There is no one-size-fits-all approach to investing. Not only do people have their own investing time horizons and risk tolerances, but every year, new investment themes unfold that all of us must navigate in our own way. Thus, our best Charles Schwab funds for 2022 have been selected for investors of all stripes, whether they want to build a complete portfolio or simply fill a niche with a targeted product.
Just as we mentioned in outlining our 22 best stocks for 2022, the theme for the new year is “anything can happen.” COVID burned most 2020 playbooks to the ground, and rampant inflation took most investors by surprise in 2021. The sudden post-Thanksgiving COVID omicron scare threatened to upend things heading into 2022 – and while the variant might end up being less damaging than feared, new COVID strains could cause turbulence in the coming year.
Investors have other factors to consider, too. If inflation remains high in the short term but normalizes in 2022, the Fed’s “transitory” narrative will hold and the market should rejoice. But if hyperinflation remains or worsens, investors could react negatively. Same with interest rates. If there’s no surprise (such as a rate hike sooner than expected), the market should continue to remain positive, assuming corporate earnings and other fundamentals hold up.
One final concern for investors is valuation. Stock prices – especially in certain pockets, such as large-cap tech – are quite elevated. Will they finally come back to earth in 2022, as some pundits have predicted, or will momentum keep them aloft?
With these themes to consider, we present our 10 best Schwab funds for 2022. This group of mutual funds and exchange-traded funds (ETFs) offers ways to participate in additional upside in stocks, as well as ways to protect against potential 2022 headwinds. Also, where applicable, we note when Schwab offers comparable mutual funds and ETFs for the same theme.
Data is as of Dec. 9. Categories are determined by Morningstar. Yields on equity and balanced funds represent the trailing 12-month yield. Yields on bond funds are SEC yields, which reflect the interest earned after deducting fund expenses for the most recent 30-day period.
Schwab U.S. Large-Cap Value ETF
- Category: Large value
- Assets under management: $10.1 billion
- Dividend yield: 2.0%
- Expenses: 0.04%
For 2022, market risk for aggressive growth stocks is arguably on the high side because of elevated valuations. Any negative surprise for the market typically affects growth stocks more negatively than value.
And just as value was the predominant style selection going into 2021, many strategists still say to stick with underappreciated shares in 2022.
“We maintain a slight preference for value over growth to benefit from potentially above-trend economic growth in 2022,” says LPL Financial in its annual outlook. “Rising interest rates and higher inflation are conditions that have historically been favorable to value-style stock performance.”
The best Schwab fund for this job is the Schwab U.S. Large-Cap Value ETF (SCHV, $71.56), which is one of the cheapest ways to gain broad exposure to large domestic shares.
The SCHV tracks the Dow Jones U.S. Large-Cap Value Total Stock Market Index, resulting in a portfolio of roughly 540 holdings with an average market value of $84 billion. These aren’t small companies.
At the moment, financials are the top sector dog at 19%, followed by healthcare at 14% and industrials at 13%. Top holdings include the likes of Berkshire Hathaway (BRK.B) and JPMorgan Chase (JPM) at just a little more than 2% of assets each.
Schwab U.S. Mid-Cap ETF
- Category: Mid-cap blend
- Assets under management: $10.0 billion
- Dividend yield: 1.1%
- Expenses: 0.04%
Schwab U.S. Mid-Cap ETF (SCHM, $78.80) can be a smart way for investors to be aggressive in 2022 without exposing themselves to too much risk.
Many fans of mid-cap stocks describe the middle of the capitalization spectrum as the “sweet spot” of investing because long-term returns have either matched or surpassed large-cap stocks while offering lower market risk compared to small-cap stocks.
The Wells Fargo Investment Institute is among strategists that favor these “Goldilocks stocks” heading into 2022.
“For several reasons, we remain above consensus earnings per share (EPS) estimates for U.S. equities, especially large caps and mid-caps,” WFII says, citing, among other things, underappreciation of positive operating leverage and strong household incomes driving spending.
The Schwab U.S. Mid-Cap ETF sits among the best Schwab funds for 2022 because it provides dirt-cheap exposure to the mid-cap space. SCHM tracks the Dow Jones U.S. Mid-Cap Total Stock Market Index, which blends growth and value styles and produces a roughly 500-stock portfolio.
The ETF is heaviest in industrials (17%) and technology (15%), but light on utilities (3%) and energy (3%). No single holding makes up even 1% of assets – top stocks ON Semiconductor (ON) and Devon Energy (DVN) are weighted at a mere 0.6% each.
Schwab 1000 Index ETF
- Category: Large blend
- Assets under management: $2.3 billion
- Dividend yield: 1.2%
- Expenses: 0.05%
SCHK tracks the Russell 1000 Index – a float-adjusted market capitalization-weighted index that includes the 1,000 largest publicly traded U.S. stocks. Apple (AAPL), Microsoft (MSFT) and Amazon.com (AM) are tops in the S&P 500, and they’re tops in Schwab 1000 Index too.
So why SCHK?
This Schwab ETF provides exposure not just to large-cap stocks, but also mid-caps like those you’d find in SCHM. That’s something you won’t find in an S&P 500 fund. Meanwhile, Schwab 1000 Index also provides less exposure to small-cap stocks than is typically offered in a total-market fund.
In a volatile environment, this weighting toward large and mids, and away from smalls, could make SCHK one of the best Schwab funds for 2022.
“We believe it prudent to take gains in lower-quality small-caps and move up in market capitalization,” WFII strategists say.
Schwab Balanced Fund
- Category: Allocation, 50%-70% equity
- Assets under management: $870.5 million
- Dividend yield: 0.9%
- Expenses: 0.50%
Balanced funds, which hold both stocks and bonds for investors, can work both as one of several core holdings, or as a one-fund portfolio for investors who want a moderate-allocation solution.
Schwab Balanced Fund (SWOBX, $19.92) is a so-called “fund of funds” that invests primarily in other Schwab products to produce a portfolio that is 55% to 65% invested in stocks, and 35% to 45% invested in bonds.
Like most balanced funds, Schwab Balanced allows investors to enjoy in some stock-market upside should 2022 be a fruitful year, but its bond holdings should protect against some downside should equities struggle. That said, if stocks maintain their upward trend and bonds continue middling, SWOBX likely won’t perform nearly as well as a pure equity holding.
As mentioned before, Schwab Balanced is a fund of funds. Its six holdings include:
- Schwab U.S. Aggregate Bond Index Fund (SWAGX, currently 37% of assets)
- Schwab Core Equity Fund (SWANX, 35%)
- Laudus U.S. Large Cap Growth Fund (LGILX, 15%)
- Schwab Small-Cap Equity Fund (SWSCX, 10%)
- Schwab Variable Share Price Money Fund (SVUXX, 2%)
- State Street US Government Money Market Fund (GVMXX, 1%)
SWOBX is one of the best Schwab mutual funds to buy if you want an all-in-one solution, as long as you aren’t concerned with geographic diversification – the portfolio is more than 97% U.S.-based.
Schwab Emerging Markets Equity ETF
- Category: Diversified emerging markets
- Assets under management: $9.1 billion
- Dividend yield: 2.5%
- Expenses: 0.11%
Emerging markets stocks can work well as a diversification tool – albeit a risky one – or as an aggressive satellite holding to juice returns in a portfolio.
Just understand that if you dip your toe in EMs at the start of the year, it might take a while before you reap the rewards.
“Emerging market companies … have yet to fully benefit from the reopening trade due to lagging vaccination rates, meaning that emerging market growth is likely to take shape only later in 2022,” say State Street Global Advisors strategists in their 2022 outlook.
You can harness EM stocks via the low-cost Schwab Emerging Markets Equity ETF (SCHE, $29.84). SCHE, which tracks the FTSE Emerging Index, owns a wide basket of nearly 1,650 stocks from countries including China (37%), Taiwan (17%) and India (15%). The index is market cap-weighted, so mega-caps such as Taiwan Semiconductor (TSM, 7.4%) and Tencent (TCEHY, 5.1%) have the most impact on the fund’s performance.
Emerging markets stocks currently look more attractive from a valuation perspective than their developed-market and U.S. brethren. The average price-to-earnings (P/E) ratio of SCHE’s holdings is just 11.7, compared to 13.7 for a basket of developed-market stocks, and 21.3 for the S&P 500.
China could be a wild card, however. An S&P Global Ratings report says the economic outlook for emerging markets in 2022 was expected to be “above trend” growth at 3.5% GDP, but a potential economic slowdown in China could make for a “bumpy transition” in the coming year. Also worth noting is China’s crackdown of its larger companies over the past few months, rattling prices of Chinese shares; more of the same in 2022 could dent the returns of China-heavy EM funds such as SCHE.
Note: Mutual fund investors can consider the Schwab Fundamental Emerging Markets Large Company Index Fund (SFENX), which holds roughly 360 stocks and charges 0.39% in annual expenses.
Schwab International Equity ETF
- Category: Foreign large blend
- Assets under management: $28.2 billion
- Dividend yield: 2.2%
- Expenses: 0.06%
Investors looking for foreign equity exposure without the higher relative risk of emerging markets might look to the developed-market exposure of the Schwab International Equity ETF (SCHF, $38.48).
Developed-market stocks have largely looked better than their U.S. counterparts for years, and that remains the case today. Yes, domestic equities could continue to outperform non-U.S. stocks, but investors worried that expensive American shares could finally come back to earth might want to consider the diversification of large companies from developed Europe, Japan and other nations.
That puts Schwab International Equity ETF among the top Schwab funds you can own in 2022. SCHF tracks the FTSE Developed ex US Index, which holds around 1,550 primarily large- and mid-cap stocks in developed international markets, primarily in Europe and Asia. Currently, Japan is top country dog at 22% of assets, followed by the U.K. (13%) and France (9%).
Like with SCHE, Schwab International Equity ETF leans heaviest on its largest components, so the likes of Nestlé (NSRGY, 1.8%) and Samsung (1.5%) get top billing. This focus on developed-market large-caps results in a current yield of 2.2% – not flashy, but much higher than the 1.3% on the S&P 500.
Schwab U.S. REIT ETF
- Category: Real estate
- Assets under management: $6.8 billion
- Dividend yield: 2.0%
- Expenses: 0.07%
The ongoing threat of higher-than-normal inflation could be a boon for real estate investment trusts (REITs), which own and sometimes operate various types of real estate, from office buildings to hotels to healthcare facilities. These businesses often maintain pricing power during inflationary periods, which enables them to remain profitable even as other sectors struggle. For example, commercial real estate companies can borrow at low interest rates while commanding higher rents as real estate demand expands.
Now, REITs are exempt from paying federal income taxes, but in return they must pay out 90% or more of their profits back to shareholders as dividends. As a result, real estate is one of the highest-yielding sectors – and can sometimes act sensitive to interest-rate hikes. However, BofA Securities notes that REITs have several things going for them heading into 2022:
“REITs can underperform ahead of the first Fed hike but can actually outperform if rates are rising alongside a growing economy,” BofA says. “This cycle, U.S. REITs have outperformed the broader market despite the market pricing in Fed hikes in ’22. Other macro risks such as supply chain issues and inflation have trumped the fear over higher rates. With these risks remaining high and longer than the market anticipated, REITs seem well positioned.”
Schwab U.S. REIT ETF (SCHH, $49.85) is one of the cheapest ways to invest in real estate. This fund, which tracks the Dow Jones Equity All REIT Capped Index, owns 140 REITs across numerous industries. For instance, top holdings include American Tower (AMT), which owns cell towers and other telecommunications real estate; Prologis (PLD), which invests in logistics facilities such as warehouses; and Simon Property Group (SPG), a massive mall owner.
Like many of the best Schwab mutual funds and ETFs on this list, SCHH is market-cap weighted, which in this case leads to significant single-stock weights in AMT (8.1%), PLD (7.6%) and telecom REIT Crown Castle (CCI, 5.4%), among a few others. But this isn’t unusual among real estate index funds.
Schwab 1-5 Year Corporate Bond ETF
- Category: Short-term bond
- Assets under management: $608.1 million
- SEC yield: 1.2%
- Expenses: 0.05%
The Federal Reserve seems primed to hike its Fed funds rate in 2022.
The central bank’s “dot plot” indicates that the Fed will raise rates by at least a quarter-point in the coming year. And according to the CME FedWatch Tool, not only is the market pricing in an 80% chance that the benchmark rate will be at least a quarter-point higher by early summer – it’s saying there’s a roughly 35% chance that rates will be 50 to 75 basis points higher. (A basis point is one one-hundredth of a percentage point.)
This kind of environment tends to push down prices of many investment assets, including bonds and other fixed-rate investments. Generally, the longer the average duration of the bond, the worse its prices will fall as rates go higher.
As a result, investors that are looking for some amount of safety and fixed income in case equity markets face turbulence – but don’t want to take on much interest-rate risk – should focus on short-term bond funds.
The Schwab 1-5 Year Corporate Bond ETF (SCHJ, $50.47) is one of the best Schwab funds for this task.
This ETF, which tracks the Bloomberg US 1-5 Year Corporate Bond Index, holds more than 2,060 debt issues with an average duration of just 2.8 years at present. (Essentially, that means a 1-percentage-point increase in interest rates should result in a mere 2.8% drop in the fund’s price, and vice versa.) Virtually the entire portfolio is in investment-grade bonds, with 90% split fairly evenly between BBB- and A-rated debt.
Schwab U.S. TIPS ETF
- Category: Inflation-protected bond
- Assets under management: $21.5 billion
- SEC yield: 2.7%
- Expenses: 0.05%
If inflation continues to rise into 2022, investors probably will want to continue to pile into Treasury Inflation-Protected Securities (TIPS). These bonds automatically increase with inflation and decrease with deflation based on America’s consumer price index. (In other words, if prices go up, TIPS go up.)
State Street Global Advisors also believes TIPS will provide defense in the coming year.
“Barbelling credit with TIPS could add another real income stream, this time on the defensive side of a bond portfolio,” SSGA’s strategists say. “Because TIPS are backed by the full faith and credit of the U.S. government, they have low credit risk. Adding TIPS to a portfolio also could help counteract some of the equity risk introduced by overweights to credit.”
The Schwab U.S. TIPS ETF (SCHP, $62.76) tracks the Bloomberg US Treasury Inflation-Linked Bond Index. It’s a tight portfolio of less than 50 TIPS with an effective duration of 7.7 years.
Prospective shareholders should keep in mind that, although TIPS might perform better during inflationary periods, they still carry interest-rate risk. So if the Fed starts hiking rates, the market value of the underlying securities could decline, which would weigh on a fund like SCHP.
Thus, Schwab U.S. TIPS ETF is a good choice for investors who want to diversify a broader bond portfolio, complementing a core bond holding that might not perform as well in an inflationary environment.
Schwab Tax-Free Bond Fund
- Category: Municipal national intermediate-term bond
- Assets under management: $795.4 million
- SEC yield: 0.7%
- Expenses: 0.40%
Schwab Tax-Free Bond Fund (SWNTX, $12.11) provides investors with income that is exempt from federal income tax, making it a smart choice for investors who want bond exposure in a taxable brokerage account.
Beyond the tax benefits, what makes SWNTX a potential winner for 2022 is that it invests in roughly 530 investment-grade municipal bonds, which can maintain their price better in a rising-rate environment compared to higher-quality corporate bonds and Treasuries, which dominate broad bond index funds.
John Miller, head of municipals at Nuveen, adds that “solid economic growth, rising tax revenues, low default rates and strong technicals provided tailwinds for municipal bonds in 2021, and we expect these trends will persist into next year. Federal stimulus and new infrastructure spending should also provide multiyear benefits for state and local governments through increased municipal project funding.”
Although investment-grade munis may have lower credit ratings (and thus higher default risk) than a mix of corporates and U.S. Treasuries, the greater risk for fixed income in 2022 would seem to be interest-rate risk, not default risk. So if you’re looking for protection from the Fed in 2022, SWNTX is among the best Schwab mutual funds you can buy.
Kent Thune did not hold positions in any of these funds as of this writing. This article is for information purposes only, thus under no circumstances does this information represent a specific recommendation to buy or sell securities.