2014 Mutual FundOneSource Select List®

Let Us Be A Part of YourFinancial Future

Trusted by Investors for Over 60 Years

1950

1952

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Value Line Fund(VLIFX)

Income and Growth Fund(VALIX)

Premier Growth Fund(VALSX)

Larger Companies Fund(VALLX)

Small Cap Opportunities Fund(VLEOX)

Asset Allocation Fund(VLAAX)

Value Line Funds Availablethrough Charles Schwab:

Past performance is no guarantee of future results. Investors should carefully consider the investment objectives, risks, charges and expense of a fund. This and other important information about a fund is contained in the fund’s prospectus. For more complete information about these Value Line Funds and a copy of a prospectus, contact Schwab at 800-435-4000 or go to www.schwab.com/mutualfunds, or contact your financial advisor. Read the prospectus carefully before you invest or send money.There are risks associated with investing in small and mid-cap stocks, which tend to be more volatile and less liquid than stocks of large companies, including the risk of price fluctuations.Charles Schwab & Co., Inc., Member SIPC, receives remuneration from fund companies and/or their affiliates in the Mutual Fund OneSource® service for recordkeeping, shareholder services and other administrative services. The amount of fees Schwab or its affiliates receive from funds participating in the Mutual Fund OneSource service is not considered in the Select List selection, nor does any fund pay Schwab to be included in the Select List (0814-4322).

OI-Fa14-Qtr3-34dOI_Fa14_34_Ads.indd 34 7/22/14 11:42 AM

research

How Funds Are SelectedTo build the Schwab Mutual Fund OneSource Select List and the Schwab Income Mutual Fund Select List, Charles Schwab Investment Advisory, Inc. (CSIA) starts by analyzing the funds tracked by Morningstar using quantitative and qualitative selection criteria described below. Then, based on its analysis, CSIA builds the Mutual Fund OneSource Select List and Income Select list by selecting the most favorably evaluated OneSource funds, including Schwab Funds and Laudus Funds (“Schwab Affiliate Funds”), within each Morningstar category.

Most of the funds on the List are actively managed OneSource funds. In addition, CSIA also includes up to one Schwab Affilate Fund that is a market-cap weighted index fund for each of the large-cap, small-cap, international and taxable bond asset classes, and one Schwab Affiliate Fund that is a fundamentally weighted index fund for each of the large cap, small cap, developed large cap international, developed small cap international and emerging market asset classes. Visit the OneSource Select List on schwab.com to view the Select List online and to learn more about how index funds are selected.

Eligibility RequirementsEach OneSource Select List and Income Select List fund must: Be no-load and open to new investors at Schwab in all 50 states. Have a minimum three-year performance track record (except funds that are

listed below the “Leading Schwab Affiliate Funds” sections of the lists, which are eligible if they have a minimum 12 months performance track record under their current management and/or current investment objectives and strategy).

Have at least $40 million in assets (except for small-cap value, high yield, multisector bond, world bond, emerging market equity and bond, diversified Pacific Asia, Pacific Asia ex-Japan, Europe, Japan, Latin America, convertibles, retirement income, target date and specialty funds, which require at least $20 million in assets). To meet this requirement, assets in multiple share classes of the same fund may be aggregated.

Additionally, each Income Select List fund must: Demonstrate a track record of making income distributions in each of the

prior five calendar years (or during every full calendar year since inception in the case of funds with less than a five-year track record, including Schwab Affiliate Funds which may have a 12-month track record).

For fixed income funds, make income distributions on at least a quarterly basis; and—with the exception of the high-yield, multisector and emerging markets bond categories—not allocate in excess of 30% to issues rated below investment grade.

For equity funds, offer a current yield in excess of their category average; and for equity funds with “dividend” or “income” in their name, make income distributions at least quarterly.

With the exception of specialty sector (REITs) and fixed income funds, not allocate in excess of 33% to any single sector.

Selection CriteriaActively Managed OneSource Funds, including Schwab Affiliate Funds, are evaluated by CSIA based on a quantitative analysis of risk, performance, expenses, active share (when meaningful), assets under management and asset flows. CSIA also may apply additional qualitative factors to its analysis to enhance its overall evaluation of a fund, including, for example, changes in a fund’s investment strategy or management structure, portfolio manager tenure, whether a fund’s investment style and portfolio holdings are representative of its investment category, portfolio composition and turnover rates, consistency of a fund’s performance and CSIA’s evaluation of the fund over time, and other risk and diversification considerations.

In addition, for the Income Select List, those funds with the best capital preservation attributes and investment strategies that focus on selecting income-generating securities will receive preference when selecting from similarly rated funds with comparable yield characteristics.

“Leading Schwab Affiliate Funds” sections of the Select List and Income Select List feature eligible actively managed Schwab Affiliate Funds that generally fall into the top 35 percent of all CSIA-evaluated funds (including OneSource and non-OneSource funds) in their respective Morningstar categories. If two or more Schwab Affiliate Funds that fit this criteria also have similar investment styles, CSIA may determine that only the most favorably evaluated fund(s) be included in the list. Because Schwab Affiliate Funds included in the “Leading Schwab Affiliate Funds” section of the OneSource Select List and Income Select List are selected independently from other actively managed funds on the list, they may have a less favorable evaluation overall than the funds listed in the “Leading Third-Party Funds” section of the list.

The Index Funds section of the Select List features only Schwab Affiliate Funds. It includes up to one market capitalization weighted index fund for each of the large-cap, small-cap, international and taxable bond asset classes and one fundamentally weighted index fund for each of the large cap, small cap, developed large cap international, developed small cap international and emerging market asset classes. A market capitalization weighted index fund is a fund that attempts to match the performance of an established list of securities, where the securities with the highest market capitalization (total market value of outstanding stock) get the most weight. A fundamentally weighted index fund is a fund that attempts to match the performance of an established list of securities, where the securities with the highest fundamental value (measured based on criteria such as sales, cash flow, dividends and stock buybacks) get the most weight. A Schwab Affiliate fund that is market capitalization weighted and a Schwab Affiliate Fund that is fundamentally weighted are included unless no funds meet Schwab’s quantitative and qualitative evaluation criteria.

The Schwab affiliate index fund that receives the most favorable evaluation by CSIA in each asset class is included on the Select List. If two index funds receive equal evaluations, CSIA will generally include the fund that has the lower expense ratio.

“Leading Third-Party Funds” sections of the OneSource Select List and Income Select List feature eligible actively managed third-party OneSource funds that generally fall within the top 35 percent of all CSIA-evaluated funds within a given Morningstar category and that receive the most favorable evaluations in their respective categories.

Mutual Fund Onesource select List®

and Income Mutual Fund select List®

analysis and commentary on actively Managed Mutual Funds by charles schwab Investment advisory, Inc.

With thousands of mutual funds available, finding the right funds for your portfolio can seem more time-consuming and difficult than ever. The Mutual Fund OneSource Select List, consisting only of OneSource funds available without a load or transaction fee, is a smart solution that can help you make confident investment decisions.

35 Mutual Fund Onesource select List® 46 eTF select List®

44 Income Mutual Fund select List® 50 argus

(continued on page 36)

Fall 2014 • On InvesTIng 35

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(continued from page 35)

For the OneSource Select List, CSIA generally includes the five most-favorably evaluated funds in each of the large-cap, small-cap, intermediate-term bond, municipal national intermediate and foreign large blend asset categories and the two most favorably evaluated funds in all other asset categories. If two or more of the most favorably evaluated funds within an asset category have similar investment styles, CSIA may substitute a less-favorably evaluated fund for one or more of those funds to provide a more diverse selection of fund investment strategies.

For the Income Select List, CSIA generally includes no more than the two most favorably evaluated funds in each asset category, except for the intermediate-term bond category, which may feature up to five funds.

Upside and downside capture ratios: a measure of how much a fund moves in comparison to the broad market when the market goes up or down.

Upside capture ratio: For the months in which the market return was positive, what was the ratio of the fund’s returns to the market’s returns? Upside capture of 110% means that in up markets, the fund went up 10% more than the market did. For investors who are concerned with growth in rising markets, looking for a fund with a high upside capture ratio (above 100%) can be useful.

Downside capture ratio: For the months in which the market return was negative, what was the ratio of the fund’s returns to the market’s returns? Downside capture of 110% means that in down markets, the fund went down 10% more than the market did. For investors who are concerned with minimizing losses, looking for a fund with a low downside capture ratio (below 100%) can be helpful.

Generally speaking, it’s good for a fund to have an upside capture ratio at least as high as its downside capture ratio, and preferably higher. A fund delivering 110% of the market’s positive returns but only 105% of the negative returns means that the fund has delivered more of the market’s upside than downside (which is desirable).

The “holy grail” for many investors is a fund with a low downside capture ratio that has an upside capture ratio of 100% or more.

The absolute level of upside capture and downside capture can be important as well, providing an overall indication of the fund’s risk relative to the market. If both ratios are around 120%, it means that the fund has been more volatile than the market (even if upside is higher than downside). If both ratios are around 80%, it means that the fund has been less volatile than the market.

As with most metrics, these ratios are backward looking (in this case, over the past three years). Just because a fund has delivered a certain percentage of the market’s returns in past up markets and down markets doesn’t mean that it is guaranteed to do the same in future up or down markets.

In a three-year period with very few up months or very few down months, the upside or downside capture ratio can be hard to measure.

These ratios provide no information about the fund’s overall returns and are simply a measure of performance relative to the market in up periods and in down periods.

Additional Important InformationMore than 3,500 funds participate in the Mutual Fund OneSource® service. Only these funds, including Schwab Affiliate Funds, are eligible for the Select Lists. Schwab receives remuneration from fund companies, and/or their affiliates, in the Mutual Fund OneSource service, including Schwab Affiliate Funds, for record keeping, shareholder services and other administrative services. Schwab and its affiliates also receive fees from Schwab Affiliate Funds for investment advisory and fund administration services. The aggregate fees Schwab or its affiliates receive from Schwab Affiliate Funds (see fund prospectuses for more details) are greater than the remuneration Schwab receives from other fund companies participating in Schwab’s Mutual Fund OneSource service. The amount of fees Schwab or its affiliates receive from funds participating in the Mutual Fund OneSource service is not considered in the Select Lists selection, nor does any fund pay Schwab to be included in the Select Lists. Eligible funds are selected based solely on the quantitative and qualitative criteria described on pages 35 and 36.

Schwab Affiliate Funds include Schwab Funds and Laudus Funds. Schwab Funds and Laudus Funds are advised by Charles Schwab Investment Management, Inc. Schwab Funds and the Laudus MarketMasters Funds are distributed by Charles Schwab & Co., Inc. and Laudus Funds (except Laudus MarketMasters Funds) are distributed by ALPS Distributors, Inc.

Investing in Mutual Funds at SchwabInvestors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can obtain a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. Investment value will fluctuate and shares, when redeemed, may be worth more or less than original cost.Trades in no-load mutual funds participating in the Mutual Fund OneSource service (including Schwab Funds), as well as certain other funds, are available without loads or transaction fees when placed through schwab.com or one of our automated phone channels. However, for each of these trades placed through a broker, a $25 service charge applies. Additionally, Schwab will charge a short-term redemption fee (STR) if you sell shares of OneSource funds held for 90 days or less. Schwab reserves the right to exempt some funds from the STR fee, including certain Schwab Funds, which may charge a separate redemption fee, and funds that accommodate short-term trading. Certain funds may charge a redemption fee separate, and in addition to, the OneSource STR. All other funds available at Schwab are subject to a transaction fee when bought and sold and may be subject to fees assessed by the fund itself. Schwab reserves the right to change the funds it makes available without transaction fees and reinstate fees on any funds.

Information on the Mutual Fund OneSource Select List®

No mention of particular funds or fund families here should be construed as a recommendation, or considered an offer to sell, or a solicitation to buy any securities. This information is provided for general information purposes only and should not be considered an individualized recommendation or personalized investment advice. The securities listed may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Schwab or its employees may sometimes hold positions in the securities listed here. Charles Schwab & Co. Inc. is the underwriter and distributor of Schwab Funds®.

Except as noted below, all data provided by Morningstar, Inc. ©2014 by Morningstar, Inc. All rights reserved. The information contained herein is the proprietary information of Morningstar, Inc., and may not be copied or redistributed for any purpose and may only be used for noncommercial, personal purposes. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. Morningstar, Inc., shall not be responsible for investment decisions, damages, or other losses resulting from use of the information. Morningstar, Inc., has not granted consent for it to be considered or deemed an “expert” under the Securities Act of 1933. With respect to SchwabFunds, Charles Schwab Investment Management, Inc. provides the following data: total net assets, actual and average annual total returns, after-tax returns, annualized quarter-end performance, top ten holdings, portfolio breakdowns, expense ratios, and, for Schwab bond funds, credit ratings, average maturity, and 30-day SEC yield.

Charles Schwab Investment Advisory (CSIA) is a separately registered investment advisor and an affiliate of Charles Schwab & Co., Inc. Among other functions, CSIA oversees the selection of investments and ongoing monitoring of the Select List and produces market commentary and other investment advice for Schwab clients and financial consultants. (0114-0381)

charLes schwab • Fall 201436

Large-cap U.s. sTOck FUndsperspectives and second Quarter 2014 summaryWith U.S. stocks near record highs, we believe there is greater likelihood of a pullback, as sentiment measures show excess optimism and geopolitical tensions are elevated, while there is a risk of a second half inflation scare. However, we continue to believe a correction would be a healthy pause in an ongoing secular bull market. U.S. stocks still look attractive to us, with the economy continuing to gather momentum while monetary policy remains quite easy. Corporate confidence is improving and the labor market is growing steadily, which can result in higher wages to reinforce consumer spending setting into motion a self-sustaining economic expansion.

Domestic equity experienced another quarter of strong positive returns across all categories, supported by ongoing cyclical productivity increases, accommodative Federal Reserve policies, strong corporate profit margins, and a resurgence in manufacturing.

As compared to small- and mid-cap stocks, large-cap U.S. stocks outperformed slightly. The large-cap blend category had the best relative performance, returning modest gains of 4.63%, while large value and large growth were relatively lower with returns of 4.53% and 4.18%, respectively.

All perspectives are as of July 17, 2014 For the latest up-to-date perspectives, please visit schwab.com

FOR THE QUARTER ENDED JUNE 30, 2014

FUND NAME (FUND INcEptIoN DAtE)MorNINgstArcAtEgory

QUotEsyMbol

AvErAgE ANNUAlIzED totAl rEtUrN UpsIDE MArkEt cAptUrE

DowNsIDE MArkEt cAptUrE

gross ExpENsE rAtIoa

NEtExpENsErAtIoa

totAl AssEts

($M) 1

yEAr3

yEArs5

yEArs10

yEArssINcE

INcEptIoN

lEADINg schwAb AFFIlIAtE FUNDsd

schwab core Equity Fund (07/01/96) large blend swANx 26.03 15.14 17.16 8.01 8.44 100.15 112.00 0.73 0.73 2,392

laudus U.s. large-cap growth Fund (10/14/97) large growth lgIlx 26.70 15.36 19.36 10.47 6.36 99.20 107.97 0.82 0.77 2,203

schwab Dividend Equity Fund (09/02/03) large value swDsx 23.01 16.17 17.90 8.33 9.40 97.69 97.81 0.89 0.89 2,035

FUNDAMENtAl INDEx FUNDs

schwab Fundamental U.s. large co Index Fund (04/02/07) large value sFlNx 23.86 16.45 20.84 — 7.78 103.17 108.60 0.41 0.35 3,835

MArkEt cAp-wEIghtED INDEx FUNDs

schwab s&p 500 Index Fund (05/20/97) large blend swppx 24.51 16.50 18.73 7.75 6.91 99.65 99.89 0.09 0.09 19,652

lEADINg 3rD pArty FUNDs

glenmede large cap core port (02/27/04) large blend gtlox 30.19 17.99 20.77 9.47 9.21 111.75 116.69 0.86 0.86 609

Janus contrarian t (02/29/00) large blend JsvAx 32.86 17.58 16.81 10.06 7.96 107.76 110.47 0.76 0.76 4,178

oakmark I (08/05/91) large blend oAkMx 27.71 19.40 21.50 9.19 13.40 109.50 100.29 0.95 0.95 15,533

parnassus core Equity Investor (09/01/92)c large blend prblx 26.99 18.26 18.24 10.29 11.01 94.07 72.47 0.87 0.87 9,827

tIAA-crEF social choice Eq retail (03/31/06) large blend tIcrx 23.53 15.56 18.63 7.98 7.33 97.92 103.27 0.48 0.48 2,104

glenmede large cap growth (02/27/04) large growth gtllx 32.81 17.87 21.29 9.72 9.36 112.55 119.53 0.87 0.87 404

INtEch U.s. growth t (07/06/09) large growth JDrtx 26.78 15.54 19.14 6.93 19.67 94.32 94.86 0.81 0.81 328

Morgan stanley Inst growth A (01/02/96)e large growth MsEgx 28.55 13.79 20.71 9.32 8.77 98.77 102.90 0.96 0.96 3,416

tIAA-crEF large-cap growth retail (03/31/06) large growth tIrtx 28.37 16.62 18.56 — 7.91 101.23 102.66 0.85 0.85 2,657

tIAA-crEF growth & Income retail (03/31/06) large growth tIIrx 26.27 16.43 18.29 9.56 9.36 99.86 100.92 0.79 0.79 4,561

Delaware value® A (09/14/98)e large value DDvAx 16.73 15.55 18.44 7.89 7.24 95.84 79.92 1.02 1.02 5,505

commerce value (03/03/97) large value cFvlx 19.38 16.97 19.59 7.83 6.46 91.71 77.09 0.66 0.66 217

INtEch U.s. value t (07/06/09) large value Jrstx 25.27 17.12 19.30 — 19.83 102.52 101.72 0.95 0.95 125

JpMorgan Equity Income A (02/18/92)e large value oIEIx 15.22 14.54 18.33 8.15 8.72 91.79 80.15 1.09 1.05 7,669

principal Equity Income A (05/31/39)e large value pQIAx 15.69 12.97 16.57 7.71 8.78 89.30 86.28 0.93 0.93 5,935

pErForMANcE bENchMArks

schwab 1000 Index® (Dividends reinvested) 25.09 16.46 19.19 8.22 —

s&p 500 Index® (Dividends reinvested) 24.61 16.58 18.83 7.78 —

New to the select list this quarter

Asset Class and Performance Benchmark Definitionslarge-cap U.s. stock funds invest primarily in stocks that fall in the top 70% of the U.s. market capitalization range as defined by Morningstar, Inc. growth funds invest in companies that may be experiencing rapid growth in earnings, sales or return on equity. value funds invest in companies that may have share prices below estimated fair market value, undervalued assets, an opportunity to “turnaround” or lower price-to-earnings or price-to-book ratios. blend funds invest in a combination of value and growth stocks.the s&p 500® Index includes common stocks of 500 widely held companies. s&p 500 is a registered trademark of the Mcgraw-hill co., Inc.If an expense waiver was in place during the period, the net expense ratio was used to calculate fund performance. A net expense ratio lower than the gross expense ratio may reflect a cap on or contractual waiver of fund expenses. please read the fund prospectus for details on limits or expiration dates for any such waivers.

Performance quoted is past performance and is no guarantee of future results. Current performance may be lower or higher. Visit schwab.com for month’s end performance information. Investment value will fluctuate, and shares, when redeemed, may be worth more or less than original cost.


research

MId- and sMaLL-cap U.s. sTOck FUndsperspectives and second Quarter 2014 summaryWe believe that second-half domestic economic momentum should buoy mid- and small-cap stocks, as improved corporate confidence has been seen in both large and small companies. Moreover, smaller domestically-oriented companies could be bolstered by potential strength in the U.S. dollar as the Fed moves toward normalizing monetary policy while other major global central banks are likely to lean more toward accommodative policies. A potential headwind is the recent ramp up in valuations concerns toward smaller company stocks. However, we continue to recommend sticking to your long-term portfolio asset allocations and not making market cap bets.

The mid- and small-cap fund categories also experienced modest returns for the quarter, with the largest gains found in mid-cap value at 4.67%, followed by mid-cap blend at 3.90%, and small-cap value which returned 2.91%. Small-cap growth at 0.57% had the lowest returns relative to the small- and mid-cap universe, followed by small-cap blend with a return of 2.31%, and mid-cap growth at 2.66%.




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schwab small-cap Equity Fund (07/01/03) small blend swscx 28.87 18.21 23.01 9.56 12.19 123.42 142.30 1.11 1.11 668 FUNDAMENtAl INDEx FUNDs

schwab Fundamental U.s. small co Index Fund (04/02/07) small blend sFsNx 27.39 15.47 22.92 — 9.14 115.14 144.59 0.48 0.35 1,227 MArkEt cAp-wEIghtED INDEx FUNDs

schwab small-cap Index Fund (05/20/97) small blend swssx 23.62 14.70 21.33 9.58 9.10 105.76 128.76 0.20 0.17 2,636 lEADINg 3rD pArty FUNDs

First Eagle Fund of America A (11/19/98)e Mid-cap blend FEFAx 19.92 14.06 17.97 9.89 9.17 95.76 94.33 1.42 1.42 3,178 stewart capital Mid cap (12/29/06) Mid-cap blend scMFx 25.51 14.29 20.31 — 9.47 92.12 99.75 1.56 1.21 81 Dreyfus/the boston co sm/Md cp gr A (03/31/09)e Mid-cap growth DbMAx 15.76 13.30 18.92 10.04 20.77 95.88 98.45 1.02 1.02 971 Janus Enterprise t (09/01/92) Mid-cap growth JAENx 22.15 14.12 20.12 10.63 10.77 88.71 93.03 0.93 0.93 3,493 tIAA-crEF Mid-cap value retail (10/01/02) Mid-cap value tcMvx 25.91 15.01 19.97 10.37 13.30 98.56 109.27 0.76 0.76 5,131 victory Established value A (05/05/00)e Mid-cap value vEtAx 20.52 12.53 18.84 10.46 9.70 97.91 109.58 1.05 1.05 2,210 gabelli small cap growth AAA (10/22/91) small blend gAbsx 22.45 15.04 19.88 10.82 13.49 100.49 113.61 1.39 1.39 3,840 glenmede small cap Equity Adv (03/01/91) small blend gtcsx 28.41 16.39 22.56 10.54 11.57 114.43 135.61 0.91 0.91 1,494 Northern small cap core (09/30/99) small blend Nsgrx 23.86 15.23 20.77 9.61 7.46 105.88 124.78 0.90 0.79 184 Nuveen NwQ small-cap value A (12/09/04)e small blend NscAx 21.21 16.77 23.23 — 8.13 108.41 100.10 1.38 1.38 327 touchstone small cap value opp A (07/31/03)e small blend tsoAx 25.68 15.28 18.04 8.89 11.23 112.49 121.69 2.47 1.51 178 AMg Managers Emerging opps svc (06/30/94) small growth MMcFx 23.02 16.52 20.32 8.76 13.78 107.90 119.21 1.62 1.43 211 Eaton vance tx-Mgd small-cap A (09/25/97)e small growth EtMgx 20.23 9.90 17.71 9.03 5.11 92.17 117.93 1.27 1.27 107 Janus venture t (04/30/85) small growth JAvtx 23.96 15.84 22.15 10.39 12.51 97.47 99.92 0.94 0.94 2,416 Neuberger berman small cap growth A (05/27/09)e small growth NsNAx 15.01 9.35 15.81 7.90 16.89 86.15 108.29 1.83 1.26 87 rice hall James Micro cap Instl (07/01/94) small growth rhJsx 26.46 17.02 20.63 8.08 12.48 108.70 117.21 1.55 1.55 40 Delaware small cap value A (06/24/87)e small value DEvlx 17.67 12.22 20.56 9.06 11.67 98.42 113.36 1.25 1.25 2,641 Diamond hill small cap A (12/29/00)e small value Dhscx 19.03 13.15 17.91 9.16 11.94 101.11 114.56 1.33 1.33 1,398 victory small company opportunity A (03/26/99)e small value ssgsx 17.38 12.01 18.24 9.29 10.15 #N/A #N/A 1.35 1.35 2,227 wells Fargo Advantage spec smcp val A (05/07/93)e small value EspAx 21.86 13.65 19.21 8.43 11.71 #N/A #N/A 1.41 1.35 690 pErForMANcE bENchMArk

russell 2000 Index® (Dividends reinvested) 23.64 14.57 20.21 8.70 —New to the select list this quarter

Asset Class and Performance Benchmark DefinitionsMid-cap U.s. stock funds invest primarily in stocks that fall in the next 20% of the U.s. market capitalization range following large-cap stocks. small-cap U.s. stock funds generally invest in stocks falling in the bottom 10% of the range. Definitions based on Morningstar, Inc.growth funds invest in companies that may be experiencing rapid growth in earnings, sales or return on equity. value funds invest in companies that may have share prices below estimated fair market value, undervalued assets, an opportunity to “turnaround” or lower price-to-earnings or price-to-book ratios. blend funds invest in a combination of value and growth stocks. the russell 2000® Index consists of the 2,000 smallest companies in the russell 3000® Index, which represents approximately 98% of the total market value of publicly available domestic equities.small-cap funds are subject to greater volatility than those in other asset categories.If an expense waiver was in place during the period, the net expense ratio was used to calculate fund performance. A net expense ratio lower than the gross expense ratio may reflect a cap on or contractual waiver of fund expenses. please read the fund prospectus for details on limits or expiration dates for any such waivers.



InTernaTIOnaL sTOck FUndsperspectives and second Quarter 2014 summaryWe remain positive on European equities despite the economic slowdown, as a potential rebound in eurozone earnings could propel the next move higher. Meanwhile, we favor Chinese stocks within an emerging market stock allocation, as we don’t believe a crisis in China is likely since policymakers have plenty of ammunition to stimulate. Additionally, the rebound in broader emerging stocks may not be sustainable due to downside risks to growth and earnings, and the potential for disappointing leadership changes in some countries is high. Finally, we are neutral on Japanese stocks, looking for more convincing details and action on proposed government reforms. Latin America Stock had the strongest category returns at 7.63%, followed closely by

Japan at 7.29%. Europe Stock (1.39%) had the worst international category performance, as concern

increased around a stalling of the recovery in those countries. Foreign fund investors had modest gains across almost all categories, with Foreign Large

Value providing the best performance with returns of 4.07%. This was followed by Foreign Large Blend with 3.71%, while Foreign Large Growth, Foreign Small/Mid Value and Foreign Small/Mid Growth had lower relative returns of 3.56%, 3.14% and 2.59%, respectively.




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schwab® International core Equity Fund (05/30/08) Foreign large blend sIcNx 26.95 11.04 14.11 — 3.13 107.24 83.88 1.10 0.86 219 laudus Mondrian International Equity select (06/17/08)b,* Foreign large value lIEFx 25.82 8.95 11.11 — 1.58 95.34 78.76 1.26 1.12 158

FUNDAMENtAl INDEx FUNDs

schwab Fundamental Emerg Mkts lg co Idx (01/31/08) Diversified Emerging Mkts sFENx 16.80 -2.17 7.38 — 1.41 90.33 127.50 0.89 0.50 371 schwab Fundamental Intl large co Idx (04/02/07) Foreign large value sFNNx 29.10 7.54 11.66 — 2.48 112.93 107.37 0.52 0.35 973 schwab Fundamental Intl small co Idx (01/31/08) Foreign small/Mid blend sFIlx 25.93 8.54 14.40 — 6.67 94.98 80.26 0.94 0.50 268 MArkEt cAp-wEIghtED INDEx FUNDs

schwab International Index Fund (05/20/97) Foreign large blend swIsx 23.22 7.99 11.78 6.99 4.93 105.99 96.61 0.23 0.19 2,637 lEADINg 3rD pArty FUNDs

Matthews china Dividend Investor (11/30/09) china region McDFx 12.48 6.47 — — 9.74 82.42 74.39 1.24 1.24 133 Matthews china small companies (05/31/11) china region McsMx 18.70 0.88 — — -0.47 80.61 99.84 2.04 1.50 24 baron Emerging Markets retail (12/31/10) Diversified Emerging Mkts bExFx 23.62 8.48 — — 6.99 101.68 88.95 1.90 1.50 996 harding loevner Emerging Markets Advisor (11/09/98) Diversified Emerging Mkts hlEMx 19.12 4.83 11.89 12.91 13.70 101.32 106.00 1.46 1.46 2,525 Matthews Asia growth Investor (10/31/03) Diversified pacific/Asia MpAcx 11.48 8.04 14.02 10.10 10.42 88.20 74.13 1.12 1.12 836 FMI International (12/31/10) Foreign large blend FMIJx 18.19 14.11 — — 12.88 75.73 29.64 1.15 1.00 347 lazard International strategic Eq open (02/03/06) Foreign large blend lIsox 23.65 11.88 15.49 — 6.60 109.52 82.86 1.10 1.10 4,937 Manning & Napier International s (08/27/92) Foreign large blend ExItx 23.42 5.09 12.10 8.56 8.91 101.55 105.02 1.14 1.11 760 tIAA-crEF International Eq retail (03/31/06) Foreign large blend tIErx 23.25 7.61 13.56 7.26 4.26 111.68 105.47 0.88 0.88 3,756 Artisan International Investor (12/28/95) Foreign large growth ArtIx 22.19 12.29 15.00 8.80 10.54 108.67 79.91 1.20 1.20 17,860 scout International (09/14/93) Foreign large growth UMbwx 14.30 5.65 12.02 8.54 8.93 92.20 90.69 1.02 1.02 8,453 American beacon Intl Equity Inv (08/01/94) Foreign large value AAIpx 24.04 8.53 12.49 7.07 7.68 107.18 95.57 1.05 1.05 2,414 brandes International Equity I (12/27/96)b,* Foreign large value bIIEx 27.45 8.60 10.13 6.21 9.38 103.63 90.81 1.03 1.00 548 oakmark International small cap I (11/01/95) Foreign small/Mid blend oAkEx 24.52 9.54 16.37 9.91 10.82 97.07 78.16 1.35 1.35 3,118 lazard International small cap Eq open (02/13/97) Foreign small/Mid growth lzsMx 27.32 11.77 16.11 6.91 7.25 95.94 66.30 1.48 1.43 74 oberweis International opportunities (02/01/07) Foreign small/Mid growth obIox 34.83 20.29 25.94 — 11.00 138.85 81.98 2.20 1.60 449 Dws latin America Equity A (05/29/01)e latin America stock slANx 9.08 -4.35 5.49 12.81 10.73 107.81 150.25 1.84 1.72 466 Matthews Asia small companies Inv (09/15/08) pacific/Asia ex-Japan stk MsMlx 15.59 4.89 17.23 — 17.75 90.34 92.03 1.47 1.47 582 Matthews Asian growth & Inc Investor (09/12/94) pacific/Asia ex-Japan stk MAcsx 8.06 7.07 12.03 11.23 10.73 75.48 62.66 1.08 1.08 4,632 perkins global value t (06/29/01) world stock JgvAx 17.58 11.92 14.18 6.41 7.40 71.13 33.89 1.03 1.03 278 oakmark global I (08/04/99) world stock oAkgx 24.19 13.52 16.80 9.44 11.77 108.44 73.98 1.13 1.13 3,714 pErForMANcE bENchMArks

MscI EAFE Index (Dividends reinvested) 23.57 8.10 11.67 6.93 —New to the select list this quarter * $50,000 initial minimum investment

Asset Class and Performance Benchmark DefinitionsForeign stock funds typically have less than 20% of assets invested in the United states. Funds that do not have a specific growth or value orientation compared to a benchmark are classified as blend funds. world stock funds invest primarily in equity securities of issuers located throughout the world and generally invest at least 20% of assets in the United states. regional funds generally hold high concentrations of securities from one specific geographic region. Emerging markets funds generally invest in securities from less developed countries.International investments are subject to risks such as currency fluctuations and political instability. Investing in emerging markets can accentuate these risks. If an expense waiver was in place during the period, the net expense ratio was used to calculate fund performance. A net expense ratio lower than the gross expense ratio may reflect a cap on or contractual waiver of fund expenses. please read the fund prospectus for details on limits or expiration dates for any such waivers.



research

secTOr FUndsperspectives and second Quarter 2014 summaryWe believe the global picture is improving, led by the U.S., while Europe and Japan have rebounded modestly, China has stabilized, and there is hope for India of much needed economic reform. As a result, we are positive on sectors tied to an accelerating economic cycle such as energy, industrials, and information technology. Likewise, given our outlook for the economic cycle, we believe consumer staples, telecom, and utilities are likely to underperform. Finally, after rallying this year, precious metal stocks could see some volatility as gold prices may be buoyed by elevated geopolitical tensions and the potential for increased inflation concerns, while a stronger-than-expected improvement in the U.S. economy to foster expectations of a sooner-than-expected first interest rate hike by the Fed could pressure the price of the commodity.

The Specialty categories had a broad range of positive returns across most categories. Notably, the Equity Precious Metals (13.74%) category experienced significantly positive returns. Financial (1.37%) and Communications (3.82%) had the worst relative performance.




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heALth funDS (CAtegORY AVeRAge)† 36.66 22.81 22.12 11.35schwab health care Fund (07/03/00) health swhFx 31.60 21.50 22.02 12.24 9.42 104.45 40.05 0.83 0.82 961 LeADIng 3RD PARtY funDS

equItY eneRgY funDS (CAtegORY AVeRAge)† 32.33 6.30 13.31 12.02guinness Atkinson global Energy (06/30/04) Equity Energy gAgEx 46.08 7.33 14.36 14.79 14.80 123.58 156.08 1.35 1.35 106 IcoN Energy s (11/05/97) Equity Energy IcENx 20.46 7.25 13.53 12.63 12.50 102.95 123.60 1.29 1.29 764 equItY LImIteD PARtneRShIP funDS (CAtegORY AVeRAge)† 24.94 15.01 — —tortoise Mlp & pipeline Investor (05/31/11)e Energy limited partnership tortx 30.97 22.59 — — 22.94 98.81 10.49 1.29 1.33 1,790 fInAnCIAL funDS (CAtegORY AVeRAge)† 19.61 13.91 14.17 3.43burnham Financial services A (06/07/99)e Financial bUrkx 17.74 15.31 11.35 5.59 12.16 82.94 28.86 1.81 1.80 86 hennessy large cap Financial Investor (01/03/97) Financial hlFNx 19.37 16.30 14.76 5.40 8.25 120.22 96.17 1.57 1.57 100 heALth funDS (CAtegORY AVeRAge)† 36.66 22.81 22.12 11.35Janus global life sciences t (12/31/98) health JAglx 45.85 27.75 24.80 12.34 11.69 114.81 22.04 0.95 0.95 2,224 nAtuRAL ReSOuRCeS funDS (CAtegORY AVeRAge)† 26.79 2.37 11.86 10.59putnam global Natural resources A (07/24/80)e Natural resources EbErx 23.78 1.07 10.41 8.51 7.61 102.12 149.11 1.23 1.23 357 PReCIOuS metALS funDS (CAtegORY AVeRAge)† 20.80 -19.27 -3.12 5.88First Eagle gold A (08/31/93)e Equity precious Metals sggDx 10.21 -17.32 -2.73 6.44 6.33 -12.62 99.05 1.25 1.25 1,467 tocqueville gold (06/29/98) Equity precious Metals tglDx 27.98 -16.85 3.85 8.95 13.51 -2.83 123.32 1.35 1.35 1,549 gLOBAL ReAL eStAte funDS (CAtegORY AVeRAge)† 13.46 8.65 15.27 7.54Janus global real Estate t (07/06/09) global real Estate JErtx 18.01 10.28 17.67 — 18.01 102.16 103.36 1.13 1.13 161 voya global real Estate A (11/05/01)e global real Estate IglAx 8.17 6.60 13.97 8.06 10.86 94.85 101.16 1.24 1.24 5,226 ReAL eStAte funDS (CAtegORY AVeRAge)† 13.14 10.89 22.56 8.91cohen & steers realty shares (07/02/91)b real Estate csrsx 14.14 10.30 22.76 10.42 12.32 83.48 72.67 0.97 0.97 5,862 teChnOLOgY funDS (CAtegORY AVeRAge)† 32.27 12.97 17.99 8.57Matthews Asia science and tech Inv (12/27/99) technology MAtFx 37.12 11.32 17.93 10.38 2.57 112.53 113.69 1.18 1.18 178 Janus global technology t (12/31/98) technology JAgtx 30.29 14.63 19.09 9.92 6.76 106.90 84.47 0.97 0.97 1,075

New to the select list this quarter † reflects load-adjusted returns

Asset Class and Performance Benchmark Definitionssector funds concentrate investments in firms that fall into specific industries that produce related products or services. sector funds, in general, have a low correlation to market indices, such as the s&p 500 Index, so they tend to perform differently than broader market measures. because of their unique investment objectives, it’s unfair to compare sector funds with broader market indices as they will seldom correlate. when evaluating sector fund performance, it’s more appropriate to compare an individual fund’s returns with the average performance of funds in its category.Due to the concentrated nature of sector funds, they can be more volatile than broadly diversified equity funds.If an expense waiver was in place during the period, the net expense ratio was used to calculate fund performance. A net expense ratio lower than the gross expense ratio may reflect a cap on or contractual waiver of fund expenses. please read the fund prospectus for details on limits or expiration dates for any such waivers.Mlp funds invest in the equity securities of master limited partnerships (“Mlps”). Investments in securities of Mlps involve risks that differ from investments in common stock, including risks related to cash flow, dilution and voting rights. Mlp funds also may carry heightened risks including industry concentration, volatility, limited liquidity, issuer-specific risks, valuation and taxation. Many Mlp funds are classified for federal tax purposes as a taxable regular corporation (“c corporation”), and are subject to Us federal income tax on taxable income at corporate income tax rates, as well as state and local income taxes. these corporate taxes and accruals for deferred tax liabilities could substantially reduce a fund’s net assets (reflected in the fund’s NAv), the amount of income available for distribution and the amount of a fund’s distributions. If an Mlp fund is classified for tax purposes as a c corporation, all distributions from a fund’s current or accumulated earnings and profits will be taxable to shareholders as ordinary income.



TaxabLe bOnd FUndsperspectives and second Quarter 2014 summaryTreasury bond yields continued their trend lower in the second quarter. The benchmark 10-year Treasury yield ended the quarter at 2.53%, down from 2.72% at the end of the first quarter. The Fed has continued to reduce the pace of its bond-buying program, and expectations are for Quantitative Easing (QE) to end in the fourth quarter of 2014. With employment improving and inflation moving closer to the Fed’s targeted range, we think the first rate hike will occur sometime in the second half of 2015. We think most fixed income investors should focus on a core portfolio of high-quality mutual funds, and we think that those reaching for yield in the lower-rated segments of the market, like sub-investment grade bonds, should consider moving up in quality.

Taxable Fixed Income had positive performance across all sectors. Emerging Markets Bond returned 4.47% followed by returns of 3.46% and 3.26% for the Long-Term Bond, and Inflation-Protected Bond categories.

The Government Bond categories had positive performance, with longer duration providing stronger returns. Long Government was the best performer at 4.65%, followed by Intermediate Government (2.09%), and Short Government (0.43%).




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schwab gNMA Fund (03/03/03) Intermediate gov’t swgsx 3.92 2.45 3.87 4.58 4.15 74.30 86.05 0.62 0.57 6.03 288schwab Intermediate-term bond Fund (10/31/07) Intermediate-term swIIx 3.24 2.62 5.16 — 4.85 71.81 72.10 0.63 0.46 4.40 363

MArkEt cAp-wEIghtED INDEx FUNDsschwab total bond Market Fund (03/05/93) Intermediate-term swlbx 4.23 3.38 4.46 3.44 5.01 95.97 101.83 0.56 0.29 6.81 986

LeADIng 3RD PARtY funDSlord Abbett Floating rate A (12/31/07)e bank loan lFrAx 2.76 4.94 6.81 — 4.47 75.09 -58.04 0.80 0.80 — 8,613ridgeworth seix Floating rt high Inc I (03/01/06) bank loan sAMbx 5.32 5.25 7.47 — 4.75 74.23 -39.04 0.60 0.60 5.29 8,391bMo tch corporate Income y (12/22/08) corporate bond McIyx 9.52 7.45 9.12 — 10.64 162.93 100.71 0.76 0.60 10.42 187lord Abbett Income A (12/31/81)e corporate bond lAgvx 7.91 6.54 9.41 6.70 8.29 151.54 75.04 0.88 0.78 — 1,885Doubleline Emerging Markets Fixed Inc N (04/06/10) Emerging Markets DlENx 11.07 6.25 — — 7.61 133.87 76.17 1.17 1.17 8.44 689tcw Emerging Markets Income N (03/01/04) Emerging Markets tgINx 7.55 6.04 12.42 10.19 9.64 135.02 88.12 1.10 1.10 7.87 5,472ridgeworth seix high yield I (12/29/00) high yield bond sAMhx 11.33 8.23 11.97 7.26 7.84 146.01 22.71 0.54 0.54 7.74 1,034tIAA-crEF high-yield retail (03/31/06) high yield bond tIyrx 10.73 8.74 12.06 — 8.30 159.94 38.03 0.67 0.67 7.10 3,069American century Infl-Adj bond Inv (02/10/97) Inflation-protected AcItx 3.96 3.13 5.10 4.89 5.64 145.32 243.16 0.47 0.47 8.44 3,209American century shDur Infl prot bd Inv (05/31/05) Inflation-protected ApoIx 1.85 1.94 4.49 — 3.98 56.57 62.37 0.57 0.57 3.17 1,283American century ginnie Mae Inv (09/23/85) Intermediate gov’t bgNMx 3.55 2.41 3.94 4.57 6.59 71.04 79.23 0.55 0.55 7.18 1,454American century government bond Inv (05/16/80) Intermediate gov’t cptNx 2.42 2.38 3.37 4.45 6.96 77.46 97.64 0.47 0.47 6.30 1,254baird core plus bond Inv (09/29/00) Intermediate-term bcosx 5.80 4.86 7.30 5.96 6.38 117.38 93.29 0.55 0.55 7.08 3,489Doubleline total return bond N (04/06/10) Intermediate-term DltNx 4.71 5.80 — — 9.03 109.92 32.21 0.72 0.72 5.66 33,755Metropolitan west total return bond M (03/31/97) Intermediate-term Mwtrx 5.67 5.89 8.66 6.81 7.14 120.63 56.75 0.61 0.61 8.25 30,620ridgeworth total return bond I (12/30/97) Intermediate-term sAMFx 4.59 4.41 5.19 5.42 5.52 109.92 93.35 0.41 0.41 8.16 994UsAA Income (03/04/74)b Intermediate-term UsAIx 6.15 5.07 7.15 5.66 8.37 112.98 72.44 0.58 0.58 6.13 4,974loomis sayles bond retail (12/31/96) Multisector bond lsbrx 12.01 8.01 12.16 8.58 8.64 147.40 35.98 0.92 0.92 6.60 24,672pIMco Income D (03/30/07) Multisector bond poNDx 9.72 10.89 14.38 — 10.25 171.34 -22.64 0.82 0.79 6.62 37,075Federated Adjustable rate secs Instl (12/03/85) short government FEUgx 0.44 0.60 1.08 2.56 4.65 10.66 0.80 1.00 0.64 — 724loomis sayles ltd term govt and Agency A (01/03/89)e short government NEFlx -1.42 0.59 2.42 3.28 5.05 39.95 32.44 0.82 0.82 3.23 682lord Abbett short Duration Income A (11/04/93)e short-term bond lAlDx 1.52 2.96 4.79 4.45 4.49 60.03 -9.87 0.58 0.58 — 36,222Metropolitan west low Duration bond M (03/31/97)b short-term bond MwlDx 2.42 3.28 6.83 3.41 4.31 47.48 -22.63 0.57 0.57 3.24 3,445payden limited Maturity (04/29/94)b Ultrashort bond pylMx 1.20 0.89 1.37 1.70 3.19 12.74 -6.94 0.55 0.35 2.73 315ridgeworth Us gov sec Ultra-short bd I (04/11/02) Ultrashort bond sIgvx 0.64 0.89 1.36 2.79 2.63 12.46 -7.71 0.38 0.38 4.40 1,805Dreyfus/standish global Fixed Income A (12/02/09)e world bond DhgAx 1.02 3.71 5.29 5.75 3.82 110.51 54.88 0.88 0.88 7.54 490pIMco Foreign bond (UsD-hedged) D (04/08/98) world bond pFoDx 7.00 6.96 8.28 6.13 5.95 134.02 45.66 0.93 0.90 6.82 6,695PeRfORmAnCe BenChmARKSbarclays U.s. Aggregate bond Index (Dividends reinvested) 4.37 3.66 4.85 4.93 —


Asset Class and Performance Benchmark Definitionsbond funds invest in corporate, municipal or government debt obligations of different maturities and interest rates. taxable bond funds generally invest in the debt obligations issued by the U.s. treasury, other U.s. government agencies and U.s. corporations. they also may invest in high-yield and foreign (non-U.s.) bonds.the barclays U.s. Aggregate bond Index tracks the total U.s. bond market, which includes U.s. treasury, government agency, investment-grade corporate bond and mortgage-backed securities with maturities of at least one year. the index includes reinvestment of interest.If an expense waiver was in place during the period, the net expense ratio was used to calculate fund performance. A net expense ratio lower than the gross expense ratio may reflect a cap on or contractual waiver of fund expenses. please read the fund prospectus for details on limits or expiration dates for any such waivers.

Performance quoted is past performance and is no guarantee of future results. Current performance may be lower or higher. Visit schwab.com for more recent performance information. Investment value will fluctuate, and shares, when redeemed, may be worth more or less than original cost.


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nOteS: ALL DAtA ShOwn IS AS Of June 30, 2014a. Definitions: gross Expense ratio—actual expense as stated in the fund’s prospectus. Net Expense ratio—net amount after any expenses are waived and/or

partially absorbed by fund management.b. Fund has an initial minimum investment greater than $2,500.c. Investor shares™ are available at a lower minimum but with higher operating expenses than select shares®.d. schwab Affiliate Funds include schwab Funds and laudus Funds. schwab Funds and laudus Funds are advised by charles schwab Investment Management, Inc.

schwab Funds and the laudus MarketMasters Funds are distributed by charles schwab & co., Inc. laudus Funds, except the laudus MarketMasters Funds, are distributed by Alps Distributors, Inc.

e. this fund is available without a load through schwab. the performance figures shown reflect the performance with the load. please see the Fund summary on schwab.com for performance without load.

Tax-Free bOnd FUndsperspectives and second Quarter 2014 summaryTax-free bonds continued their strong performance in the second quarter largely due to falling Treasury yields and continued limited supply. Puerto Rico continues to make headlines as its bonds were downgraded to sub-investment grade by all three major ratings agencies earlier in the year, and legislation was passed that would allow the commonwealth to restructure some of the island’s major utility bonds. We believe that the negative issues Puerto Rico faces are not indicative of the rest of the broad muni market and we continue to have a favorable view on municipal bonds. We believe that credit conditions as a whole have been improving. Going forward, we expect price appreciation to be more muted but investors should continue to earn an attractive after-tax distribution relative to Treasuries and taxable bonds.

Most Tax Free categories had strong performance as investor concerns around the health of municipal regions were moderated by continuing signs of domestic economic strength.

The High Yield Muni provided the highest relative performance at 3.66%, followed by Muni California Long (3.12%) and Muni New York (2.81%).

Shorter duration categories were noteworthy for poor performance, including Muni National Short (0.65%) and Muni Single State Short (0.89%).




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schwab tax-Free bond Fund (09/11/92) Muni National Interm swNtx 5.13 4.53 5.26 4.49 5.27 82.86 79.74 0.56 0.49 5.30 619

LeADIng 3RD PARtY funDS

American century high-yield Muni Inv (03/31/98) high yield Muni Abhyx 5.28 7.15 8.37 4.18 4.73 127.58 119.01 0.60 0.60 18.82 345

western Asset Municipal high Income A (11/06/92)e high yield Muni stxAx 1.14 5.53 6.77 4.94 4.95 124.85 114.54 0.80 0.80 13.73 742

American century Intermtrm tx-Fr bd Inv (03/02/87) Muni National Interm twtIx 3.63 3.87 4.64 4.17 5.09 80.34 92.54 0.47 0.47 8.89 3,304

baird Intermediate Muni bd Inv (03/30/01) Muni National Interm bMbsx 4.04 2.96 3.64 4.00 4.37 65.54 81.40 0.55 0.55 5.11 1,084

bMo Intermediate tax-Free y (02/01/94) Muni National Interm MItFx 5.39 4.94 5.46 4.68 4.66 87.33 79.27 0.62 0.56 4.91 1,351

Northern Intermediate tax-Exempt (03/31/94) Muni National Interm NoItx 5.24 4.35 4.56 4.05 4.49 91.21 106.72 0.50 0.46 8.97 2,423

UsAA tax Exempt Intermediate-term (03/19/82)b Muni National Interm UsAtx 5.56 5.45 6.25 4.71 6.93 90.93 73.65 0.54 0.54 9.19 3,565

Northern tax-Exempt (03/31/94) Muni National long NotEx 7.26 5.76 5.68 4.80 5.31 114.77 126.22 0.49 0.45 17.45 755

UsAA tax Exempt long-term (03/19/82)b Muni National long UstEx 7.54 7.06 7.33 4.94 7.61 121.31 105.47 0.53 0.53 16.62 2,309

Federated shrt-Interm Dur Muni Instl (09/04/81) Muni National short FshIx 2.46 2.31 2.76 2.70 4.40 38.80 31.23 0.80 0.47 — 1,135

wells Fargo Advantage s/t Muni bd Inv (12/31/91) Muni National short stsMx 1.52 1.77 2.75 3.15 3.87 21.39 1.97 0.79 0.63 1.78 6,391

PeRfORmAnCe BenChmARKS

barclays Municipal bond Index (Dividends reinvested) 6.14 5.35 5.81 4.97 —


Asset Class and Performance Benchmark Definitionstax-exempt bond funds primarily invest in municipal bonds generally issued by state and local governments to fund general expenditures and public projects. Investment income may be subject to certain state and local income taxes and a portion of income may be subject to the alternative minimum tax (AMt). capital gains are not exempt from federal income tax.the barclays Municipal bond Index is a total-return performance benchmark for the investment-grade tax-exempt bond market. the index includes reinvestment of interest.If an expense waiver was in place during the period, the net expense ratio was used to calculate fund performance. A net expense ratio lower than the gross expense ratio may reflect a cap on or contractual waiver of fund expenses. please read the fund prospectus for details on limits or expiration dates for any such waivers.



addITIOnaL FUnd caTegOrIes FOR THE QUARTER ENDED JUNE 30, 2014


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schwab balanced Fund (11/18/96) Moderate Allocation swobx 16.42 10.20 12.41 6.18 6.71 100.18 87.42 0.73 0.63 191 BALAnCeD funDS—LeADIng 3RD PARtY funDS

oakmark Equity & Income I (11/01/95) Aggressive Allocation oAkbx 21.69 10.58 12.62 8.24 11.19 108.12 100.04 0.77 0.77 21,191 value line Asset Allocation (08/24/93) Aggressive Allocation vlAAx 15.76 11.56 14.71 7.83 10.04 107.56 86.57 1.25 1.15 244 American century one choice® vrycnsrvInv (09/30/04) conservative Allocation AoNIx 8.66 5.71 7.07 — 5.14 51.30 37.32 0.64 0.64 356 JpMorgan Income builder A (05/31/07)e conservative Allocation JNbAx 8.70 7.28 11.88 — 5.75 102.37 108.31 1.13 0.75 10,914 buffalo Flexible Income (08/12/94) Moderate Allocation bUFbx 13.38 11.62 14.46 8.27 7.82 93.62 55.02 1.04 1.04 1,557 greenspring (07/01/83)b Moderate Allocation grspx 11.58 8.97 9.78 7.09 9.81 86.08 72.07 0.94 0.94 862 First Eagle global A (04/28/70)e world Allocation sgENx 11.76 7.56 12.50 9.86 12.08 109.48 117.71 1.13 1.13 52,067 Morgan stanley Instl global strat A (11/01/96)e world Allocation MbAAx 9.47 9.64 12.12 6.74 6.68 106.52 83.39 1.11 1.09 477 tARget DAte funDS—LeADIng SChwAB AffILIAte funDSd

schwab Monthly Income Fund—Enhanced (03/28/08) retirement Income swkrx 9.35 5.94 7.79 — 5.05 53.03 38.10 0.71 0.56 98 schwab Monthly Income Fund—Max (03/28/08) retirement Income swlrx 6.80 4.02 5.59 — 4.04 31.23 14.94 0.66 0.45 55 schwab target 2015 Fund (03/12/08) target Date 2011–2015 swgrx 12.70 7.96 11.04 — 5.83 86.04 84.92 0.72 0.58 110 schwab target 2020 Fund (07/01/05) target Date 2016–2020 swcrx 15.36 9.48 12.67 — 6.45 103.74 104.43 0.70 0.65 486 schwab target 2025 Fund (03/12/08) target Date 2021–2025 swhrx 17.47 10.55 13.91 — 7.93 117.02 119.88 0.79 0.71 320 schwab target 2030 Fund (07/01/05) target Date 2026–2030 swDrx 18.96 11.24 14.70 — 7.33 127.11 133.16 0.78 0.74 714 schwab target 2035 Fund (03/12/08) target Date 2031–2035 swIrx 20.42 12.00 15.55 — 8.60 136.49 144.04 0.87 0.78 262 schwab target 2040 Fund (07/01/05) target Date 2036–2040 swErx 21.50 12.54 16.09 — 7.94 143.24 151.99 0.84 0.80 750 schwab target 2045 Fund (01/23/13) target Date 2041-2045 swMrx 22.07 — — — 19.01 — — 1.83 0.75 34 schwab target 2050 Fund (01/23/13) target Date 2046-2050 swNrx 22.51 — — — 19.54 — — 2.13 0.76 27 tARget DAte funDS—LeADIng 3RD PARtY funDS

American beacon retire Inc & Apprec Inv (07/01/03) retirement Income AANpx 7.64 4.83 6.40 5.00 4.80 39.77 23.25 1.11 1.11 92 American century one choice In ret Inv (08/31/04) retirement Income Artox 12.33 8.34 10.42 — 6.23 81.92 70.98 0.77 0.77 625 American century one choice 2015 Inv (08/31/04) target Date 2011-2015 ArFIx 12.68 8.47 10.94 — 6.74 85.18 76.49 0.79 0.79 1,302 American century one choice 2020 Inv (05/30/08) target Date 2016-2020 Arbvx 13.56 8.88 11.64 — 5.88 91.72 85.66 0.82 0.82 1,353 American century one choice 2025 Inv (08/31/04) target Date 2021-2025 ArwIx 14.63 9.37 12.35 — 7.32 99.07 95.59 0.85 0.85 2,186 American century one choice 2030 Inv (05/30/08) target Date 2026-2030 Arcvx 15.62 9.89 13.09 — 5.93 106.78 105.87 0.87 0.87 1,334 Manning & Napier target 2030 k (03/28/08) target Date 2026-2030 Mtpkx 21.07 11.30 14.22 — 7.64 122.27 121.95 1.16 1.11 202 American century one choice 2035 Inv (08/31/04) target Date 2031-2035 AryIx 16.79 10.54 13.99 — 7.84 115.08 115.79 0.90 0.90 1,712 American century one choice 2040 Inv (05/30/08) target Date 2036-2040 ArDvx 18.01 11.14 14.80 — 6.44 123.41 126.32 0.93 0.93 973 American century one choice 2045 Inv (08/31/04) target Date 2041-2045 AroIx 19.14 11.64 15.29 — 8.25 130.07 134.65 0.97 0.97 1,221 American century one choice 2050 Inv (05/30/08) target Date 2046-2050 ArFvx 19.47 11.79 15.58 — 6.28 133.52 140.18 0.98 0.98 532 American century one choice 2055 Inv (03/31/11) target Date 2051+ ArEvx 19.91 12.05 — — 11.35 135.60 141.51 0.99 0.99 119 LOng-ShORt, COmmODItY AnD mARKet neutRAL funDS—LeADIng SChwAB AffILIAte funDSd

schwab hedged Equity Fund (09/03/02) long/short Equity swhEx 14.72 8.04 10.44 5.55 7.07 60.85 77.24 2.52 1.33 192 LOng-ShORt, COmmODItY AnD mARKet neutRAL funDS—LeADIng 3RD PARtY funDS

glenmede long/short (09/29/06) long/short Equity gtApx 7.98 6.58 6.61 — 1.66 42.94 46.25 2.62 1.25 106 gateway A (12/07/77)e long/short Equity gAtEx 0.98 3.16 4.87 3.43 7.61 33.06 34.10 1.03 0.94 8,161 goldman sachs commodity strategy A (03/30/07)e commodities broad basket gscAx 5.85 -2.92 2.46 — -3.52 87.28 94.52 1.10 0.97 1,418 pIMco commoditiesplUs strategy D (05/28/10) commodities broad basket pclDx 14.35 0.26 — — 8.48 90.73 89.15 1.40 1.24 7,339 Arbitrage r (09/18/00) Market Neutral ArbFx 1.90 1.43 2.08 3.09 4.61 12.46 -32.62 1.99 1.30 2,551 PeRfORmAnCe BenChmARKS

s&p 500 Index® (Dividends reinvested) 24.61 16.58 18.83 7.78 —barclays U.s. Aggregate bond Index (Dividends reinvested) 4.37 3.66 4.85 4.93 —New to the select list this quarter

Asset Class Definitionsbalanced funds invest in a mix of stocks, bonds and cash within one fund and are classified into two categories. conservative Allocation funds may invest 20% to 50% of assets in equities and 50% to 80% of assets in fixed income and cash. Moderate Allocation funds may invest 50% to 70% of assets in equities, with the balance invested in fixed income and cash. convertible funds invest primarily in bonds and preferred stocks that can be converted into common stocks. target maturity or “lifecycle” funds are managed for investors planning to retire (or to begin withdrawing substantial portions of their investments) in a particular year. these funds provide both asset allocation and rebalancing for investors following an investment strategy that grows more conservative as the target date approaches. commodity-related products, including futures, carry a high level of risk and are not suitable for all investors. commodity-related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions, regardless of the length of time shares are held. Investments in commodity-related products may subject the fund to significantly greater volatility than investments in traditional securities and involve substantial risks, including risk of loss of a significant portion of their principal value.If an expense waiver was in place during the period, the net expense ratio was used to calculate fund performance. A net expense ratio lower than the gross expense ratio may reflect a cap on or contractual waiver of fund expenses. please read the fund prospectus for details on limits or expiration dates for any such waivers.Performance quoted is past performance and is no guarantee of future results. Current performance may be lower or higher. Visit schwab.com for month’s end performance information. Investment value will fluctuate, and shares, when redeemed, may be worth more or less than original cost.Data provided by Morningstar, Inc. ©2014 by Morningstar, Inc. All rights reserved. the information contained herein is the proprietary information of Morningstar, Inc., and may not be copied or redistributed for any purpose and may only be used for noncommercial, personal purposes. the information contained herein is not represented or warranted to be accurate, correct, complete or timely. Morningstar, Inc., shall not be responsible for investment decisions, damages or other losses resulting from use of this information. Morningstar, Inc., has not granted consent for it to be considered or deemed an “expert” under the securities Act of 1933.


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Schwab’s Income Mutual Fund Select List was developed and is managed by the Charles Schwab Investment Advisory, Inc. (CSIA) experts and includes mutual funds that have met their rigorous criteria, including both quantitative and qualitative factors. All are no-load and no-transaction fee and are selected based on their ability to generate income in their respective asset classes. The list is designed to help you achieve income and growth. For more information on how funds are selected, see pages 35 and 36.

IncOMe MUTUaL FUnd seLecT LIsT®

Definitions30-day sEc yield: based on a fund’s most recently reported portfolio holdings, this measure shows the income an investor would earn if invested in that fund for the subsequent 12 months. Although a fund’s holdings are likely to change over that time, the sEc yield provides a yardstick for comparing the income potential across funds within the same category.Annual Dividend return: this measure looks back at the actual payouts of an equity fund over the past 12 months. It provides an accurate picture of the fund’s recent short-term distributions without any forward anticipation. the Income select list shows the 12-month dividend return for each equity fund in the form of a percentage of its share price (also known as “payout ratio”).


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laudus Mondrian International Equity Fund — select shares (06/17/08)b,* Foreign large value lIEFx 25.82 8.95 11.11 — 1.58 95.34 78.76schwab gNMA Fund (03/03/03) Intermediate government swgsx 3.92 2.45 3.87 4.58 4.15 74.30 86.05schwab Intermediate-term bond Fund (10/31/07) Intermediate-term bond swIIx 3.24 2.62 5.16 — 4.85 71.81 72.10schwab core Equity Fund (07/01/96) large blend swANx 26.03 15.14 17.16 8.01 8.44 100.15 112.00schwab Dividend Equity Fund (09/02/03) large value swDsx 23.01 16.17 17.90 8.33 9.40 97.69 97.81schwab tax-Free bond Fund (09/11/92) Muni National Interm swNtx 5.13 4.53 5.26 4.49 5.27 82.86 79.74schwab Monthly Income Fund — Enhanced payout (03/28/08) retirement Income swkrx 9.35 5.94 7.79 — 5.05 53.03 38.10schwab Monthly Income Fund— Max payout (03/28/08) retirement Income swlrx 6.80 4.02 5.59 — 4.04 31.23 14.94LeADIng 3RD PARtY funDS

DOmeStIC

parnassus core Equity Investor (09/01/92) large blend prblx 26.99 18.26 18.24 10.29 11.01 94.07 72.47tIAA-crEF social choice Eq retail (03/31/06) large blend tIcrx 23.53 15.56 18.63 7.98 7.33 97.92 103.27Jensen Quality growth J (08/03/92) large growth JENsx 19.30 12.69 15.93 6.67 8.45 87.00 100.69JpMorgan Equity Income A (02/18/92)e large value oIEIx 15.22 14.54 18.33 8.15 8.72 91.79 80.15principal Equity Income A (05/31/39)e large value pQIAx 15.69 12.97 16.57 7.71 8.78 89.30 86.28parnassus Mid-cap (04/29/05) Mid-cap growth pArMx 23.40 14.84 20.02 — 9.68 92.25 95.56tIAA-crEF Mid-cap value retail (10/01/02) Mid-cap value tcMvx 25.91 15.01 19.97 10.37 13.30 98.56 109.27American century small company Inv (07/31/98) small blend AsQIx 26.79 16.65 21.71 7.18 9.23 116.50 138.46InteRnAtIOnAL

harding loevner Emerging Markets Advisor (11/09/98) Diversified Emerging Mkts hlEMx 19.12 4.83 11.89 12.91 13.70 101.32 106.00schwab® International core Equity (05/30/08) Foreign large blend sIcNx 26.95 11.04 14.11 — 3.13 107.24 83.88tIAA-crEF International Eq retail (03/31/06) Foreign large blend tIErx 23.25 7.61 13.56 7.26 4.26 111.68 105.47brandes International Equity I (12/27/96)b,* Foreign large value bIIEx 27.45 8.60 10.13 6.21 9.38 103.63 90.81perkins global value t (06/29/01) world stock JgvAx 17.58 11.92 14.18 6.41 7.40 71.13 33.89SeCtOR

Janus global real Estate t (07/06/09) global real Estate JErtx 18.01 10.28 17.67 — 18.01 102.16 103.36cohen & steers realty shares (07/02/91)b real Estate csrsx 14.14 10.30 22.76 10.42 12.32 83.48 72.67tAxABLe BOnD

lord Abbett Income A (12/31/81)e corporate bond lAgvx 7.91 6.54 9.41 6.70 8.29 151.54 75.04bMo tch corporate Income y (12/22/08) corporate bond McIyx 9.52 7.45 9.12 — 10.64 162.93 100.71tcw Emerging Markets Income N (03/01/04) Emerging Markets bond tgINx 7.55 6.04 12.42 10.19 9.64 135.02 88.12ridgeworth seix high yield I (12/29/00) high yield bond sAMhx 11.33 8.23 11.97 7.26 7.84 146.01 22.71tIAA-crEF high-yield retail (03/31/06) high yield bond tIyrx 10.73 8.74 12.06 — 8.30 159.94 38.03JpMorgan Inflation Managed bond A (03/31/10)e Inflation-protected bond JIMAx -0.40 0.85 — — 2.50 70.10 88.85American century ginnie Mae Inv (09/23/85) Intermediate government bgNMx 3.55 2.41 3.94 4.57 6.59 71.04 79.23baird core plus bond Inv (09/29/00) Intermediate-term bond bcosx 5.80 4.86 7.30 5.96 6.38 117.38 93.29Doubleline total return bond N (04/06/10) Intermediate-term bond DltNx 4.71 5.80 — — 9.03 109.92 32.21Metropolitan west total return bond M (03/31/97) Intermediate-term bond Mwtrx 5.67 5.89 8.66 6.81 7.14 120.63 56.75ridgeworth total return bond I (12/30/97) Intermediate-term bond sAMFx 4.59 4.41 5.19 5.42 5.52 109.92 93.35UsAA Income (03/04/74)b Intermediate-term bond UsAIx 6.15 5.07 7.15 5.66 8.37 112.98 72.44pIMco Income D (03/30/07) Multisector bond poNDx 9.72 10.89 14.38 — 10.25 171.34 -22.64loomis sayles ltd term govt and Agency A (01/03/89)e short government NEFlx -1.42 0.59 2.42 3.28 5.05 39.95 32.44lord Abbett short Duration Income A (11/04/93)e short-term bond lAlDx 1.52 2.96 4.79 4.45 4.49 60.03 -9.87Metropolitan west low Duration bond M (03/31/97)b short-term bond MwlDx 2.42 3.28 6.83 3.41 4.31 47.48 -22.63ridgeworth Us gov sec Ultra-short bd I (04/11/02) Ultrashort bond sIgvx 0.64 0.89 1.36 2.79 2.63 12.46 -7.71pIMco Foreign bond (UsD-hedged) D (04/08/98) world bond pFoDx 7.00 6.96 8.28 6.13 5.95 134.02 45.66tAx-fRee BOnD

American century Intermtrm tx-Fr bd Inv (03/02/87) Muni National Interm twtIx 3.63 3.87 4.64 4.17 5.09 80.34 92.54UsAA tax Exempt Intermediate-term (03/19/82)b Muni National Interm UsAtx 5.56 5.45 6.25 4.71 6.93 90.93 73.65Northern tax-Exempt (03/31/94) Muni National long NotEx 7.26 5.76 5.68 4.80 5.31 114.77 126.22Federated shrt-Interm Dur Muni Instl (09/04/81) Muni National short FshIx 2.46 2.31 2.76 2.70 4.40 38.80 31.23RetIRement InCOme

American century one choice In ret Inv (08/31/04) retirement Income Artox 12.33 8.34 10.42 — 6.23 81.92 70.98New to the select list this quarter * $50,000 initial minimum investment


Whether you need income monthly, quarterly or annually, you have a number of fund choices. The funds on the Income Select List provide different types of income: fixed-income funds generally pay interest measured by yield; equity funds pay dividends measured by dividend return or payout ratio.

a smart approach to help you generate income from your investmentsSchwab developed the Income Mutual Fund Select List to help investors in or approaching retirement build or modify an investment portfolio that addresses their growth and income needs. Here are some things to consider as you develop or fine-tune your portfolio: Asset Allocation: As always, your

portfolio’s asset allocation should be driven by your investment goals, time horizon and risk tolerance. As your goals shift from accumulation to income, you can use the funds on this list to help address your income and growth needs from both bond and equity funds.

Diversification: Investors in or nearing retirement often believe that they should be exclusively in bonds and other fixed income assets. While for some investors this might be an appropriate strategy, you may want to consider keeping some percentage of your portfolio in equities for the capital appreciation potential they provide.

Risk vs. Return: Evaluate yields within the context of risk: different categories or asset classes will reflect differing risk/reward trade-offs. Consider a mix of bond funds: government, municipal and corporate. Also, a fund’s exposure to below-investment grade bonds is important to keep in mind. One of the selection criteria for fixed-income funds on the Income Select List is relatively low exposure to these types of securities, except for the high yield, multisector and emerging bond categories. (To see a fixed-income fund’s credit rating, click on the fund name, then the Portfolio tab.)

Maturity: Bond funds with longer maturities can leave investors exposed to greater inflation and credit risk, so consider a balance of maturities, from ultrashort to long.

Distribution Frequency: Different funds provide payouts on different schedules. Check the frequency of distributions to determine when you’ll receive income, if any, from the fund.

Taxes: Remember tax implications. Income on investments in nonretirement accounts is generally taxable; in tax-protected retirement accounts, such as IRAs and 401(k)s, it’s less of a concern. Where appropriate, consider tax-free bond funds.

Schwab provides a range of easy-to-use tools, resources and guidance at schwab.com for investors in or nearing retirement.If an expense waiver was in place during the period, the net expense ratio was used to calculate fund performance.

A net expense ratio lower than the gross expense ratio may reflect a cap or contractual waiver of fund expenses. please read the fund prospectus for details on limits or expiration dates for any such waivers.performance quoted is past performance and is no guarantee of future results. current performance may be lower or higher. visit schwab.com for month’s end performance information. Investment value will fluctuate, and shares, when redeemed, may be worth more or less than original cost. For asset class and performance benchmark definitions, please see footnotes on pages 37–43. please see page 42 for information on items a–f cited above.


M

gross ExpENsE

rAtIoa

NEtExpENsE

rAtIoa

Avg.wEIghtED

MAtUrIty (yrs)

totAl AssEts

($M) pAyMENt

DAtE FrEQUENcy

ANNUAlDIvIDENDrEtUrN

Most rEcENtDIvIDENDpAyMENt

30-DAysEc yIElD

1.26 1.12 — 158 12/5/13 Annually 2.39 0.22 —0.62 0.57 6.03 288 6/30/14 Monthly 2.73 0.02 2.22 0.63 0.46 4.40 363 6/30/14 Monthly 1.95 0.02 1.68 0.73 0.73 — 2,392 12/5/13 Annually 0.85 0.22 —0.89 0.89 — 2,035 6/30/14 Quarterly 1.45 0.07 1.30 0.56 0.49 5.30 619 6/30/14 Monthly 2.32 0.02 1.52 0.71 0.56 5.81 98 7/15/14 Monthly 1.95 0.02 2.00 0.66 0.45 5.81 55 7/15/14 Monthly 2.00 0.02 2.04

0.87 0.87 — 9,827 6/30/14 Quarterly 1.16 0.09 —0.48 0.48 — 2,104 12/13/13 Annually 1.18 0.18 —0.90 0.90 — 5,259 6/24/14 Quarterly 0.95 0.10 —1.09 1.05 — 7,669 6/30/14 Monthly 1.53 0.03 1.35 0.93 0.93 — 5,935 6/30/14 Quarterly 1.87 0.11 2.20 1.14 1.14 — 260 12/27/13 Annually 0.95 0.26 —0.76 0.76 — 5,131 12/13/13 Annually 0.81 0.21 —0.88 0.88 — 424 6/10/14 N/A 0.24 0.01 —

1.46 1.46 — 2,525 12/20/13 Annually 0.75 0.40 —1.10 0.86 — 219 12/5/13 Annually 2.44 0.26 —0.88 0.88 — 3,756 12/13/13 Annually 1.93 0.16 —1.03 1.00 — 548 6/30/14 Quarterly 2.11 0.20 2.18 1.03 1.03 — 278 12/19/13 Annually 2.03 0.32 —

1.13 1.13 — 161 6/30/14 Annually 2.03 0.03 1.32 0.97 0.97 — 5,862 6/30/14 Quarterly 2.06 0.38 —

0.88 0.78 — 1,885 6/30/14 Monthly 4.68 0.01 3.84 0.76 0.60 10.42 187 6/30/14 Monthly 3.44 0.03 2.40 1.10 1.10 7.87 5,472 6/30/14 Monthly 4.61 0.04 5.00 0.54 0.54 7.74 1,034 6/30/14 Monthly 5.61 0.04 4.37 0.67 0.67 7.10 3,069 6/30/14 Monthly 4.94 0.04 4.12 1.06 0.76 4.32 1,655 6/30/14 Monthly 1.17 0.02 1.60 0.55 0.55 7.18 1,454 6/30/14 Monthly 2.63 0.02 1.63 0.55 0.55 7.08 3,489 6/25/14 Monthly 2.79 0.03 2.49 0.72 0.72 5.66 33,755 6/30/14 Monthly 4.86 0.04 4.16 0.61 0.61 8.25 30,620 6/30/14 Monthly 2.43 0.02 2.25 0.41 0.41 8.16 994 6/30/14 Monthly 2.34 0.02 2.37 0.58 0.58 6.13 4,974 6/26/14 Monthly 3.83 0.03 2.79 0.82 0.79 6.62 37,075 6/30/14 Monthly 5.00 0.05 3.40 0.82 0.82 3.23 682 6/30/14 Monthly 2.13 0.02 1.42 0.58 0.58 — 36,222 6/30/14 Monthly 3.65 0.01 2.43 0.57 0.57 3.24 3,445 6/30/14 Monthly 1.48 0.01 1.22 0.38 0.38 4.40 1,805 6/30/14 Monthly 0.63 0.01 0.63 0.93 0.90 6.82 6,695 6/30/14 Monthly 1.97 0.02 1.40

0.47 0.47 8.89 3,304 6/30/14 Monthly 2.59 0.02 1.55 0.54 0.54 9.19 3,565 6/30/14 Monthly 3.64 0.04 1.97 0.49 0.45 17.45 755 6/24/14 Monthly 3.68 0.03 3.22 0.80 0.47 — 1,135 6/30/14 Monthly 1.46 0.01 0.93

0.77 0.77 — 625 6/17/14 Quarterly 2.01 0.04 1.14


research

Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can obtain a prospectus by calling 800-435-4000. Please read the prospectus carefully before investing.

1 charles schwab Investment Advisory, Inc., a registered investment advisor, is an affiliate of charles schwab & co., Inc.2 the $5,000 investment size is representative of historical schwab independent retail client trading activity. the one-year holding period is an estimate based on industry averages and schwab’s general view regarding the benefits of annual portfolio rebalancing.

† conditions Apply: trades in EtFs available through schwab EtF onesource™ (including schwab EtFs™) are available without commissions when placed online in a schwab account. service charges apply for trade orders placed through a broker ($25) or by automated phone ($5). An exchange processing fee applies to sell transactions. certain types of schwab EtF onesource transactions are not eligible for the commission waiver, such as short sells and buys to cover (not including schwab EtFs). schwab reserves the right to change the EtFs we make available without commissions. All EtFs are subject to management fees and expenses. please see pricing guide for additional information.

the select list excludes leveraged EtFs, inverse EtFs, EtNs, actively-managed EtFs, muni bond EtFs with underlying holdings subject to AMt, and unmanaged baskets of securities.

eTF select List®

a List of prescreened Low-cost exchange-Traded Funds

The ETF Select List provides you with a list of prescreened, low-cost ETFs representing one ETF from approximately 65 asset categories. This makes it easier for you to find the right ETFs to fit your investment needs and goals. The List was developed by the experts at Charles Schwab Investment Advisory, Inc.,1 and is updated quarterly.

Want to learn more about the ETFs listed here? Log on to schwab.com/ETFSelectList and click on a ticker symbol.

how eTFs are selectedTo build the Schwab ETF Select List, Schwab analyzes all eligible ETFs using the quantitative and qualitative selection criteria described below. This includes both Schwab ETFs™ and ETFs from third-party providers. Schwab accepts no payments for inclusion of any ETF on this List, and all ETFs are evaluated using the same criteria.

Because the ETFs featured typically seek to track their index as closely as possible (not outperform, as actively-managed mutual funds seek to do), the List highlights just one ETF per category. Each ETF that makes the List has earned its spot based upon a combination of qualitative and quantitative variables such as cost of ownership, risk, fund structure and fit within a given category rather than outperforming its peers.

eligibility requirementsTo be eligible for the ETF Select List, an ETF must meet certain minimum requirements to ensure a basic standard of liquidity, viability and structural stability among eligible ETFs. Eligibility criteria include:

assets under management length of track record bid-ask spread tracking error number of competitive market makers

selection criteriaFrom among these eligible funds, one is selected for each ETF Select List category on the basis of its low cost of ownership, assuming a $5,000 purchase into the ETF is made online on schwab.com, held for one year, then sold.2

Estimated total cost of ownership as an annual percentage of invested assets including:

net operating expenses

bid-ask spreads

trade commissions (buy and sell)

Commissions can add significantly to the cost of ownership, particularly smaller positions with shorter holding periods. Schwab does not charge a commission for online trades of ETFs in Schwab ETF OneSource,™† giving them a cost advantage in the selection process. Investing different amounts, trading more or less frequently, trading through brokers with commission structures different from Schwab’s, or trading at Schwab through a trading channel like a live representative or automated phone, or through a Schwab fee-based service that waives commissions, would affect cost of ownership estimates and could favor an ETF other than the one selected by Schwab for the List.

Other criteria are also considered, such as risk, fund structure and other qualitative factors. For example, a fund may be excluded if its investment style or portfolio holdings are not representative of its asset category; its bid-ask spread reflects a history of occasional large spikes; or its structure makes it more susceptible to adverse tax consequences.

To show a broader sampling of ETF providers on the List, no single ETF provider, including Schwab, may represent more than one-third of the ETFs on the ETF Select List. If any ETF provider, including Schwab, has more than one-third of the most favorably evaluated funds on the List, one or more of the second-most favorably evaluated ETFs will be substituted as necessary to limit that ETF provider’s representation. ETFs are evaluated and selected quarterly for the List using quarter-end data.


exchange-Traded FUnds

* “gross expenses” reflect a fund’s total annual operating expenses as stated in the fund’s prospectus and do not reflect any expense reimbursements or waivers that may exist. some EtFs appearing on this list may be subject to expense reimbursements and waivers, and less such reimbursements and waivers may have lower total annual operating expenses (i.e., “net expenses”) than indicated herein. please read the fund prospectus carefully to determine the existence of any expense reimbursements or waivers and details on their limits and termination dates.

charles schwab & co., Inc. receives remuneration from third-party EtF companies participating in schwab EtF onesource™ for record keeping, shareholder services and other administrative services, including program development and maintenance. Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of EtFs are not individually redeemable directly with the EtF. shares are bought and sold at market price, which may be higher or lower than the net asset value “(NAv)”.

No mention of particular funds or fund families here should be construed as a recommendation or considered an offer to sell or a solicitation of an offer to buy any securities. this information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. the securities listed may not be suitable for everyone. Each investor needs to review a securities transaction for his or her own particular situation. schwab or its employees may sometimes hold positions in the securities listed here. Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, political instability, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

small-cap funds are subject to greater volatility than those in other asset categories.

high-yield funds invest in lower-rated securities. this subjects these funds to greater credit risk, default risk and liquidity risk.

commodity-related products, including futures, carry a high level of risk and are not suitable for all investors. commodity-related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions, regardless of the length of time shares are held. Investments in commodity-related products may subject the fund to significantly greater volatility than investments in traditional securities and involve substantial risks, including risk of loss of a significant portion of their principal value.

some specialized exchange-traded funds can be subject to additional market risks. Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of EtFs are not individually redeemable directly with the EtF.


EtF sElEct lIst cAtEgory

QUotEsyMbol FUND NAME INDEx

grossExpENsEs*

oNlINEcoMMIs-

sIoN DEscrIptIoN

U.s. EQUIty EtFs

large core schx schwab U.s. large-cap EtF Dow Jones U.s. total stock Market large cap 0.04% $0† Index covers over 700 largest U.s. firms which comprise

about 80% of the U.s. market (by capitalization)

large growth schg schwab U.s. large-cap growth EtF Dow Jones U.s. total stock Market large cap growth 0.07% $0† EtF has diversified exposure to large growth names

such as Apple, Microsoft, and Johnson & Johnson

large value schv schwab U.s. large-cap value EtF Dow Jones U.s. total stock Market large cap value 0.07% $0† EtF has diversified exposure to large value names

such as ExxonMobil, gE, and wells Fargo

Mid core schM schwab U.s. Mid-cap EtF Dow Jones U.s. Mid cap total stock Market Index 0.07% $0† over 500 holdings providing U.s. equity exposure to the

mid-cap portion of the broader U.s. stock market

Mid growth MDyg spDr s&p 400 Mid cap growth EtF s&p 400 Mid cap growth 0.25% $0† U.s. growth stocks with market caps between $850M and $3.8b selected based on sales growth, earnings growth, & momentum

Mid value MDyv spDr s&p Mid cap 400 value s&p 400 Mid cap value 0.25% $0† holds mid-cap stocks with value characteristics based on: book value to price, earnings to price and sales to price ratios

small core schA schwab U.s. small-cap EtF Dow Jones U.s. total stock Market small cap 0.08% $0† Focuses on over 1700 small-cap companies; index

excludes the smallest micro-cap stocks

small growth slyg spDr s&p 600 small cap growth EtF s&p 600 small cap growth 0.25% $0† holds small-cap stocks with growth characteristics and

market caps ranging from $250M to $1.2b

small value slyv spDr s&p small cap 600 value s&p 600 small cap value 0.25% $0† holds stocks with value characteristics selected from the s&p 600 smallcap 600 index

total stock Market schb schwab U.s. broad Market EtF Dow Jones U.s. broad stock Market 0.04% $0† holds over 1900 large to small-cap firms; covers virtually the entire U.s. stock market (by capitalization)

Dividend-focused schD schwab U.s. Dividend Equity EtF Dow Jones U.s. Dividend 100 Index 0.07% $0† holds U.s. companies that consistently pay dividends and have strong relative fundamental strength based on financial ratios

INtErNAtIoNAl EQUIty EtFs

Developed core schF schwab International Equity EtF FtsE Developed ex U.s. Index 0.08% $0† canada included in this index which highlights large and mid-cap stocks from 20 developed markets

Developed growth EFg ishares MscI EAFE growth Index MscI EAFE growth 0.40% $8.95 Developed stock markets excl. U.s. and canada. top index weights are U.k., Japan and switzerland

Developed value EFv ishares MscI EAFE value Index MscI EAFE value 0.40% $8.95 Developed stock markets excl. U.s. and canada. Index heavy in Japan, U.k., and financial services

Developed small schc schwab International small-cap Equity

FtsE Developed small cap ex-U.s. liquid Index 0.19% $0† the fund has a diversified exposure to international small-

cap companies in over 20 developed international markets

Emerging Market stock schE schwab Emerging Markets Equity EtF FtsE Emerging Index 0.14% $0† large and mid-cap stocks from over 20 emerging markets. Financials are over 25% of the holdings

All world ex-U.s. stock cwI spDr MscI AcwI ex-U.s. MscI All country world Index ex UsA Index 0.34% $0† tracks a cap-weighted index of developed and emerging

market countries excluding the U.s.

global stock vt vanguard total world stock Index EtF FtsE global All cap Index 0.18% $8.95 holds over 5000 stocks spanning the investable global

stock markets, including emerging markets

Europe stock FEU spDr stoxx Europe 50 stoxx Europe 50 Index 0.29% $0† holds 50 of the largest companies in Europe, including Nestle, hsbc, and royal Dutch shell

pacific Asia stock vpl vanguard FtsE pacific EtF FtsE Developed Asia pacific Index 0.12% $8.95 Features about 800 stocks, approximately 55% from Japan; also includes Australia, south korea and hong kong

pacific Asia ex-Japan stock Epp ishares MscI pacific ex-Japan MscI pacific ex-Japan Index 0.50% $8.95 Includes publicly traded stocks from Australia,

hong kong, and singapore

Japan stock Jpp spDr russell/Nomura prIME Japan russell/Nomura prime Index 0.50% $0† the index consists of the 1,000 largest Japanese stocks by market-cap, including toyota, Mitsubishi and honda

china stock MchI ishares MscI china MscI china Index 0.61% $8.95 tracks a cap-weighted index of chinese equities primarily listed in hong kong

New to the EtF select list this quarter


research

exchange-Traded FUnds

† conditions Apply: trades in EtFs available through schwab EtF onesource™ (including schwab EtFs™) are available without commissions when placed online in a schwab account. service charges apply for trade orders placed through a broker ($25) or by automated phone ($5). An exchange processing fee applies to sell transactions. certain types of schwab EtF onesource transactions are not eligible for the commission waiver, such as short sells and buys to cover (not including schwab EtFs). schwab reserves the right to change the EtFs we make available without commissions. All EtFs are subject to management fees and expenses. please see pricing guide for additional information.

Many fixed-income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks, including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. the lower-rated securities in which some bond funds invest are subject to greater credit risk, default risk and liquidity risk. government bond fund shares are not guaranteed. their price and investment return will fluctuate with market conditions and interest rates. shares, when redeemed, may be worth more or less than their original cost. risks of rEIts are similar to those associated with direct ownership of real estate, such as changes in real-estate values and property taxes, interest rates, cash flow of underlying real-estate assets, supply and demand, and the management skill and creditworthiness of the issuer. since a sector fund is typically not diversified and focuses its investments on companies involved in a specific sector, the fund may involve a greater degree of risk than an investment in other mutual funds with greater diversification.

charles schwab Investment Management, Inc., (“csIM”) the investment advisor for the schwab EtFs and an affiliate of schwab, receives fees from the schwab EtFs for investment advisory and fund administration services. the amount of fees csIM receives from the schwab EtFs is not considered in EtF select list selection, nor do the schwab EtFs or any third-party EtF, or any of their affiliates, pay schwab to be included in the EtF select list.

schwab EtFs are distributed by sEI Investments Distribution co. (sIDco). sIDco is not affiliated with the charles schwab corporation or any of its affiliates.

©2014 charles schwab & co., Inc. (Member sIpc) All rights reserved. (0714-4626)




grossExpENsEs*

oNlINEcoMMIs-

sIoN DEscrIptIoN

boND EtFs

short term broad Market bsv vanguard short-term bond EtF barclays U.s. 1–5 year government/

credit Float Adjusted Index 0.10% $8.95 Invests in U.s. government and investment grade corporate bonds with durations from one to five years

short term corporate vcsh vanguard short-term corp bond Index EtF

barclays U.s. 1–5 year corporate bond Index 0.12% $8.95 holds over 1000 short-term, investment grade

U.s. corporate bonds

short term Muni shM spDr Nuveen barclays short term Municipal bond

barclays Managed Money Municipal short term Index 0.20% $0† holds short-term tax exempt bonds (includes: state and local

general obligation, revenue, insured and pre-refunded bonds)

short term treasury scho schwab short-term U.s. treasury EtF

barclays U.s. 1–3 year treasury bond Index 0.08% $0† EtF features 50 treasuries which mature in 1–3 years

Intermediate broad Market schz schwab U.s. Aggregate bond EtF barclays U.s. Aggregate bond Index 0.06% $0† holds securities that are fixed rate, non-convertible with

least $250 million of outstanding face value.

Intermediate corporate vcIt vanguard Interm-term corp bond Index EtF

barclays U.s. 5–10 year corporate bond Index 0.12% $8.95 provides diversified exposure to the intermediate-term

investment-grade U.s. corporate bond market

Intermediate Muni tFI spDr Nuveen barclays Municipal bond

barclays Municipal Managed Money Index 0.30% $0† tracks the U.s. long term tax-exempt bond market and includes

general obligation, revenue, pre-refunded and insured issues

Intermediate treasury schr schwab Intermediate-term U.s. treasury EtF

barclays U.s. 3–10 year treasury bond Index 0.10% $0† EtF features 66 treasuries which mature in 3–10 years

long term broad Market blv vanguard long-term bond Index EtF barclays U.s. long government/

credit Float Adjusted Index 0.10% $8.95 provides diversified exposure to the long-term, investment-grade segment of the U.s. bond market

long term corporate vclt vanguard long-term corp bond Index EtF

barclays U.s. 10+ year corporate bond Index 0.12% $8.95 Invests in high-quality (investment-grade) corporate bonds;

maintains a dollar-weighted average maturity of 10–25 years

long term treasury tlo spDr barclays long term treasury barclays long U.s. treasury Index 0.13% $0† holds U.s. treasuries with an average maturity of over 24 years

high yield phb powershares Fundamental high yield corp bond

rAFI® bonds U.s. high yield 1–10 Index 0.50% $0† tracks an index of high-yield, U.s. bonds that are selected based

on the research Affiliates Fundamental Index® methodology

tIps schp schwab U.s. tIps EtF barclays U.s. treasury Inflation protected securities — series l 0.07% $0† EtF highlights treasury securities which are designed to

adjust for and help protect against inflation

Emerging Markets pcy powershares Emerging Mkts sovereign Debt

Db Emerging Market UsD liquid balanced 0.50% $0† holds U.s. dollar denominated government bonds issued

by 22 emerging market countries

International bwx spDr barclays International treasury bond

barclays global treasury ex-U.s. capped Index 0.50% $0† EtF features debt issued by foreign governments:

non-dollar denominated, investment grade

preferred stock pgx powershares preferred portfolio bofA Merrill lynch core plus Fixed rate preferred securities 0.50% $0† Dividends on preferreds may appeal to income seekers;

top 5 holdings are financial firmssEctor EtFs

consumer Discretionary rcD guggenheim s&p Equal weight consumer Discretionary

s&p 500 Equal weight Index consumer Discretionary 0.40% $0† tracks an index of U.s. consumer discretionary stocks

where each holding is rebalanced quarterly to equal weight

consumer staples rhs guggenheim s&p Equal weight consumer staples

s&p 500 Equal weight Index consumer staples 0.40% $0† tracks an index of U.s. consumer staples where each

holding is rebalanced quarterly to equal weight

Energy ryE guggenheim s&p Equal weight Energy s&p 500 Equal weight Index Energy 0.40% $0† tracks an index of U.s. energy stocks where the market

value of each holding is rebalanced quarterly to equal weight

clean Energy QclN First trust NAsDAQ clean Edge green Energy

NAsDAQ® clean Edge® green Energy Index 0.98% $8.95 tracks stocks that develop and manufacture emerging clean-

energy technologies, including biofuels and advanced batteries

Financial ryF guggenheim s&p Equal weight Financial

s&p 500 Equal weight Index Financials 0.40% $0† tracks an index of U.s. financial stocks where the market


health care ryh guggenheim s&p Equal weight health care

s&p 500 Equal weight Index health care 0.40% $0† tracks an index of U.s. healthcare stocks where the market


Industrials rgI guggenheim s&p Equal weight Industrials s&p Equal weight Industrials Index 0.40% $0† tracks an index of U.s. industrial stocks where the market


Materials vAw vanguard Materials MscI U.s. Investable Market Materials 25/50 Index 0.14% $8.95 Includes companies in a wide range of commodity-related manu-

facturing industries (e.g. chemicals, paper, metals and minerals)

technology ryt guggenheim s&p Equal weight technology

s&p 500 Equal weight Index Information technology 0.40% $0† tracks an index of U.s. technology stocks where the market


telecommunications FcoM Fidelity MscI telecommunication services

MscI UsA IMI telecommunication services 25/50 Index 0.12% $8.95 holds telecom stocks including At&t, verizon and

centurylink weighted by market cap

Utilities ryU guggenheim s&p Equal weight Utilities

s&p 500 Equal weight Index tele-communication services & Utilities 0.40% $0† tracks and index of U.s. utilities stocks where the market

value of each holding is rebalanced quarterly to equal weightNew to the EtF select list this quarter


exchange-Traded FUndsFOR THE QUARTER ENDED JUNE 30, 2014



grossExpENsEs*

oNlINEcoMMIs-

sIoN DEscrIptIoN

rEAl AssEts

commodities broad UscI United states commodity Index summerhaven Dynamic commodity Index 1.14% $0† 14 futures contracts on precious metals, industrial metals,

energy and agricultural products. Investors will receive k-1s

Agriculture DbA powershares Db Agriculture DbIQ Diversified Agriculture Index Excess return 0.85% $8.95 Uses futures contracts to access a cornucopia of coffee, sugar,

livestock, grain, cocoa. Investors will get k-1s at tax time

gold sgol EtFs physical swiss gold shares london pM Fix price of gold 0.39% $0† Each share backed by gold bullion held in a swiss vault; provides direct exposure to gold price movements

broad precious Metals gltr EtFs physical pM basket shares london pM Fix price of gold, silver, platinum and palladium 0.60% $0† EtF is structured as a grantor trust; holds gold, silver,

platinum and palladium

Industrial Metals Dbb powershares Db base Metals DbIQ optimum yield Industrial Metals Index Excess return 0.75% $8.95 tracks a proprietary index including aluminum, copper and

zinc using futures contracts. Investors will get k-1s at tax time

oil Usl United states 12 Month oil west texas Intermediate light, sweet crude 0.99% $0† holds futures contracts expiring in 12 consecutive months

for light, sweet crude. Investors will get k-1s at tax time.broad Energy commodities DbE powershares Db Energy DbIQ optimum yield Energy Index

Excess return 0.75% $8.95 holds futures contracts on light sweet crude, heating oil, brent oil, gasoline and natural gas. Investors will get k-1s

real Estate schh schwab U.s. rEIt EtF Dow Jones U.s. select rEIt Index 0.07% $0† Invests in rEIts (real estate investment trusts) that own and commonly operate commercial and residential properties

spEcIAlty EtFs

Multi-Asset Income cvy guggenheim Multi-Asset Income zacks Multi-Asset Income Index 0.89% $0† holdings may include U.s. stocks, ADrs, rEIts, Mlps, closed-end funds and/or canadian royalty trusts; top sector is energy

ALteRnAtIVe weIghteD etfs

EQUAl wEIghtED EtFs

U.s. large weighted Equal rsp guggenheim s&p 500 Equal weight s&p 500 Equal weight 0.40% $0† compared to market cap weighted indexes, this EtF has lower

exposure to the largest companies; Index is rebalanced quarterlyFUNDAMENtAl wEIghtED EtFs

U.s. large weighted Fundamental FNDx schwab Fundamental

U.s. large companyrussell Fundamental U.s. large company Index 0.32% $0† Diversified exposure to large U.s. stocks; holdings are weighted

based on fundamental measure of company performanceU.s. small weighted Fundamental FNDA schwab Fundamental

U.s. small companyrussell Fundamental U.s. small company Index 0.32% $0† stocks are selected based on company fundamentals: retained

operating cash flow, adjusted sales and dividends plus buybacksInternational weighted Fundamental FNDF schwab Fundamental

International large companyrussell Fundamental Developed ex-U.s. large company Index 0.32% $0† Exposure to large, int’l companies selected and weighted

based on fundamental measures of company performancelow volAtIlIty wEIghtED EtFs

U.s. large weighted low volatility splv powershares s&p 500 low volatility s&p 500® low volatility Index 0.25% $0† holds 100 stocks from the s&p 500® Index with the lowest

realized volatility over the past 12 monthsInternational weighted low volatility IDlv powershares s&p International

Developed low volatilitys&p bMI International Developed low volatility Index 0.35% $0† holds the 200 least volatile large and mid cap stocks

excluding the U.s. and south korea over the past 12 monthsNew to the EtF select list this quarter

tRADItIOnAL InDexeS

these EtFs track indexes that are mostly weighted by market capitalization; that is, they give the most weight to companies whose outstanding stock is worth the most money. the advantages of EtFs that track market capitalization or traditional weighted indexes are that they require very little rebalancing (which keeps costs low) and that they reflect the way the market itself is weighted. In some cases a different weighting scheme may be traditional, such as commodity indexes that are weighted by the liquidity of various commodities.

ALteRnAtIVe weIghteD etfS

there are three Alternative weighted EtF categories on the EtF select list. Each category has a specific approach to building an index so you can consider which EtFs are best for your situation.

•equAL-weIghteD InDexeS: Most indexes are weighted by market capitalization, where companies with the highest stock market value get the most weight. Equal-weighted indexes give an equal amount of weight to each stock in the index. If an EtF tracks an equal-weighted index with 100 stocks, it would generally put about 1% of the fund’s assets into each of the stocks.

•funDAmentAL-weIghteD InDexeS: rather than relying on stock market values for weights, a fundamental index uses criteria such as companies’ profits, dividends, book value, cash flow or number of employees to assign weight to the stocks in the index. the theory is to put more weight into stocks that have a larger economic footprint rather than just a large market value.

•LOw VOLAtILItY-weIghteD InDexeS: In these funds, the lower the volatility of a stock, the more weight it receives in the index. the goal is to arrive at a group of stocks whose overall volatility is lower than the market as a whole, which means that the index may gain less than the market during rallies but lose less than the market during declines.


Is the Consumer Tapped Out?An examination of the consumer discretionary sector.BY JOHN M. EADE

C onsumer discretionary companies have led the stock market’s � ve-year surge.

� is diverse sector—which includes industries such as autos, advertising, restaurants and retailers—has generated compound annual returns of 21.9% for the past � ve years—well above the S&P 500® Index’s 15.8%.1 But as the bull market began its sixth year, the sector was dragging, dropping 3.8% in the � rst quarter of 2014, while the S&P 500 gained 0.5%.

Is the consumer discretionary sector’s long run over? Let’s take a closer look.

Employment plays a large role in the sector’s performance, and trends at the beginning of 2014 supported consumer spending growth. Unemployment fell from 10% in March 2009 to 6.7% in March 2014, according to the U.S. Department of Labor. While many in the workforce are still struggling to � nd permanent positions and the labor participation rate is near historically low levels, the U.S. economy is creating jobs and opportunities for consumers and families.

Of course, there’s more to the sector than jobs. If consumers spend beyond their means, debt levels soar, placing future spending at risk. Recent data on consumer debt, though, is promising. Since peaking at $12.7 trillion in late 2008, total consumer debt has declined 9%, to $11.6 trillion, according to the Federal Reserve Bank of New York. Also, the percentage of total debt balances that are current rose from 89% at the end of 2009 to 93% earlier this year.2

Finally, we turn to consumer con� dence, which is a lagging indicator but a good measure of consumers’ moods and outlooks. Earlier this year, the readings for consumer con� dence were in the 80s. Back in 2006, when equity markets were establishing highs and unemployment was around 5%, the Consumer Con� dence Index peaked at 107.6. So, there appears to be upside potential.

� e combination of falling unemployment and stronger consumer balance sheets suggests the consumer sector can grow. Investors, though, may want to take some pro� ts from the sector in the not-too-distant future, and look for value in other areas, particularly if consumer con� dence readings start to approach 100. -

John M. Eade is President of Argus Research Co.

“The combination of falling

unemployment and stronger

consumer balance sheets

suggests the consumer sector

can grow.”

DO THE RESEARCHTo see additional Argus Research, log in to schwab.com/OIresearch.

1S&P 500 GICS Sector Scorecard, as of 4/11/2014.2Federal Reserve Bank of New York, “Quarterly Report on Household Debt and Credit,” February 2014.


The research is prepared by Argus, independently of Charles Schwab & Co., Inc., and its affi liates (collectively “Schwab”). None of the information constitutes a recommendation by Schwab or a solicitation of an offer to buy or sell any securities. The information is not intended to provide tax, legal or investment advice. Schwab does not guarantee the suitability or potential value of any particular investment or information source. Schwab does not guarantee the accuracy, timeliness, completeness or correct sequencing of the information, or warrant any results from use of the information. Percentages in portfolios may total more or less than 100% due to rounding. Data as of 4/9/2014.

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THE ARGUS MODEL PORTFOLIOS

International Paper Co.Ford Motor Co.Gannett Co Inc.Staples Inc.Archer Daniels Midland Co.Clorox Co.General Mills Inc.Chevron Corp.Marathon Oil Corp.Noble Corporation PLCBoston Properties Inc.Chubb Corp.HCP Inc.JPMorgan Chase & Co.Eli Lilly & Co.Johnson & JohnsonPfi zer Inc.Caterpillar Inc.General Electric Co.Harsco Corp.Applied Materials Inc.Automatic Data Processing IncCisco Systems Inc.Symantec Corp.AT&T Inc.Verizon Communications Inc. TelecommunicationsGreat Plains Energy Inc.PG&E Corp.Spectra Energy Corp.UIL Holdings Corp.

BASIC MATERIALS

12%

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RESEARCH: ARGUS RESEARCH CO.

dOI_Fa14_50-51_Argus.indd 50 7/3/14 4:38 PM

1S&P 500 GICS Sector Scorecard, as of 4/11/2014.2Federal Reserve Bank of New York, “Quarterly Report on Household Debt and Credit,” February 2014.


The research is prepared by Argus, independently of Charles Schwab & Co., Inc., and its affi liates (collectively “Schwab”). None of the information constitutes a recommendation by Schwab or a solicitation of an offer to buy or sell any securities. The information is not intended to provide tax, legal or investment advice. Schwab does not guarantee the suitability or potential value of any particular investment or information source. Schwab does not guarantee the accuracy, timeliness, completeness or correct sequencing of the information, or warrant any results from use of the information. Percentages in portfolios may total more or less than 100% due to rounding. Data as of 4/9/2014.

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THE ARGUS MODEL PORTFOLIOSEquity Income Growth & Income Mid-Cap Growth

International Paper Co. - IP - Basic MaterialsFord Motor Co. - F - Consumer DiscretionaryGannett Co Inc. - GCI - Consumer DiscretionaryStaples Inc. - SPLS - Consumer DiscretionaryArcher Daniels Midland Co. - ADM - Consumer StaplesClorox Co. - CLX - Consumer StaplesGeneral Mills Inc. - GIS - Consumer StaplesChevron Corp. - CVX - EnergyMarathon Oil Corp. - MRO - EnergyNoble Corporation PLC - NE - EnergyBoston Properties Inc. - BXP - FinancialChubb Corp. - CB - FinancialHCP Inc. - HCP - FinancialJPMorgan Chase & Co. - JPM - FinancialEli Lilly & Co. - LLY - HealthcareJohnson & Johnson - JNJ - HealthcarePfi zer Inc. - PFE - HealthcareCaterpillar Inc. - CAT - IndustrialsGeneral Electric Co. - GE - IndustrialsHarsco Corp. - HSC - IndustrialsApplied Materials Inc. - AMAT - TechnologyAutomatic Data Processing Inc. - ADP - TechnologyCisco Systems Inc. - CSCO - TechnologySymantec Corp. - SYMC - TechnologyAT&T Inc. - T - TelecommunicationsVerizon Communications Inc. - VZ - TelecommunicationsGreat Plains Energy Inc. - GXP - UtilityPG&E Corp. - PCG - UtilitySpectra Energy Corp. - SE - UtilityUIL Holdings Corp. - UIL - Utility

Dow Chemical Co. - DOW - Basic MaterialsWeyerhaeuser Co. - WY - Basic MaterialsCoach Inc. - COH - Consumer DiscretionaryLas Vegas Sands Corp. - LVS - Consumer DiscretionaryMattel Inc. - MAT - Consumer DiscretionaryWilliams-Sonoma Inc. - WSM - Consumer DiscretionaryCVS Caremark Corp. - CVS - Consumer StaplesProcter & Gamble Co. - PG - Consumer StaplesSysco Corp. - SYY - Consumer StaplesHollyFrontier Corp. - HFC - EnergyOccidental Petroleum Corp. - OXY - EnergySchlumberger Ltd. - SLB - EnergyAmerican Express Co. - AXP - FinancialBank of New York Mellon Corp. - BK - FinancialFederated Investors Inc. - FII - FinancialPrudential Financial Inc. - PRU - FinancialAmgen Inc. - AMGN - HealthcareMedtronic Inc. - MDT - HealthcarePfi zer Inc. - PFE - HealthcareStryker Corp. - SYK - HealthcareCummins Inc. - CMI - IndustrialsGeneral Electric Co. - GE - IndustrialsUnited Parcel Service Inc. - UPS - IndustrialsApple Inc. - AAPL - TechnologyCorning Inc. - GLW - TechnologyEMC Corp. - EMC - TechnologyInternational Business Machines - IBM - TechnologyConsolidated Edison Inc. - ED - UtilityOneok Inc. - OKE - Utility

Ashland Inc. - ASH - Basic MaterialsDick’s Sporting Goods Inc. - DKS - Consumer DiscretionaryDunkin’ Brands Group Inc. - DNKN - Consumer DiscretionaryLions Gate Entertainment Corp. - LGF - Consumer DiscretionaryPep Boys-Manny Moe & Jack - PBY - Consumer DiscretionaryPier 1 Imports Inc. - PIR - Consumer DiscretionaryScripps Networks Interactive Inc. - SNI - Consumer DiscretionaryCoca-Cola Enterprises Inc. - CCE - Consumer StaplesKeurig Green Mountain Inc. - GMCR - Consumer StaplesApache Corp. - APA - EnergyDevon Energy Corp. - DVN - EnergyNoble Corporation PLC - NE - EnergyAmerican Campus Communities Inc. - ACC - FinancialCME Group Inc. - CME - FinancialAllergan Inc. - AGN - HealthcareCerner Corp. - CERN - HealthcarePerrigo Company PLC - PRGO - HealthcareZimmer Holdings Inc. - ZMH - HealthcareAecom Technology Corp. - ACM - IndustrialsEaton Corp Pub Ltd Co. - ETN - IndustrialsParker-Hannifi n Corp. - PH - IndustrialsStanley Black & Decker Inc. - SWK - IndustrialsActivision Blizzard Inc. - ATVI - TechnologyAltera Corp. - ALTR - TechnologyBlackhawk Network Holdings Inc. - HAWK - TechnologyBroadcom Corp. - BRCM - TechnologyCA Inc. - CA - TechnologyeBay Inc. - EBAY - TechnologyIHS Inc. - IHS - TechnologyJuniper Networks Inc. - JNPR - TechnologyVishay Intertechnology Inc. - VSH - TechnologyXerox Corp. - XRX - TechnologyAqua America Inc. - WTR - UtilityMDU Resources Group Inc. - MDU - Utility

BASIC MATERIALS CONSUMER DISCRETIONARY

CONSUMER STAPLES

ENERGY FINANCIAL HEALTHCARE INDUSTRIALS TECHNOLOGY TELE-COMMUNICATIONS

UTILITY

3%13%9%

10%

10%

13%

11%

11%

12%

6%

5%

13%

9%

11%

14%14%

10%

17%

6% 3%

16%

6%

9%

6%

15%11%

28%

6%

OI-Fa14-Q3-51


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Why I Believe in Index InvestingThis simple, powerful investment strategy can help build wealth.

‘‘ Academic research shows how difficult it is for active managers to

consistently outperform their benchmarks over

the long term, especially when factoring in the

impact of fees.’’

I have always believed that investing is the best way for people to participate in the growth of the world’s economies

and build wealth. Of course, we also participate through our jobs and the earnings that come from our work. But for most of us, stock investing is the means to participate—as owners—in the growth of companies that make up the global economy.

The challenge for many investors is determining which stocks to buy. Not everyone can take the time to research a company, analyze its balance sheet and determine whether it is fairly priced in the market. This is challenging work that even seasoned professionals often struggle to do successfully and consistently.

For those of us without the time or interest to do research, one of the most effective strategies for gaining exposure to the growth power of companies is using mutual funds and exchange-traded funds (ETFs) to own a basket of securities. And a brilliant approach to that is index investing.

I believe indexing is unfairly perceived as unsophisticated. The industry often refers to indexing as “passive” because index funds follow a stock index, as opposed to actively managed funds, which have individual managers

who choose securities based on their professional assessment of an investment’s potential for returns. However, academic research shows how difficult it is for active managers to consistently outperform their benchmarks over the long term, especially when factoring in the impact of fees.

In contrast, index investing typically aims for market-based results and doesn’t deviate from a predetermined methodology. It removes the emotions that often hinder buy and sell decisions. For these reasons, index funds can be an important tool for both new and experienced investors, and will often form the core of a well-diversified portfolio.

That’s why we launched the Schwab 1000® Index, and the mutual fund based on it, back in 1991: to offer investors a lower-cost, diversified option to invest in stock. Since then, we’ve created a competitive suite of index-based investments to provide even greater access to the markets. Because sometimes, the most straightforward and simple approach is best.

Charles R. SchwabFounder & Chairman

See page 2 for important information.Investors should carefully consider information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than the net asset value.

(0814-3074)

OI-Fa14-Q3-52

Charles sChWaB • FALL 2014 52

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Now, with Schwab Bank’s home lending program provided by Quicken Loans,® you can save $1,000 on closing costs on any new purchase or refinance loan when you apply by September 30, 2014.1 You’ll enjoy a streamlined process and fast closing—often within 35 days.2

Call 1-866-431-2722 or visit schwab.com/mortgageoffer to get started.

1. In order to participate, you must agree that the lender, Quicken Loans, may share your information with Charles Schwab Bank. Offer available for mortgages—except for Home Equity Lines of Credit—that close through Schwab Bank’s home lending program from Quicken Loans. The $1,000 closing cost discount includes the standard closing cost discount of $200 offered under Schwab Bank’s home lending program, plus an additional limited-time $800 closing cost discount. You must apply between April 7, 2014, and September 30, 2014, to receive the $1,000 closing cost discount offer. Your application date is printed on the Good Faith Estimate (GFE). The closing cost discount will appear on your fi nal HUD-1 statement at closing.2. Average monthly closing time for purchase and refi nance loans between December 2013 and May 2014 was 35 days or fewer from the date the interest rate was locked.3. Quicken Loans received the highest numerical score in the proprietary J.D. Power 2010–2013 Primary Mortgage Origination Studies.SM 2013 study based on 3,267 total responses measuring 13 lenders and measures opinions of consumers who originated a new mortgage. Proprietary study results are based on experiences and perceptions of consumers surveyed in July–August 2013. Your experiences may vary. Visit jdpower.com.Nothing herein is or should be interpreted as an obligation to lend. Loans are subject to credit and property approval. Other conditions and restrictions may apply. Hazard insurance may be required. Program terms and conditions are subject to change.Charles Schwab Bank and Charles Schwab & Co., Inc., are separate but affi liated companies and subsidiaries of The Charles Schwab Corporation. Investment products are offered by Charles Schwab & Co., Inc. (member SIPC). Charles Schwab & Co., Inc., does not solicit, offer, endorse, negotiate, or originate any mortgage loan products and is neither a licensed mortgage broker nor a licensed mortgage lender. Home lending is offered and provided by Quicken Loans Inc., Equal Housing Lender. Quicken Loans Inc. is not affi liated with The Charles Schwab Corporation, Charles Schwab & Co., Inc., or Charles Schwab Bank. Deposit and other lending products are offered by Charles Schwab Bank, Member FDIC and an Equal Housing Lender.Lending services provided by Quicken Loans Inc., a subsidiary of Rock Holdings Inc. “Quicken Loans” is a registered service mark of Intuit Inc., used under license.Licensed in all 50 states. State-specifi c license information: Arizona: Quicken Loans Inc., 16425 North Pima, Suite 200, Scottsdale, AZ 85260, Mortgage Banker License #BK-0902939; Arkansas: Quicken Loans Inc., 1050 Woodward Avenue, Detroit, MI 48226-1906, 1-888-474-0404; California: Licensed by Department of Corporations, CA Residential Mortgage Lending Act; Colorado: Quicken Loans Inc., NMLS #3030, 1-888-474-0404, Regulated by the Division of Real Estate; Georgia: Residential Mortgage Licensee (#11704)—1050 Woodward Avenue, Detroit, MI 48226-1906; Illinois: Residential Mortgage Licensee #4127—Department of Financial and Professional Regulation, 1050 Woodward Avenue, Detroit, MI 48226-1906; Maine: Quicken Loans Inc., Supervised Lender License NMLS #3030; Massachusetts: Quicken Loans Inc., Mortgage Lender License #ML-3030; Minnesota: Not an offer for a rate lock agreement; Mississippi: Licensed by the Mississippi Department of Banking and Consumer Finance; Nevada: Quicken Loans Inc., 8860 S. Maryland Parkway, Las Vegas, NV 89123, License #356738; New Hampshire: Licensed by the NH Banking Department, #6743MB; New Jersey: Licensed Mortgage Banker—NJ Department of Banking, fi rst (and/or second) mortgages only; New York: Licensed Mortgage Banker—NYS Banking Department; Oregon: Quicken Loans Inc.—License #ML-1387; Pennsylvania: Licensed as a fi rst Mortgage Banker by the Department of Banking and licensed pursuant to the Pennsylvania Secondary Mortgage Loan Act; Rhode Island: Licensed Lender; Texas: Quicken Loans Inc., 1050 Woodward Avenue, Detroit, MI 48226-1906; Virginia: Quicken Loans Inc., NMLS ID #3030 (www.nmlsconsumeraccess.org); Washington: Consumer Loan Company License CL-3030; Quicken Loans Nationwide Mortgage Licensing System #3030. Restrictions may apply. Equal Housing Lender.

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