dOI Wi14 C1 Cover rev - Charles Schwab · Demystifying eTF Trading PAGE 17 OI-Wi14-Q4-C1...

STRATEGIES & IDEAS FOR THE CHARLES SCHWAB COMMUNITY • WINTER 2014

OnInvesting

Time To

ThinkGlobally? Reasons To

consideR oveRseas Real esTaTe PAGE 20

The Risks of chasing yieldPAGE 27

A Strategy for Wise GivingPAGE 24

Demystifying eTF TradingPAGE 17

OI-Wi14-Q4-C1dOI_Wi14_C1_Cover_rev.indd 1 10/2/14 12:24 PM

A great year-end discount on our 5/1 Adjustable-Rate Mortgages

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5/1 ARM as of 09/24/14. 0.0% points: This Adjustable-Rate Mortgage (ARM) offers principal and interest payments based on a 30-year amortization with a fixed rate of interest for the first five years and may adjust annually thereafter for the remaining 25 years using a fully indexed rate ( index plus margin) rounded to the nearest 0.125%. For example, during the first five years, the initial payment on a 30-year $650,000.00 loan is $2,784.45 at 3.125%, with 75% loan-to-value, 0% points due at closing, and 2.994% Annual Percentage Rate (APR). After the initial five years, the fully indexed rate will adjust annually, in which case your payment may increase. Based on a recently published index, the initial fully indexed rate rounded to the nearest 0.125% would be 2.875%, with principal and interest payments of $2,709.13. Disclosed payments do not include taxes and insurance premiums, so the actual payment amount may be greater.

Due to market fluctuations, interest rates are subject to change at any time and without notice and are subject to credit and property approval based on underwriting guidelines. The rates and APRs shown are based on the purchase of an owner-occupied, single-family residence, for our best-qualified customers. Your individual rate may vary.

This offer is subject to change or withdrawal at any time and without notice. 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 affiliated companies and subsidiaries of The Charles Schwab Corporation. Investment products are offered by Charles Schwab & Co., Inc. (Member SIPC), are not insured by the FDIC, are not deposits or obligations of Charles Schwab Bank, and are subject to investment risk, including the possible loss of principal invested. 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 provided by Quicken Loans Inc., an Equal Housing Lender. Quicken Loans Inc. is not affiliated with The Charles Schwab Corporation, Charles Schwab & Co., Inc., or Charles Schwab Bank. Deposit and other non-home-lending products are offered by Charles Schwab Bank, Member FDIC and an Equal Housing Lender. Home lending is provided by Quicken Loans Inc., the home loan provider of Charles Schwab Bank. Quicken Loans Inc., Equal Housing Lender, is not affiliated with The Charles Schwab Corporation, Charles Schwab & Co., Inc., or Charles Schwab Bank, 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-specific 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, first (and/or second) mortgages only; New York: Licensed Mortgage Banker—NYS Banking Department; Oregon: Quicken Loans Inc.—License #ML-1387; Pennsylvania: Licensed as a first 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.

©2014 Charles Schwab Bank. All rights reserved.Member FDIC. Equal Housing Lender. CLB (1114-6223) (09/14) ADP82824-00SCHWAB BANK ADVERTISEMENT

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WINTER 2014 • ON INVESTING 1

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CONTENTS

DEPARTMENTS

FE ATURES

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3 CEO’s NoteIn search of higher yields.By Walt Bettinger

4 The Bottom Line‘Go-anywhere’ funds, year-end tax strategies and more.

8 Ask CarrieSet up your grad for success.By Carrie Schwab-Pomerantz

10 PerspectivesRetirementHow to live off your nest egg.By Rob Williams

12 BondsWhat this year’s price signals mean for bond investors.By Kathy Jones

14 TaxesA tax-smart approach to your cost basis.By Rande Spiegelman

17 TradingDemystifying ETF trading.By Michael Iachini

30 SpotlightThe latest products and services from Schwab.

34 ResearchSchwab Mutual Fund OneSource Select List®

43 Schwab ETF Select List®

47 Argus Research

48 On Your SideReady to engage.By Charles R. Schwab

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.

Apple, the Apple logo, iPad and iPhone are trademarks of Apple, Inc., registered in the United States and other countries.

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. NWS73442Q414

27

14

17

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20 CAPITALIZING ON GLOBAL REAL ESTATE

Consider overseas property investments to balance your portfolio.

24 GIVING WISELY Make the most of your charitable

giving by thinking strategically.

27 WORTH THE RISK? Why preferreds, REITs and MLPs

aren’t substitutes for bonds.

schwab.com/[email protected]/charlesschwabschwab.com888-484-5340CONNECT WITH US

GO PAPERLESSLog in to schwab.com/OIpaperless to receive email alerts when new issues of On Investing are available online. You can also scan here to download the On Investing app for iPad®.

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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 Bettinger Michael Iachini

Kathy JonesCharles R. Schwab

Carrie Schwab-PomerantzRande Spiegelman

Rob Williams

oninvesting

iMPortant disClosurEsInvesting involves risks, including loss of principal. (p. 3, 5, 6–7, 10–11, 48)

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. 3, 4, 12–13, 27–29)

Lower-rated securities are subject to greater credit risk, default risk and liquidity risk. (p. 4, 12–13, 27–29)

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. Shares are bought and sold at market price, which may be higher or lower than the net asset value. (p. 17–19)

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. 17–19)

Risks of investing in real estate investment trusts (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. (p. 3, 20–23, 27–29, 31)

Investing in master-limited partnerships (MLPs) involves additional risks as compared to the risks of investing in common stock, including risks related to tax treatment cash flow, dilution and voting rights. Additional risks include volatility, difficulty buying and selling, and regulatory oversight. (p. 27–29)

Preferred stocks generally have lower credit ratings and lower claim to assets than a firm’s individual bonds, and are often callable. (p. 27–29)

International investments involve additional risks, including differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks. (p. 20–23, 31)

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. (p. 5)

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. 5, 6–7, 17–19)

The Consumer Price Index is a measure taken by the U.S. government that calculates the weighted average of prices of a basket of consumer goods and services. (p. 12–13)

Indexes are unmanaged, do not incur management fees, costs or expenses, and cannot be invested in directly. (p. 6–7, 17–19, 20–23, 27–29)

Diversification strategies do not ensure a profit and do not protect against losses in declining markets. (p. 20–23, 27–29, 31)

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. (p. 5)

Charles Schwab Investment Management, Inc., the investment advisor for Schwab’s proprietary funds, and Charles Schwab & Co., Inc., the distributor for Schwab Funds, are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation. (p. 31)

Fundamental Index® is a registered trademark of Research Affiliates, LLC. (p. 31)

Charles Schwab Investment Advisory, Inc., is an affiliate of Charles Schwab & Co., Inc. (p. 17–19)

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc. (p. 5, 10–11, 12–13, 14–16, 20–23, 27–29)

The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC), offers investment services and products, including Schwab brokerage accounts. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides deposit and lending services and products. (p. 48)

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. (p. 3, 4, 5, 8–9, 10–11, 12–13, 14–16, 17–19)

This information 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 consultation with a qualified tax advisor, CPA, financial planner or investment manager. (p. 5, 10–11, 14–16, 30)

A donor’s ability to claim itemized deductions is subject to a variety of limitations depending on the donor’s specific tax situation. Consult your tax advisor for more information. (p. 5)

©2014 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (1114-5917)

ihWe can help you understand the impact of fixed income alternatives on your portfolio.

i f you’ve been frustrated by low yields from your fixed income investments, you’re

not alone. For those who rely on bonds to generate a steady stream of income, low rates are most unwelcome. In some cases, low rates might even tempt investors to seek returns elsewhere—for better or worse.

In this issue of , we look into a few of the alternatives to which yield-seeking investors have turned. Some of them, such as real estate investment trusts (REITs), while more risky than bonds, could potentially still help shoulder some of the burden of generating income as part of a diversified portfolio. Others, such as nontraditional fixed income mutual funds, may deliver returns that are too small to justify the larger risks involved.

As with any investing strategy, the hunt for higher yield should be conducted with great care and due diligence—there are no one-size-fits-all solutions. For example, swapping out bond investments for equity-income investments might work for investors who can tolerate the increased risk associated with equities, but that approach isn’t for everyone.

See page 2 for important information.(1114-4702)

ClarifiCation and CorrECtion Thank you to readers who pointed out incomplete and erroneous information in our Fall 2014 edition.

In “Demystifying RMDs” on page 5, we stated that RMDs must be calculated separately for each retirement account but can be taken from any account. While that is true for IRAs, RMDs for qualified employer-sponsored retirement plans, such as 401(k)s, must be withdrawn from each account separately.

We also stated that if you are 70½ or older and still working and contributing to an employer-sponsored retirement plan, you can delay your first RMD until after you retire. This is only true for your current employer-sponsored account. Standard RMD rules still apply for all other retirement accounts you hold.

In “Investing for Income and Growth With Dividend-Paying Stocks” on page 33, we incorrectly identified Procter & Gamble as Proctor & Gamble.

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CharlEs sChwaB • Winter 2014 2

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ceo’s note

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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. (p. 3, 20–23, 27–29, 31)

stock, including risks related to tax treatment cash flow, dilution and voting rights. Additional risks include volatility, difficulty buying and selling, and regulatory oversight. (p. 27–29)

Preferred stocks generally have lower credit ratings and lower claim to assets than a firm’s individual bonds, and are often callable. (p. 27–29)

International investments involve additional risks, including differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks. (p. 20–23, 31)

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. (p. 5)

basket of consumer goods and services. (p. 12–13)

Indexes are unmanaged, do not incur management fees, costs or expenses, and cannot be invested in directly. (p. 6–7, 17–19, 20–23, 27–29)

Diversification strategies do not ensure a profit and do not protect against losses in declining markets. (p. 20–23, 27–29, 31)

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. (p. 5)

is a registered trademark of Research Affiliates, LLC. (p. 31)

Charles Schwab Investment Advisory, Inc., is an affiliate of Charles Schwab & Co., Inc. (p. 17–19)

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc. (p. 5, 10–11, 12–13, 14–16, 20–23, 27–29)

The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC), offers investment services and

In search of Higher YieldsWe can help you understand the impact of fixed income alternatives on your portfolio.

I f you’ve been frustrated by low yields from your fixed income investments, you’re

not alone. For those who rely on bonds to generate a steady stream of income, low rates are most unwelcome. In some cases, low rates might even tempt investors to seek returns elsewhere—for better or worse.

In this issue of On Investing, we look into a few of the alternatives to which yield-seeking investors have turned. Some of them, such as real estate investment trusts (REITs), while more risky than bonds, could potentially still help shoulder some of the burden of generating income as part of a diversified portfolio. Others, such as nontraditional fixed income mutual funds, may deliver returns that are too small to justify the larger risks involved.

As with any investing strategy, the hunt for higher yield should be conducted with great care and due diligence—there are no one-size-fits-all solutions. For example, swapping out bond investments for equity-income investments might work for investors who can tolerate the increased risk associated with equities, but that approach isn’t for everyone.


Bondholders should also be aware that, as rates begin to rise and prices correspondingly begin to decline, it may become more challenging to sell the fixed income investments they already hold in their portfolios without incurring significant losses.

However you address your situation, a low-yield environment doesn’t mean you should lower your standards when it comes to making investment decisions. Our experienced fixed income professionals can help guide you through the bond market as you consider yield-generating ideas.

With bond yields likely to rise in the coming years, we will make sure you have all of the information necessary—in the transparent Schwab way—to help you achieve your financial goals.

Sincerely,

Walt BettingerPresident & CEO

“the hunt for higher yield should be conducted with great care and due diligence.”

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‘Go-Anywhere’ FundsDoes the potential for higher yields outweigh the risks?

W ith interest rates hovering near historic lows, some yield-hungry fixed income investors have poured money into a variety

of nontraditional fixed income funds.Unlike traditional fixed income funds, which tend

to target specific parts of the bond market, such as municipal or corporate bonds, nontraditional funds can hold debt from any type of issuer, with any type of credit rating and in any maturity.

In theory, such flexibility enables nontraditional bond funds to focus on higher-yielding investments, which is likely contributing to their appeal. Assets in such funds rose about 80% to $123 billion in 2013, and grew another 7% to $132 billion in the first two months of 2014.1

However, the freedom to look for yield doesn’t always pay off. According to fund-research company Morningstar, nontraditional bond funds had a 2.5% year-to-date return through June 23, 2014. That’s less than half

1Conrad De Aenlle, “When Bond Funds Think Outside the Box,” The New York Times, 4/4/2014.

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.Past performance is no guarantee of future results.

(1114-4542)

the 5.7% return on corporate bond funds Morningstar tracked during the period.

Although nontraditional funds haven’t been performing particularly well as a group, it’s important to understand that management styles vary widely between funds. Some managers may adopt risky strategies or invest heavily in high-yield bonds, while others may be fairly conservative.

Investors interested in nontraditional bond funds should pay attention to a fund’s investment strategy and other information available to shareholders. They should also consider these funds a complement to, rather than a replacement for, traditional core bond funds. -

Next StepS Call a Fixed

Income Specialist at

866-893-6699 for help

determining which bond

investments are appropriate for your portfolio. ©

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Taxes: 4 Things to Check This YearOptimize your tax situation before 2015.

W ith the end of the year approaching, now is a great time to give your finances an annual tax checkup. Here are four items to consider.

Check your withholding. If you’ve had any changes to your finances that could affect your tax situation—such as a new job,

extra income from a side business, or a new or refinanced mortgage—it’s a good idea to review and, if necessary, adjust your tax withholding before the end of the year. Doing so helps position you for a more tax-efficient 2015.

Reduce your capital gains. If you have losing investments, you may want to sell them before the end of the year and write

off the losses. Selling now allows you to reposition your portfolio allocations and helps offset any realized capital gains. And if your capital losses exceed your capital gains by more than $3,000, you can carry forward those losses to future tax years.

NOTE: If you plan to reinvest in a losing position, watch out for the “wash sale” rule, which prohibits you from claiming a loss if you replace the losing security with the same or a “substantially identical” investment within 30 days before or after the sale.

Take required minimum distributions (RMDs) on time—or face a steep penalty. The IRS requires investors who are age 70½ or

older to take annual distributions from most retirement accounts by the end of the year. If you don’t withdraw the required sum on time, you may face a penalty amounting to 50% of any funds you should have withdrawn.

NOTE: If you turned 70½ in 2014, you have until April 1, 2015, to take your first RMD. However, if you delay until then, you will still have to take your next withdrawal by December 31, 2015, meaning you would be taking two RMDs in 2015, potentially increasing your income and tax burden for the year.

Make your giving tax efficient. Gifts to qualified charities must be made before the end of the year to qualify for a tax deduction. Save

receipts for donations of $250 or more. You may also want to consider donating appreciated securities. Doing so allows you to claim the full market value of the donated securities as a deduction while avoiding capital gains taxes. But don’t donate depreciated securities— you’re better off selling those, taking the tax benefit and then donating the cash. -

NExT STEpS For more tax help and to access year-end tax documents, visit schwab.com/OItax.


Are Technology Stocks Getting a Reboot?Several factors suggest the potential for outperformance in the IT sector.

E arlier this year, the tech-heavy NASDAQ Composite Index® shed roughly 8% over a few weeks as investors suddenly cashed

out of fast-growing technology and social media stocks. The ensuing talk of a slump in tech stocks may have overshadowed some attractive possibilities in the sector.

For one thing, we may be at the beginning of an information technology (IT) investment cycle that could boost sales for tech companies, says Brad Sorensen, Director of Market and Sector Analysis at the Schwab Center for Financial Research. “Businesses that delayed IT investments in the wake of the 2008–2009 financial crisis are long overdue for upgrades,” he says. IT research firm Gartner expects businesses in mature markets to replace roughly 60 million personal computers by the end of 2014.1

Brad also says some established tech companies have been introducing or boosting dividends in recent years, potentially making IT stocks appropriate for investors focused on equity income. According to S&P Capital IQ data, 44 stocks in the S&P 500® Index’s IT sector paid dividends in 2013, yielding an average 1.63%. This is a significant change from 2010, when the 32 dividend-paying stocks in the sector had an average yield of 0.94%.2

“A few of the high-flying technology companies from the late 1990s are now some of the most stable, income-generating stocks in the market,” Brad says. -

1Michael McEnaney, “Signs of Life in PC Market? Consumers/Business Looking for More Muscle Than Tablets Offer,” TechTimes.com, 7/8/2014. 2Constance Gustke, “High Dividend-Paying Tech Stocks Still Undervalued,” CNBC.com, 3/12/2014.


Do tHe ReseaRcHReview Schwab’s top-rated technology stocks by logging in to schwab.com/OIstocks and clicking the Schwab Stock Lists™ tab.

the 5.7% return on corporate bond funds Morningstar tracked during the period.

Although nontraditional funds haven’t been performing particularly well as a group, it’s important to understand that management styles vary widely between funds. Some managers may adopt risky strategies or invest heavily in high-yield bonds, while others may be fairly conservative.

Investors interested in nontraditional bond funds should pay attention to a fund’s investment strategy and other information available to shareholders. They should also consider these funds a complement to, rather than a replacement for, traditional core bond funds.

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Over the years, several adages based on supposed seasonal patterns in stock

market returns have taken hold. Some investors treat these sayings as established wisdom and use them to make important decisions about when to get in or out of the market. But should a saying take the place of a strategy?

Here we take a closer look at a few of these adages, examining their accuracy over a 64-year period.

Source: Schwab Center for Financial Research. Market returns based on S&P 500® Index from 1950–2013.

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

(1114-6019)

Staying in the market over the long term can helpbig trading days come along. Some adages might seem like conventional wisdom, but they shouldn’t guide your investing decisions or distract you from your long-term investing strategy.

Conclusion:Stay Invested

Should Market adageS guide Your inveSting?

As January Goes, So Goes the YearThis refers to the idea that if the market rises in January, it will go on to post gains for the full year. In the 64 years covered by our data, January posted gains in 40 of them. And in 36 of those 40 years, the market went on to record gains for the full year.

90% Truethat when

JanuarY PoSted gainS,

the Market ended the

Year higher

Jan FEB MaR aPR

1%

3%

5%

7%

2%

4%

6%

So should you try to time the market?

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Next StepS Find more of Schwab’s market research and commentary at schwab.com/OImarketinsight.

Staying in the market over the long term can help ensure you benefit when big trading days come along. Some adages might seem like conventional wisdom, but they shouldn’t guide your investing decisions or distract you from your long-term investing strategy.

Sell in May and Go Away Santa Claus RallyThis adage suggests that the stock market will see losses for the period between Memorial Day and Labor Day, so it’s better to pull out of the market altogether during the summer months. However, our research shows that this was only true in 22 of the 64 years studied.

This refers to the idea that stocks tend to surge at the end of the year, partly as a result of tax considerations. In fact, the market rallied in 49 of the 64 years studied, and a positive December preceded a positive January two-thirds of the time.

34% tRue

ThaT The markeT

fell in The summer monThs

77% tRue

ThaT The markeT

rallied in december

MAY JUN JUL AUG SEP OCT NOV DEC

20092010201120122013No. Although some adages have proved more reliable than others over the years, the market

can surge at any time. The chart below shows the 10 biggest single-day stock market gains in each of the past five years. As you can see, trying to time the market would have meant missing out on major single-day gains in some years.

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Dear Carrie,My 22-year-old son graduated from college last spring. Now he’s struggling to find a job—and I’m trying to figure out my role as he transitions to life in the real world. How can I help him find his footing ?—A Reader

Set Up Your Grad for SuccessHow financial support and independence can go hand in hand.BY CARRie SChwAB-PomeRAntz

Provide a savings incentiveSaving is one of the hardest things to do on a small salary, but still one of the most important. Encourage your son to open a savings account where he can sock away money for an apartment, a car or other goals. Also talk to him about the importance of having an emergency fund. As an incentive, you could offer to match a portion of his savings.

Once he’s earning some money, encourage him to take advantage of his 401(k) if his company offers one. If not, have him open an IRA. (Roth IRAs, which are funded with after-tax dollars and offer tax-free growth and earnings, as well as tax- and penalty-free withdrawals in retirement, are particularly practical for younger investors, who are likely to be in a lower tax bracket today than they will be in retirement.) Again, you might offer to match his savings, or contribute a certain amount with the proviso that he has to add a percentage of his own income every month.

A colleague of mine did this with her daughter several years ago and now has the pleasure of seeing her not only saving regularly, but managing a growing retirement account and handling her own investing. That brings me to the next point.

1Thomas Luke Spreen, “Recent College Graduates in the U.S. Labor Force: Data from the Current Population Survey,” 2Jaison R. Abel, Richard Deitz and Yaqin Su, “Are Recent College Graduates Finding Good Jobs?” Federal Reserve Bank of New York, , Vol. 20, No. 1 (2014). 3“A New Era: $60K Per Year Colleges,” CampusGrotto.com, 10/4/2012. 4Richard Fry, “A Rising Share of Young Adults Live in Their Parents’ Home,” Pew Research Center’s Social & Demographic Trends, 8/1/2013. 5Withdrawals from a Roth IRA are generally tax- and penalty-free if the account has been open for at least five years and the withdrawals are taken after age 59½.

See page 2 for important information.To receive a complimentary copy of , attend a branch workshop and request one. Workshops require registration, and space is limited. Book available while supplies last; one per person; only U.S. residents over 18 are eligible. Other restrictions may apply.

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Dear Reader,

You’re certainly not alone in facing this quandary. Whether you’re talking to

other parents or reading the news, the consensus is that it’s difficult for today’s college graduates to find a job. That’s corroborated by the U.S. Bureau of Labor Statistics, which put the unemployment rate for recent graduates with a bachelor’s degree at 13.5% in 2011 (the most recent year for which statistics on this subset of graduates are available).1

But it’s not just a matter of unemployment; it’s also a matter of underemployment. A 2014 study by the Federal Reserve Bank

make your support specificThere are a couple of ways to do this, and they should apply whether your son has a place of his own or is still living at home. (Having a young adult at home wouldn’t be surprising. According to Pew Research Center, 56% of adult children ages 18–24 live with their parents.4)

Let’s say he finds a part-time job. First, discuss his expenses with him: transportation, food, clothes, entertainment, credit card balances, student loan payments, possibly even rent paid to you to cover his share of household expenses. Help him draw up a monthly budget and talk about what his salary will cover. Then you can consider supplementing his paycheck to help cover his essentials, provided you can afford to do so.

If your son is living on his own, be clear about how you will help support him. Ask to see his budget so that you know exactly where your money is going. You won’t be helping him achieve independence if you pay for everything.

of New York estimates that up to 44% of recent college graduates hold jobs that don’t require a bachelor’s degree.2 Before we jump to conclusions, we should realize that even though these unemployment and underemployment rates are higher than in the recent past, they’re not far off historical norms. As the Federal Reserve study also points out, it is actually quite common for young graduates to take several years to successfully transition into a meaningful career path.

The one thing that has changed significantly over time is how much an education costs. With the combined cost of tuition, room and board at some colleges topping $200,000 for a four-year degree,3 the sting of unemployment or underemployment is that much more acute. Even so, a degree is likely worth the investment—unemployment rates are about 50% higher for those without a college degree.

The lesson is that the “real world” may look a little different than we—and our recent graduates—anticipated. Nonetheless, there are still some positive steps we can take to help them get a handle on their finances. ©

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Ask CARRie

dOI_Wi14_8-9_Carrie.indd 8 10/2/14 12:01 PM

Provide a savings incentiveSaving is one of the hardest things to do on a small salary, but still one of the most important. Encourage your son to open a savings account where he can sock away money for an apartment, a car or other goals. Also talk to him about the importance of having an emergency fund. As an incentive, you could offer to match a portion of his savings.

Once he’s earning some money, encourage him to take advantage of his 401(k) if his company offers one. If not, have him open an IRA. (Roth IRAs, which are funded with after-tax dollars and offer tax-free growth and earnings, as well as tax- and penalty-free withdrawals in retirement,5 are particularly practical for younger investors, who are likely to be in a lower tax bracket today than they will be in retirement.) Again, you might offer to match his savings, or contribute a certain amount with the proviso that he has to add a percentage of his own income every month.

A colleague of mine did this with her daughter several years ago and now has the pleasure of seeing her not only saving regularly, but managing a growing retirement account and handling her own investing. That brings me to the next point.

Lead by exampleShare your experiences with money management and investing. The colleague I mentioned earlier helped her daughter get into investing by going over her own portfolio with her daughter and introducing her to some of the investing tools on schwab.com.

Schwab.com/OImoneywise is a great place to begin your son’s investing education. There you’ll find not only information and tools to help with budgeting and saving, but also a good introduction to investing concepts and basic portfolio construction.

Once your son has this information under his belt, you can help him get started with a broadly diversified investment like an index mutual fund or exchange-traded fund (ETF). With some seed money in his IRA, investing can come alive—and hopefully inspire a lifelong interest.

Use your connectionsUltimately, you have to have money to learn to manage it wisely. So if you have professional associations or friends in a field related to your son’s area of education and interest, don’t be shy about approaching them for help with your son’s job search. Today, with the majority of resumes submitted online and the competition numbering

1Thomas Luke Spreen, “Recent College Graduates in the U.S. Labor Force: Data from the Current Population Survey,” Monthly Labor Review, February 2013. 2Jaison R. Abel, Richard Deitz and Yaqin Su, “Are Recent College Graduates Finding Good Jobs?” Federal Reserve Bank of New York, Current Issues in Economics and Finance, Vol. 20, No. 1 (2014). 3“A New Era: $60K Per Year Colleges,” CampusGrotto.com, 10/4/2012. 4Richard Fry, “A Rising Share of Young Adults Live in Their Parents’ Home,” Pew Research Center’s Social & Demographic Trends, 8/1/2013. 5Withdrawals from a Roth IRA are generally tax- and penalty-free if the account has been open for at least five years and the withdrawals are taken after age 59½.

See page 2 for important information.To receive a complimentary copy of The Charles Schwab Guide to Finances After Fifty, attend a branch workshop and request one. Workshops require registration, and space is limited. Book available while supplies last; one per person; only U.S. residents over 18 are eligible. Other restrictions may apply.

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Next StePSAttend a branch workshop near you and receive a complimentary copy of Carrie’s latest book, The Charles Schwab Guide to Finances After Fifty (Crown Business, 2014). Reserve your seats at schwab.com/OIworkshops.

in the thousands for even the most entry-level jobs, a personal connection is invaluable. Even an informational interview can be an important learning experience and could open the door to future opportunities.

Provide advice—up to a pointGraduates should understand that they most likely won’t end up in their dream jobs immediately after collecting their diplomas. And we parents need to understand our kids’ employment challenges and be realistic about the difficulties and time involved in landing a job today.

I encourage you to talk openly with your son about his goals and your expectations. But ultimately, your son’s life is his own, and it’s appropriate for him as a young adult to make his own decisions. As a supportive parent, you just have to be clear about the limits of your financial support. That will help each of you transition into this new life stage—and may help each of you accept the ups and downs that are part of your child’s personal and financial success. -

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

There are a couple of ways to do this, and they should apply whether your son has a place of his own or is still living at home. (Having a young adult at home wouldn’t be surprising. According to Pew Research Center, 56% of adult children ages 18–24 live with

)Let’s say he finds a part-time

job. First, discuss his expenses with him: transportation, food, clothes, entertainment, credit card balances, student loan payments, possibly even rent paid to you to cover his share of household expenses. Help him draw up a monthly budget and talk about what his salary will cover. Then you can consider supplementing his paycheck to help cover his essentials, provided you can afford to do so.

If your son is living on his own, be clear about how you will help support him. Ask to see his budget so that you know exactly where your money is going. You won’t be helping him achieve independence if you pay for everything. ©

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Charles sChwab • Winter 2014 10

PersPeCtives: RetiRement

Funding Your retirementHow to live off your nest egg.bY rob williams

w hen many investors think about retirement, they focus on socking away cash and then investing

it wisely to grow their nest egg. But there’s another critical—and often overlooked—piece of retirement planning: devising a strategy for withdrawing those carefully tended savings.

When it’s time to tap their savings, many retirees either spend too much and risk not having enough money to fund their entire retirement, or they spend too little and leave more behind than desired.

In previous issues of On Investing, we discussed the first two steps in our three-step approach to retirement income. The first article in the series covered planning your retirement. The second article discussed your portfolio’s allocation, or choosing the right mix of investments to help you reach your goals once your plan is in place.

That brings us to the final step of retirement planning—distribution. As with the planning and allocation steps, each person’s circumstances are unique. We all have different portfolios, and our needs and goals are our own. That said, some general principles apply to any retirement withdrawal strategy. It’s just a matter of drawing up a budget reflecting all of your income and spending expectations, and then devising a suitable distribution strategy.

Cover essentials with predictable income sources Social Security, pension payments, annuities, interest income, or even cash or short-term bonds kept in reserve are among the

“Paying for essentials with

predictable income may

help you avoid selling investment

assets to cover your bills.”

See page 2 for important information.The Personal Portfolio Review is complimentary, although the implementation of any recommendations made during the consultation may result in trade commissions or other fees, charges or expenses. The Personal Portfolio Review is available only to clients with at least $25,000 in assets at Schwab or prospects with at least $25,000 in assets available to bring to Schwab. Individualized recommendations are available only to Schwab clients and are limited to assets held in a Schwab retail brokerage account. Information provided to prospects, or pertaining to assets held outside of Schwab, as part of a Personal Portfolio Review are examples of the kinds of recommendations available on assets held at Schwab; these examples do not constitute recommendations, solicitations or investment advice.

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predictable sources of income you can use to cover essential expenses. Many retirees fall into the trap of tapping their more volatile investment assets to cover regular costs—such as housing, car loans, food and utilities—when they could be using income from more predictable sources. Paying for essentials with predictable income may help you avoid selling investment assets to cover your bills, which can be particularly costly when the market is down.

Fund discretionary expenses with fluctuating income Stock dividends, distributions from mutual funds or exchange-traded funds, required minimum distributions from your retirement accounts, and proceeds from selling investments are less reliable than the predictable income sources cited above. Then again, they also have more growth potential and tend to keep pace with inflation. This makes such income a good fit when paying for nonessential items, such as vacations or gifts to a charity or grandchild. Fluctuating income from dividends and other distributions also can help supplement Social Security payments and other sources of income outside your portfolio.

Generate cash flow when you rebalance your portfolioSelling investments as part of the annual rebalancing of your portfolio could provide another opportunity to generate cash flow. Annual portfolio rebalancing is especially important when you’re retired, as your allocation should grow more conservative as you age to help preserve your assets. A portfolio that’s out of balance can leave you with more risk or less growth potential than you want. These risks can be magnified in volatile markets because retirees have less time than younger investors to recover from the potential losses or lackluster returns caused by a portfolio that has strayed from a chosen asset allocation.

How do portfolios drift away from target allocations? Many investors got a first-hand look in 2013, when major U.S. stock indexes rose more than 25% and left many portfolios overweighted in equities.

To help remedy an imbalance like this one, you could sell from the stock portion of your portfolio to generate needed cash and get your portfolio back on target. (See “Selling investments” at right for more information.) Remember that rebalancing does not protect you against losses or guarantee that you’ll meet your goals.

With these points in mind as you create your own distribution plan, watch for changes in your spending or income to ensure that your expectations are on track. In a prolonged down market, for example, you may need to curb or postpone discretionary spending to avoid drawing down your portfolio too quickly.

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Winter 2014 • on investing 11

Call UsTalk to us about your retirement. Call 888-484-5340 or visit a branch near you to schedule your Personal Portfolio Review.

See page 2 for important information.The Personal Portfolio Review is complimentary, although the implementation of any recommendations made during the consultation may result in trade commissions or other fees, charges or expenses. The Personal Portfolio Review is available only to clients with at least $25,000 in assets at Schwab or prospects with at least $25,000 in assets available to bring to Schwab. Individualized recommendations are available only to Schwab clients and are limited to assets held in a Schwab retail brokerage account. Information provided to prospects, or pertaining to assets held outside of Schwab, as part of a Personal Portfolio Review are examples of the kinds of recommendations available on assets held at Schwab; these examples do not constitute recommendations, solicitations or investment advice.

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predictable sources of income you can use to cover essential expenses. Many retirees fall into the trap of tapping their more volatile investment assets to cover regular costs—such as housing, car loans, food and utilities—when they could be using income from more predictable sources. Paying for essentials with predictable income may help you avoid selling investment assets to cover your bills, which can be particularly costly when the market is down.

Stock dividends, distributions from mutual funds or exchange-traded funds, required minimum distributions from your retirement accounts, and proceeds from selling investments are less reliable than the predictable income sources cited above. Then again, they also have more growth potential and tend to keep pace with inflation. This makes such income a good fit when paying for nonessential items, such as vacations or gifts to a charity or grandchild. Fluctuating income from dividends and other distributions also can help supplement Social Security payments and other sources of income outside your portfolio.

Selling investments as part of the annual rebalancing of your portfolio could provide another opportunity to generate cash flow. Annual portfolio rebalancing is especially important when you’re retired, as your allocation should grow more conservative as you age to help preserve your assets. A portfolio that’s out of balance can leave you with more risk or less growth potential than you want. These risks can be magnified in volatile markets because retirees have less time than younger investors to recover from the potential losses or lackluster returns caused by a portfolio that has strayed from a chosen asset allocation.

How do portfolios drift away from target allocations? Many investors got a first-hand look in 2013, when major U.S. stock indexes rose more than 25% and left many portfolios overweighted in equities.

To help remedy an imbalance like this one, you could sell from the stock portion of your portfolio to generate needed cash and get your portfolio back on target. (See “Selling investments” at right for more information.) Remember that rebalancing does not protect you against losses or guarantee that you’ll meet your goals.

With these points in mind as you create your own distribution plan, watch for changes in your spending or income to ensure that your expectations are on track. In a prolonged down market, for example, you may need to curb or postpone discretionary spending to avoid drawing down your portfolio too quickly.

Selling investmentsWhen it comes to selling assets, it’s usually better to part with investments held in taxable accounts before taking money from tax-deferred accounts. Withdrawals from traditional IRAs and 401(k)s are treated as ordinary income—which is typically taxed at a higher rate than long-term capital gains. What’s more, tapping your IRA means losing opportunities for tax-deferred compound growth.

A possible exception is if your IRA balance is very large. If that is the case, you might want to start taking distributions before you reach age 70½, which is when most retirees must start withdrawing a minimum amount from their retirement savings. Otherwise, your mandatory withdrawal amount might bump you up to a higher tax bracket.

One other thing to consider when selling is the need to weed out nonperformers. When you’re rebalancing your portfolio and selling assets from taxable and tax-preferred accounts, sell holdings with the lowest performance or credit ratings to improve the quality of your portfolio.

Creating income during retirement might sound daunting, but it doesn’t have to be. Three steps—planning, allocating and distributing—can help you simplify the process and lay the groundwork for the kind of retirement you’ve always wanted. -

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

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PersPeCtives: bonds

Inflation Pressure?What this year’s price signals mean for bond investors.by Kathy Jones

e conomists don’t like to place too much emphasis on any single piece of data, but the Labor Department’s Consumer

Price Index report for May certainly grabbed their attention. Consumer prices, as tracked by the index, posted their sharpest gains in more than a year that month, pushing the annual rate of inflation to 2.1%.1

The market’s reaction to the report was swift: Investors sold short-dated government bonds, sending their yields to fresh highs for the year. The perception was that after months of only moderate gains in prices, inflation had bottomed out and was starting to rise—possibly even fast enough for the Federal Reserve to consider raising interest rates before 2015, when the market was expecting the hike. The Fed maintains a 2% target for inflation, and price growth above that level could prompt the central bank to intervene to head off the possibility of the economy overheating.

Just a few months earlier, the situation looked very different to bond investors. At the International Monetary Fund (IMF) meeting in Washington, D.C., in April, finance officials from around the world expressed concern about disinflation—a slowing in the pace of inflation—and wondered whether it was a possible precursor to deflation, a sustained fall in the general price level of goods and services. Such concerns had dragged long-term bond yields lower.

Fixed income investors might be forgiven for feeling a little seasick, but in times like these, a bit of long-term perspective can help steady the horizon. It’s unwise to draw too many conclusions from one month’s worth of pricing data. Other pricing reports favored by the Fed—such as the Commerce Department’s personal consumption expenditures deflator—recorded inflation of less than 2% in August.2

And in Europe and other parts of the world, disinflation is still a real concern, even if inflation has reached a turning point here at home.

All things considered, it’s probably safe for fixed income investors to assume that, unless growth falters, short-term rates will move higher eventually. (It’s worth noting that Fed Chair Janet Yellen told Congress in July that there have been some “false dawns” over the past few years, so the path to higher interest rates is by no means carved in stone.)

Any further signs of life in the economy would probably mean additional price declines for bonds as investors position themselves for a rate hike. Given these conditions, bond investors may need to consider new strategies for dealing with shifting markets.

Strategies to considerOne alternative for investors who are thinking about making tactical moves in anticipation of rising rates is what’s commonly called a “barbell strategy.” This approach involves concentrating the maturities in a bond portfolio at the shorter and longer ends of the spectrum.

Here’s how it works: Bonds maturing in the short-term portion of the portfolio deliver proceeds that can be reinvested in newly issued short-term securities, giving an investor the flexibility to immediately take advantage of any rise in short-term interest rates. Meanwhile, bonds in the longer-term portion of the portfolio, which tend to offer higher yields, deliver steady income.

The idea is that by constantly rolling over short-maturity bonds while avoiding intermediate-term ones, an investor can manage his or her exposure to the big price swings likely to hit the short- to intermediate-term portion of the yield curve when rates rise.

The barbell strategy is far from a perfect solution, since yields are still low across the yield curve and a rise in rates could have a negative impact on the overall portfolio by

1Bureau of Labor Statistics, Consumer Price Index Summary, 7/17/2014. 2Ben Leubsdorf, “U.S. Consumer Spending Rises 0.5% in August,”


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What this year’s price signals mean for bond investors.

“It is probably safe for fixed income investors to assume that, unless growth falters, short-term rates will move higher eventually.”

conomists don’t like to place too much emphasis on any single piece of data, but the Labor Department’s Consumer

Price Index report for May certainly grabbed their attention. Consumer prices, as tracked by the index, posted their sharpest gains in more than a year that month, pushing the annual rate of inflation to 2.1%.

The market’s reaction to the report was swift: Investors sold short-dated government bonds, sending their yields to fresh highs for the year. The perception was that after months of only moderate gains in prices, inflation had bottomed out and was starting to rise—possibly even fast enough for the Federal Reserve to consider raising interest rates before 2015, when the market was expecting the hike. The Fed maintains a 2% target for inflation, and price growth above that level could prompt the central bank to intervene to head off the possibility of the economy overheating.

Just a few months earlier, the situation looked very different to bond investors. At the International Monetary Fund (IMF) meeting in Washington, D.C., in April, finance officials from around the world expressed concern about disinflation—a slowing in the pace of inflation—and wondered whether it was a possible precursor to deflation, a sustained fall in the general price level of goods and services. Such concerns had dragged long-term bond yields lower.

Fixed income investors might be forgiven for feeling a little seasick, but in times like these, a bit of long-term perspective can help steady the horizon. It’s unwise to draw too many conclusions from one month’s worth of pricing data. Other pricing reports favored by the Fed—such as the Commerce Department’s personal consumption expenditures deflator—recorded inflation of less than 2% in August.

And in Europe and other parts of the world, disinflation is still a real concern, even if inflation has reached a turning point here at home.

All things considered, it’s probably safe for fixed income investors to assume that, unless growth falters, short-term rates will move higher eventually. (It’s worth noting that Fed Chair Janet Yellen told Congress in July that there have been some “false dawns” over the past few years, so the path to higher interest rates is by no means carved in stone.)

Any further signs of life in the economy would probably mean additional price declines for bonds as investors position themselves for a rate hike. Given these conditions, bond investors may need to consider new strategies for dealing with shifting markets.

Strategies to considerOne alternative for investors who are thinking about making tactical moves in anticipation of rising rates is what’s commonly called a “barbell strategy.” This approach involves concentrating the maturities in a bond portfolio at the shorter and longer ends of the spectrum.

Here’s how it works: Bonds maturing in the short-term portion of the portfolio deliver proceeds that can be reinvested in newly issued short-term securities, giving an investor the flexibility to immediately take advantage of any rise in short-term interest rates. Meanwhile, bonds in the longer-term portion of the portfolio, which tend to offer higher yields, deliver steady income.

The idea is that by constantly rolling over short-maturity bonds while avoiding intermediate-term ones, an investor can manage his or her exposure to the big price swings likely to hit the short- to intermediate-term portion of the yield curve when rates rise.

The barbell strategy is far from a perfect solution, since yields are still low across the yield curve and a rise in rates could have a negative impact on the overall portfolio by

1Bureau of Labor Statistics, Consumer Price Index Summary, 7/17/2014. 2Ben Leubsdorf, “U.S. Consumer Spending Rises 0.5% in August,” The Wall Street Journal, 9/29/2014.


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Call UsFor help with your bond investments, call 866-893-6699 to speak with a Schwab Fixed Income Specialist.

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pushing down prices, but it does offer a way to limit exposure to shorter-term price volatility.

Long-term investors who don’t take such a tactical approach could consider a laddered strategy. This involves spreading bond purchases evenly across a variety of maturities and then reinvesting the proceeds from maturing bonds in longer-term ones. To help increase the income from the portfolio as interest rates rise, investors following this strategy may want to extend their portfolio’s average duration—the amount of time it takes for the cash flows from a bond to cover its purchase price. Again, it’s worth remembering that an interest rate increase will affect all parts of a bond portfolio.

Don’t chase yieldBarbell and ladder strategies are preferable to chasing yield by investing in riskier segments of the bond market. Valuations for some of these segments, such as high-yield bonds and bonds from debt-laden European countries, are stretched by historical standards, reflecting the demand for yield. (For more, see “Worth the Risk?” on page 27.) As 2015 and the prospect of a U.S. rate hike get closer, some pullback is likely.

Even though it seems unlikely that short-term rates will rise quickly, just the indication that they’re going to be “unanchored” from zero some time down the road could cause the yield chasers to run for cover. It’s probably best to avoid being caught in the crowd, as that’s the kind of excitement in the bond market that we like to avoid. -

Kathy Jones is Vice President, Fixed Income Strategist at the Schwab Center for Financial Research.

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“It’s not what you make but what you keep that counts.”

W hen it comes to calculating your capital gains tax, understanding your cost basis is crucial.

Essentially, the cost basis of an investment is what you paid for it. Working out any capital gains when you sell an investment is just a matter of subtracting your cost basis from your sale price. It sounds simple enough, but calculating your cost basis can be complex—and if you do it incorrectly, you could end up paying the wrong amount in taxes.

Adjusting your cost basisYou can adjust your original purchase price for a variety of reasons. When you buy stocks, for example, you typically calculate your initial cost basis by adding commissions and fees to your per-share purchase price. You can also

make adjustments to account for events that affect the per-share price of a stock, such as mergers, stock splits and spinoffs.

Your adjusted cost basis should also reflect reinvested dividends or distributions from mutual funds and exchange-traded funds (ETFs). Why? The IRS treats reinvested dividends as if the money had been distributed directly to you, meaning distributions in a taxable account will be reported on a 1099-DIV form and taxed as regular dividend income. Adjusting your cost basis ensures you won’t also pay capital gains taxes on those funds.

Imagine you invest $10,000 in a stock that pays out $200 in taxable dividends, which you automatically reinvest. That gives you an initial cost basis of $10,000 and an adjusted cost basis of $10,200. Now, imagine the value of your stock rises to $10,500 and you sell your holdings.

Using your original cost basis instead of the adjusted one would result in a bigger capital gain—and therefore a higher tax bill.

Know your accounting methodAnother complication arises if you’ve purchased the same security on multiple occasions at a variety of prices.

For example, say you buy 100 shares of a stock for $50 each, and a year later buy 100 more at $60 each. By the following year, the stock is trading at $80 and you sell 50 shares. Your capital gain will differ depending on which shares—those purchased for $50 or $60—you sell.

Let’s look at two common accounting options for such cases.

--

--

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OriginAl vs. Adjusted cOst bAsis

$10,500- $10,000

$500

sale price

Original cost basis

capital gain

$10,500- $10,200

$300

sale price

Adjusted cost basis

capital gain

A tax-smart Approach to Your cost basisUnderstanding the tax rules may help you keep more of your gain.bY rAnde spiegelmAn

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chArles schWAb • Winter 2014 14

perspectives: taxes

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make adjustments to account for events that affect the per-share price of a stock, such as mergers, stock splits and spinoffs.

Your adjusted cost basis should also reflect reinvested dividends or distributions from mutual funds and exchange-traded funds (ETFs). Why? The IRS treats reinvested dividends as if the money had been distributed directly to you, meaning distributions in a taxable account will be reported on a 1099-DIV form and taxed as regular dividend income. Adjusting your cost basis ensures you won’t also pay capital gains taxes on those funds.

Imagine you invest $10,000 in a stock that pays out $200 in taxable dividends, which you automatically reinvest. That gives you an initial cost basis of $10,000 and an adjusted cost basis of $10,200. Now, imagine the value of your stock rises to $10,500 and you sell your holdings.

Using your original cost basis instead of the adjusted one would result in a bigger capital gain—and therefore a higher tax bill.

For example, say you buy 100 shares of a stock for $50 each, and a year later buy 100 more at $60 each. By the following year, the stock is trading at $80 and you sell 50 shares. Your capital gain will differ depending on which shares—those purchased for $50 or $60—you sell.

Let’s look at two common accounting options for such cases.

-- First in, first out (FIFO): This is the IRS’s default accounting method. For partial sales, the IRS presumes you’re selling the oldest shares first, which can lead to a larger capital gain if the oldest shares have appreciated more than those acquired later. In the example above, that would mean selling your $50 shares first, resulting in a capital gain of $30 per share, or $1,500 in total.

-- Specific identification: This method allows you to identify which shares you’re selling at the time of the sale. It is more flexible than FIFO and gives you the opportunity to optimize results. For our hypothetical portfolio, you could choose to sell the $60 shares first, resulting in a capital gain of $20 per share, or $1,000 in total.

There are other accounting methods out there. Investors may want to discuss their options with a tax professional before selling an investment.

Reporting your cost basisYour brokerage firm lists the proceeds of sales in your taxable account on Form 1099-B. It may also report your adjusted cost basis, but this will depend on when you bought the asset. Policy reforms introduced after the financial crisis require banks and brokerages to report adjusted cost basis for:

-- Stocks bought after 2010-- Mutual funds, ETFs and dividend reinvestment plans bought after 2011

-- Other specified securities, including most fixed income securities, acquired after 2013

Accounting method

Sale price

Purchase price

Gain/ share

Shares sold

Total gain

FIFO ($80 – $50) = $30 × 50 = $1,500

Specific identification ($80 – $60) = $20 × 50 = $1,000

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Winter 2014 • On InveSTInG 15



Tracking your cost basisYou can check the cost basis of your Schwab portfolio on schwab.com. Under the Accounts tab, click on “Positions” and then navigate to the Unrealized Gain/Loss tab. The image below shows a hypothetical portfolio:

Whether your cost basis is reported to the IRS or not, you are ultimately responsible for the information on your tax return, so you should save your original purchase and sale documentation. For mutual funds, that includes statements showing automatic reinvestments.

You should also make sure your � nancial institution is using the accounting method of your choice. If not, you may want to adjust it for future sales.

Using the reporting rules to your advantageUsually, you want to minimize taxes by recognizing the smallest net gain (or largest loss) possible on your tax return. However, on occasion you might want to do the opposite. For example, you may decide to recognize a larger gain if you can o� set it with a current loss or capital-loss carryovers from previous tax years.

Remember, it’s not what you make but what you keep that counts. If you’re tax-smart about calculating and reporting the cost basis of your investments, you may be able to hold on to more of your return. Be sure to check with your tax advisor before entering into any transaction that may have signi� cant tax consequences. -

Rande Spiegelman, CPA, CFP ®, is Vice President of Financial Planning at the Schwab Center for Financial Research.

NEXT STEPSFor more information about cost basis reporting, including a schedule of when you can expect to receive your 2014 tax forms from Schwab, log in to schwab.com/OItax.

When you sell a position, you can determine your cost basis by clicking on “Cost Basis Calculator” at the top right in the image above. Here is an example using one of the holdings in a hypothetical portfolio:

The Cost Basis Calculator allows you to look up a stock’s ticker symbol and price. Corporate actions such as name changes, splits and spinoffs going back to 1950 are automatically refl ected in a position’s cost basis. You can also include reinvested dividends going back to 1973 and factor in your tax rate.

When you’re ready to calculate, click the Analyze button to receive a report showing realized gains or losses and applicable taxes.

SAMPLE

Examples are hypothetical and not representative of any specifi c investment or situation. Individual stock positions are for illustrative purposes only and are not a recommendation or solicitation to buy or sell. There is no guarantee that positions would have been or may be profi table.

SAMPLE

Trades made today will not appear until tomorrow.

Market Value Positions Monitor

SAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLESAMPLETrades made today will not appear until tomorrow.

SAMPLETrades made today will not appear until tomorrow.Trades made today will not appear until tomorrow.

SAMPLETrades made today will not appear until tomorrow.Trades made today will not appear until tomorrow.

SAMPLETrades made today will not appear until tomorrow.

SAMPLEGENERAL ELECTRIC CO

OI-Wi14-Q4-16

CHARLES SCHWAB • WINTER 2014 16

PERSPECTIVES: TAXES


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trading

e xchange-traded funds (ETFs) occupy a central place in many traders’ portfolios, and for good

reason. Because these funds trade much like stocks, they generally offer exceptional liquidity. And although most ETFs track indexes of stocks or bonds, some ETFs can hold assets like commodities. This sheer variety means there’s likely an ETF to suit just about any trading strategy.

As widely used as ETFs have become, though, traders still have questions about them. Here are some of the most common ones.

Q: When i invest in an etF, i usually just pick the top

performer in a given category. after all, aren’t the etFs in a category pretty similar to one another?

a: Not really. Of course, two ETFs tracking the performance of a

particular benchmark, such as the S&P 500® Index, will perform similarly. But there can be significant differences between the individual ETFs in most other categories. For example, two ETFs tracking tech industry stocks could deliver vastly different returns.

“As widely used as ETFs have

become, traders still have questions

about them.”

demystifying etF tradingAnswers to top questions about trading ETFs.By Michael iachini

dOI_Wi14_17-19_Trading_b.indd 17 10/2/14 12:06 PM

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Trading

The table below looks at why the holdings of the ETFs within a given category might differ. It also shows how this can lead to varying outcomes.

As you can see, it’s important to research potential ETF selections to ensure they provide the exposure you actually want. To do this, you can go to schwab.com and enter an ETF ticker symbol. Then go to the Portfolio tab, where you can see the ETF’s portfolio characteristics.

Q: how much does average volume matter when

trading an eTF?

a: Not as much as you might think. Some traders look at

average volume to determine how easy it will be to trade an ETF at a good

it rose on the first day because of the extra inverse exposure it took on.

What’s the bottom line? Over periods longer than a day, inverse ETFs might not return the opposite of what the index returns. They are intended for very active traders and should be monitored as frequently as daily.

There are other ways to achieve your hedging goals. Call us at to talk about them.

Q: Market volatility was particularly low earlier

this year. want to bet that volatility will pick up again soon, does it make sense to buy V

a The VIX is a market volatility index published by the

Chicago Board Options Exchange. It is tied to the amount of volatility traders expect to see in the S&P 500 over the next month and is sometimes called the “fear index” since it tends to go up when market participants panic.

You can’t buy individual stocks to mirror the VIX’s movements. As a result, VIX ETFs own baskets of futures contracts tied to the future level of the VIX and are designed to rise when volatility-wary investors drive up the prices of such derivatives.

For this reason, you might think that a VIX ETF could provide portfolio insurance. But that would be a mistake. At issue is a characteristic affecting futures known as “contango.”

In a nutshell, contango occurs when a longer-dated futures contract costs more than one that is about to expire. This poses a major problem for VIX-linked ETFs because when they are trading in contango they must constantly buy longer-dated, higher-cost futures to replace the cheaper contracts that are expiring. In other words, they must repeatedly buy high and sell low—not a recipe for success. And this doesn’t even take

price, the idea being that when large quantities of ETFs are changing hands, there might be more chances to buy at a lower price or sell at a higher one.

However, when searching for a good price, I think it makes more sense to look at the bid-ask spread, or the gap between the best price at which you can buy an ETF and the best price at which you can sell it. Think of the bid-ask spread as one of the costs of trading, separate from fees and commissions. The smaller the spread, the smaller the cost.

You should also think about the bid-ask spread as a percentage rather than a cost per share. To see why, imagine you’re trading a $100 ETF and the difference between the bid and ask prices is $0.05 per share. That’s a spread of 0.05%, which is pretty good. Now imagine you’re trading a $20 ETF

with a price difference of $0.05 per share. That’s a spread of 0.25%, which isn’t nearly as good.

In general, you probably want to avoid ETFs that have a spread greater than 0.25%. However, the longer you hold an ETF, the less important spread becomes.

Q: should i use inverse eTFs to hedge my portfolio?

a: If you choose to use them, do so very, very carefully. Inverse

ETFs are designed to go up when the market goes down and down when the market goes up. They are often used to make very short-term tactical bets against the market, and they can also be used for hedging purposes.

For instance, imagine that you believe a particular stock is likely to outperform its peers, whether the sector goes up or down in value. In this scenario, you could buy $5,000 worth of the stock and $5,000 worth of an inverse ETF tied to the stock’s sector. Let’s assume that you’re right, and the stock outperforms its sector by 2%. If the stock rises by 6% while the sector rises by 4%, your combined investment would be expected to rise by 2%. Similarly, if the stock falls by 7% while the sector falls by 9%, your total investment would also rise by 2%. Of course, if you’re wrong and your stock underperforms the sector, you would likely lose money regardless of whether the stock goes up or down in value.

The situation becomes trickier when we factor in “beta slippage.” This refers to the effects that arise from ETFs having to adjust their holdings to reflect changes in the market.

For example, if the index your inverse ETF is tracking falls by 1% on a given day, the ETF should rise by about 1%, at which point it will need to buy more inverse exposure to reflect its larger total asset base. If on the next day the index rises back to where it started, the ETF will drop by slightly more than

how eTFs in the same category might differDifferentiating factors

weighting: two etFs in the same category might use different methods for calculating the weights of the components they hold. Weights can be determined by market capitalization (the most common methodology), economic variables, dividends, volatility or other characteristics.

Market segment: two etFs within a particular category might focus on different subsectors or industries.

bond duration: two bond etFs within a single category might focus on different durations. Duration measures the amount of time it takes for the cash flows from a bond to cover its purchase price.

examples of returns

Morningstar category: U.s. large blend

- One-year average return for equal-weighted funds: 16.6%

- One-year average return for volatility-weighted funds: 13.5%

Morningstar category: health - One-year average return for pharmaceutical funds: 27.1%

- One-year average return for health care equipment funds: 19.1%

Morningstar category: Corporate bond

- One-year average return for long duration funds: 12.2%

- One-year average return for short duration funds: 2.3%

Source: Morningstar, as of 7/31/2014.


OI-Wi14-Q4-19


it rose on the first day because of the extra inverse exposure it took on.

What’s the bottom line? Over periods longer than a day, inverse ETFs might not return the opposite of what the index returns. They are intended for very active traders and should be monitored as frequently as daily.

There are other ways to achieve your hedging goals. Call us at 888-484-5340 to talk about them.

Q: Market volatility was particularly low earlier

this year. if i want to bet that volatility will pick up again soon, does it make sense to buy viX®-based etFs?

A: The VIX is a market volatility index published by the

Chicago Board Options Exchange. It is tied to the amount of volatility traders expect to see in the S&P 500 over the next month and is sometimes called the “fear index” since it tends to go up when market participants panic.

You can’t buy individual stocks to mirror the VIX’s movements. As a result, VIX ETFs own baskets of futures contracts tied to the future level of the VIX and are designed to rise when volatility-wary investors drive up the prices of such derivatives.

For this reason, you might think that a VIX ETF could provide portfolio insurance. But that would be a mistake. At issue is a characteristic affecting futures known as “contango.”

In a nutshell, contango occurs when a longer-dated futures contract costs more than one that is about to expire. This poses a major problem for VIX-linked ETFs because when they are trading in contango they must constantly buy longer-dated, higher-cost futures to replace the cheaper contracts that are expiring. In other words, they must repeatedly buy high and sell low—not a recipe for success. And this doesn’t even take

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.

1Bloomberg, with data from 8/31/2006–2/28/2014.


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. Past performance is no guarantee of future results.

Inverse ETFs seek to provide the opposite of the investment returns, daily, of a given index or benchmark, either in whole or by multiples. Due to the effects of compounding, aggressive techniques, and possible correlation errors, inverse ETFs may experience greater losses than one would ordinarily expect. Compounding can also cause a widening differential between the performances of an ETF and its underlying index or benchmark, so that returns over periods longer than one day can differ in amount and direction from the target return of the same period. Consequently, these ETFs may experience losses even in situations where the underlying index or benchmark has performed as hoped. Aggressive investment techniques such as futures, forward contracts, swap agreements, derivatives and options can increase ETF volatility and decrease performance. Investors holding these ETFs should therefore monitor their positions as frequently as daily.

(1114-4736)

Source: Morningstar, as of 2/28/2014. The example shown above is hypothetical and is provided for illustrative purposes only, and is not representative of any specific investment or trade. Fees in this example differ and can affect performance. Past performance is no guarantee of future results.

value of $10,000 in viX and viX futures contracts

VIX IndexMedium-Term VIX Futures PortfolioShort-Term VIX Futures Portfolio

$25k

$20k

$15k

$10k

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into account the transaction costs involved in this process, which also reduce returns.

So, if you want to bet on a very short-term jump in market volatility, a VIX ETF might go up in value if you’re right. But if you plan to hold a VIX ETF for a longer period of time, be aware of the eroding power of contango in VIX futures contracts, as illustrated in the chart above. You should note that, since mid-2006, VIX futures have traded in contango 78% of the time.1 -

Michael Iachini is Managing Director of Mutual Fund and ETF Research at Charles Schwab Investment Advisory, Inc.

with a price difference of $0.05 per share. That’s a spread of 0.25%, which isn’t nearly as good.

In general, you probably want to avoid ETFs that have a spread greater than 0.25%. However, the longer you hold an ETF, the less important spread becomes.

If you choose to use them, do so very, very carefully. Inverse

ETFs are designed to go up when the market goes down and down when the market goes up. They are often used to make very short-term tactical bets against the market, and they can also be used for hedging purposes.

For instance, imagine that you believe a particular stock is likely to outperform its peers, whether the sector goes up or down in value. In this scenario, you could buy $5,000 worth of the stock and $5,000 worth of an inverse ETF tied to the stock’s sector. Let’s assume that you’re right, and the stock outperforms its sector by 2%. If the stock rises by 6% while the sector rises by 4%, your combined investment would be expected to rise by 2%. Similarly, if the stock falls by 7% while the sector falls by 9%, your total investment would also rise by 2%. Of course, if you’re wrong and your stock underperforms the sector, you would likely lose money regardless of whether the stock goes up or down in value.

The situation becomes trickier when we factor in “beta slippage.” This refers to the effects that arise from ETFs having to adjust their holdings to reflect changes in the market.

For example, if the index your inverse ETF is tracking falls by 1% on a given day, the ETF should rise by about 1%, at which point it will need to buy more inverse exposure to reflect its larger total asset base. If on the next day the index rises back to where it started, the ETF will drop by slightly more than

Here’s what $10,000 would be worth if it had been invested in a hypothetical VIX index, a portfolio of short-term VIX futures contracts or a portfolio of medium-term VIX futures contracts. These portfolios are based on actual ETFs that buy VIX futures contracts.


OI-Wi14-Q4-20



Capitalizing on global Real estate

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OI-Wi14-Q4-21



CAPITALIZING REAL ESTATE

The potential bene� ts of investing in real estate extend beyond the comfort of having a roof over your head.

As an asset class, real estate can complement a traditional portfolio of stocks, bonds and other � nancial products. Some of the key

bene� ts of investing in real estate include: - Growth potential. Real estate holdings can grow in value over time, potentially delivering capital gains.

- Income potential. Real estate has historically provided attractive income to investors, whether in the form of rental income or dividends and other distributions.

- Diversifi cation. Including real estate in your portfolio could o� er another way to further diversify your holdings.

� is last point raises an important question: When it comes to real estate investing, how broad should investors’ horizons be? A� er all, how much diversi� cation can

one expect from owning multiple properties in the same neighborhood, city or even country?

� at’s why it might make sense to think on a global scale, says Tony Davidow, Vice President of Alternative Beta and Asset Allocation Strategist at the Schwab Center for Financial Research.

Historically, global real estate has delivered strong performance and attractive returns. And having exposure to a portfolio of real estate holdings allocated across regions could offer investors not only international diversi� cation, but also another way to participate in global economic growth.

“Real estate can be an e� ective barometer of the state of the economy,” Tony says. “Rising real estate prices and rents could indicate strong demand and a healthy economy, while falling prices may portend trouble.”

Let’s take a closer look at how growth potential, income potential and diversi� cation bene� ts could make global real estate attractive to investors.©

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OI-Wi14-Q4-22


1Prudential Real Estate Investors, “Why Global Real Estate Securities?” 2013. 2FactSet and Bloomberg data as of 6/30/2014. U.S. stocks are represented by the S&P 500 Index. International stocks are represented by the MSCI EAFE Index.


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.

Past performance is no guarantee of future results.

(1114-4880)

Source: Morningstar Direct with data from 2/22/2005–6/30/2014. FTSE EPRA/NAREIT Global Index was incepted on 2/22/2005. The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment or product. Dividends and interest are assumed to have been reinvested, and the example does not reflect the effects of expenses, taxes or fees. If it had, performance would have been substantially lower. Past performance is no guarantee of future results.

Source: Morningstar Direct. Asset classes are represented by the following indexes: broad U.S. stock market: S&P 500 Index; U.S. small-cap stocks: Russell 2000 Index; international stocks: MSCI EAFE Index; global stocks: MSCI Word Index; investment-grade bonds: Barclays U.S. Aggregate Bond Index; commodities: Dow Jones-UBS Commodity Index; global real estate: FTSE EPRA/NAREIT Global Real Estate Index.

In fact, the United States and Europe accounted for a combined 48.7% share of global gross domestic product (GDP) in 2012, down from 60.7% in 2000. During the same period, Asia and Latin America’s combined share of global GDP rose to 40.1% from 33.7%.1

“In other words, the growth outside of the United States is likely to be stronger than the growth within our borders, supporting the case for a global allocation,” Tony says.

2 attraCtive inComeOn top of offering growth potential, global real estate investment trusts (REITs) have historically provided

attractive yields relative to equities and many fixed income options. As of the end of June 2014, global REITs were yielding 3.5%, which compares favorably with the 3.4% yield on international stocks and 1.9% yield on U.S. stocks.2

“With fixed income yields at generationally low levels, investors have been seeking other sources of income and REITs have been an attractive option,” Tony says.

Of course, higher yields could also mean increased risks, so income investors should use caution when considering global REITs for their income needs. (For more, read “Worth the Risk?” on page 27.)

1 strong growth potentialGlobal real estate securities have compared favorably to other asset classes in recent years, as you can see in

the chart below. “A global allocation could also be a means of gaining

exposure to emerging economies, whose share of global economic output has been increasing in recent years as growth rates have picked up,” says Tony. “Many economists are predicting stronger international growth in coming years, particularly in Asia and Latin America.”

“global real estate securities have compared

favorably to other asset classes in recent years,

performing nearly as well as U.S. stocks even as global equities lagged.”

3 In 2006, 2009 and 2012, global real estate was the best performer out of seven major asset classes, as shown in

the chart above. Conversely, it was the worst performer in 2007 and 2008.

There is a natural rotation among the best- and worst-performing asset classes. By allocating across stocks, bonds, commodities and real estate, investors gain diversified exposure—and global investments amplify that diversification potential.

“Global real estate provides exposure to various parts of the globe, and has historically delivered strong performance, attractive yields and diversification benefits relative to traditional investments,” says Tony.

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global real estate outpaces global securities

2006 2007 2008 2009 2010 2011 2012 20142013

S&P 500 indexMSCi eAFe indexFtSe ePrA/nAreit Global index

dOI_Wi14_20-23_FT_Real_Estateb.indd 22 10/8/14 9:31 AM

Next StepS The new Schwab Fundamental Global Real Estate Index Fund is a simple way to gain diversification and income potential. Learn more on page 31 or at schwab.com/OIglobalrealestate.

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Winter 2014 • ON iNveStiNg 23

Ways to Invest In Real estateInvestors can simply buy property—ranging from a second home or condo to something as large as a shopping mall or office building—in the United States and in many overseas countries. However, such purchases could involve challenges such as hefty down payments, maintenance obligations and restrictive foreign ownership laws, not to mention the cost of traveling to check on the property.

A Reit is a special type of corporation that invests in real estate properties, mortgages or both. REITs trade on major exchanges like stocks and many are required to distribute a portion of their income to shareholders as dividends. reits offer a variety of diverse investing styles. Some invest in property in specific geographic regions, while others are widely diversified. Some REITs specialize in property types, such as office buildings, shopping malls, apartments, warehouses, hotels or a combination of properties.

A real estate operating company (ReOC) is like a REIT in that it is a corporation that owns real estate and trades like a stock. However, reOCs don’t have to distribute their cash flow to investors, leaving them free to invest their holdings in other properties or improvements.

Mutual funds and exchange-traded funds (etFs) that invest in REITs or reOCs can provide diversified exposure across a variety of sectors and regions.

1Prudential Real Estate Investors, “Why Global Real Estate Securities?” 2013. 2FactSet and Bloomberg data as of 6/30/2014. Global REITs are represented by the FTSE EPRA/NAREIT Global Real Estate Index. U.S. stocks are represented by the S&P 500 Index. International stocks are represented by the MSCI EAFE Index.

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 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.


(1114-4880)

2006 2007 2008 2009 2010 2011 2012 2013

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Source: Morningstar Direct. Asset classes are represented by the following indexes: broad U.S. stock market: S&P 500 Index; U.S. small-cap stocks: Russell 2000 Index; international stocks: MSCI EAFE Index; global stocks: MSCI Word Index; investment-grade bonds: Barclays U.S. Aggregate Bond Index; commodities: Dow Jones-UBS Commodity Index; global real estate: FTSE EPRA/NAREIT Global Real Estate Index.

global real estateinternational stocks

investment-grade bondsBroad u.S. stock market

Commoditiesglobal stocks

u.S. small cap stocks

Comparing asset class performance

On top of offering growth potential, global real estate investment trusts (REITs) have historically provided

attractive yields relative to equities and many fixed income options. As of the end of June 2014, global REITs were yielding 3.5%, which compares favorably with the 3.4% yield on international stocks and 1.9% yield on U.S. stocks.2

“With fixed income yields at generationally low levels, investors have been seeking other sources of income and REITs have been an attractive option,” Tony says.

Of course, higher yields could also mean increased risks, so income investors should use caution when considering global REITs for their income needs. (For more, read “Worth the Risk?” on page 27.)

3 DiveRSiFiCAtiONIn 2006, 2009 and 2012, global real estate was the best performer out of seven major asset classes, as shown in

the chart above. Conversely, it was the worst performer in 2007 and 2008.

There is a natural rotation among the best- and worst-performing asset classes. By allocating across stocks, bonds, commodities and real estate, investors gain diversified exposure—and global investments amplify that diversification potential.

“Global real estate provides exposure to various parts of the globe, and has historically delivered strong performance, attractive yields and diversification benefits relative to traditional investments,” says Tony. -

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Make the Most of your charitable DoNatioNs by thiNkiNg strategically.

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GivingWisely

For many people, the end of the year signifies a time of giving—not just to family and friends, but to charitable organizations as well. On average, charities receive about 40% of their total donations during the final weeks of the year.1 The annual tide of

goodwill helps organizations direct funding, set their budgets for the coming year, and hire or retain employees.

As meaningful as year-end contributions can be, many individual donors have discovered that they can optimize their giving throughout the year with donor-advised funds. These charitable vehicles—tax-advantaged accounts to which you can contribute cash, securities, real estate, art and other valuables for eventual distribution to charities—offer a number of advantages over traditional direct giving.

One of the main attractions of donor-advised funds is their flexibility. Donors can contribute to the account at any time—and claim an immediate tax deduction—but can take a more strategic approach regarding when and how to distribute the gifts. For example, an individual might

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make several tax-deductible donations to a donor-advised fund account throughout the year as part of a plan to give a large, one-time gift to an organization later in life.

In addition, contributing appreciated securities or other assets to a donor-advised fund—instead of selling first and then donating the proceeds to a charity—can help you avoid paying capital gains taxes on those assets and enable more money to go to charity.

As you can see from the example in the table below, thinking strategically about donations could boost the value of those donations as well as deliver attractive tax benefits.

Schwab Charitable President Kim Laughton says donors are increasingly sensitive to the fact that while giving is always good, giving wisely is great. “Charitable planning is becoming a natural part of financial planning and wealth management discussions,” she says.

Regardless of how you give—directly to charities, through a donor-advised fund or via another method—it may be possible to increase the impact of your contributions. Here are five tips for creating a strategic plan for your charitable giving. >

Hypothetical example is provided for illustrative purposes only. Assumes that the investment has been held for more than a year, donor is in the 28% federal income tax bracket, and that all realized gains are subject to a 15% federal long-term capital gains tax rate. Does not take into account any state or local taxes. Certain federal income tax deductions, including the charitable contribution, are available only to taxpayers who itemize deductions, and may be subject to reduction for taxpayers with adjusted gross income (AGI) above certain levels. In addition, deductions for charitable contributions may be limited based on the type of property donated, the type of charity and the donor’s AGI. For example, deductions for contributions of appreciated property to public charities generally are limited to 30% of the donor’s AGI. Excess contributions may be carried forward for up to five years. Total donor tax savings are calculated by subtracting any long-term capital gains paid from the value of the charitable income tax deduction.

scenario 1: Sell appreciated stock and donate proceeds (cash) to charity

scenario 2:Donate appreciated stock directly to donor-advised fund

Fair market value (FMv) $100,000 $100,000

capital gains tax (cgt) paid

$50,000 appreciation

× 15%

= $7,500 $0

total donated to charity

(FMv – cgt)

$100,000 – $7,500

= 92,500 $100,000

charitable tax deduction (ctD)

$92,500 × 28%

= $25,900

$100,000 × 28%

= $28,000

net tax savings (ctD – cgt)

$25,900 – $7,500

= $18,400 $28,000

tax benefits of donating cash vs. stock


OI-Wi14-Q4-26


1Charity Navigator, “Year-End Giving Trends: 2013 Poll Results.”

Contributions of certain real estate, private equity or other illiquid assets may be accepted via a charitable intermediary, with proceeds of your donation transferred to your donor-advised account upon liquidation. This intermediary considers donations on a case-by-case basis, and assets typically must be valued at $250,000 or more. Call Schwab Charitable for more information at 800-746-6216.

Donors should carefully consider information contained in the prospectus for the mutual funds underlying the investment pools, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab Charitable at 800-746-6216. Please read the prospectus carefully before making contributions or recommending investment of funds. Market fl uctuations may cause the value of investment fund shares held in a donor-advised account to be worth more or less than the value of the original contribution to the funds.

Schwab Charitable does not provide specifi c individualized legal or tax advice. Please consult a qualifi ed legal or tax advisor where such advice is necessary or appropriate.

Schwab Charitable is the name used for the combined programs and services of Schwab Charitable Fund, an independent nonprofi t organization, and Schwab Charitable Trust Services, a limited liability company owned by Schwab Charitable Fund. The Fund has entered into service agreements with certain affi liates of The Charles Schwab Corporation.

©2014 Schwab Charitable Fund. All rights reserved.

(1114-5555)

1DEVELOP A PURPOSE. When defining your purpose, start by asking yourself which specific causes you would like to support. You should also

identify specific charitable goals before making any grants. In addition to reflecting your values, having clear goals can help you say no when you get solicitations to support projects that aren’t in line with your desired outcomes.

2CHOOSE ORGANIZATIONS TO SUPPORT. Once you’ve settled on a cause, it’s time to think about which organizations you want to support.

As part of your research, consider contacting di� erent organizations and asking questions. � eir answers could help inform your decision.

You can conduct due diligence on charities through the IRS website or through your donor-advised fund. In addition to verifying the organization’s 501(c)(3) status, you might also consider analyzing its program results, � nancials and sta� turnover.

3DECIDE ON GRANT TIMING AND AMOUNTS.Once you identify speci� c charities, you can grant money in one lump sum or spread it out over a

span of months or years. Some charities prefer donations toward the end of their � scal year, which is generally when they draw up plans for the following year. With a donor-advised fund, you can create a giving schedule to make one-time or recurring donations.

4CHOOSE YOUR DESIRED LEVEL OF RECOGNITION. Depending on the size of your charitable gi� and the philanthropic vehicle you

choose, the record of your donation could be made available to the public. For example, federal law requires private foundations to report on their annual tax returns—which are public records—the names of donors who give more than $5,000 in a single year.

With donor-advised funds, on the other hand, you can choose how (or whether) you would like to be recognized for each grant, giving you control over the amount of public exposure you receive for your donation. � ose who prefer to avoid scrutiny or unwanted solicitations might opt for anonymity.

5LEAVE A LASTING LEGACY. Consider adopting an estate-planning strategy to help pass down your charitable values along with your assets. With such

a strategy in place, your heirs will know which charitable organizations to continue to support in your memory.

A donor-advised account may make sense for people who want to create a legacy of giving for future generations, without the administrative burden or cost of setting up a private foundation. -

Giving through Schwab CharitableYou can open a Schwab Charitable donor-advised fund with an initial deposit of $5,000 in cash or marketable securities. We are also generally able to arrange for contributions of other appreciated assets, such as real estate, private equity and other non-cash assets.

Those assets can then be placed in a variety of investment pools. For clients who would prefer to take advantage of an existing strategy, Schwab Charitable offers four pools following specially tailored, diversifi ed investment approaches ranging from conservative to growth. Clients who prefer to build their own allocations can spread their contributions across a variety of single asset class pools.

Schwab Charitable will handle all due diligence surrounding the charities you recommend and will distribute your grants on personalized letterhead. Additionally, you can use your mobile device to send timely grants to the charities that mean the most to you. And you can access an online summary of your grant history by cause so that you can monitor your activity and ensure it is consistent with your giving plans.

To learn more about Schwab Charitable or to open an account, call 888-484-5340 or visit schwab.com/OIschwabcharitable.


OI-Wi14-Q4-27

27WINTER 2014 • ON INVESTING

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Why preferreds, REITs and MLPs aren’t substitutes for bonds.

dOI_Wi14_27-29_FT_BondYields.indd 27 10/2/14 12:14 PM

OI-Wi14-Q4-28



REITA REIT is a special corporation that invests in real estate properties, mortgages or both. Some specialize in speci� c property types such as shopping malls or o� ce buildings, others invest in geographic regions, and some are diversi� ed and invest across property types, regions or both.

Fixed income investors may be attracted to REITs because they generally distribute a portion of their income as dividends to shareholders. Such distributions helped push the average annualized total return on the Dow Jones U.S. Select REIT Index to 16.36% in the 2009–2013 period.

Again, it is important to note that such returns come with added risk. Because REITs o� en trade like stocks on major exchanges, their prices can be volatile—of the eight asset classes compared in the chart at le� , REIT prices exhibited the highest risk during the 2009–2013 period. (For more on REITs, see “Capitalizing on Global Real Estate” on page 20.)

MLPMLPs are a niche sector in the income world—most of them are oil and gas partnerships. MLPs trade like stocks on an exchange and distribute most of their cash � ow to unit holders, who are technically considered limited partners in the business. Returns on MLPs can be high—the Alerian MLP Index had an average annualized total return of 29.55% during the 2009–2013 period. But these products also involve risks and potential complications that must be weighed carefully.

For example, distributions can be diluted if an MLP issues additional units to raise capital, and energy-linked MLPs are sensitive to changes in fuel prices. Also, because MLPs don’t pay corporate income taxes, unit-holders, as limited partners, pay income taxes on their share of the distributions. � is avoids the problem of double taxation that arises with dividends, but it also means additional complexity when � ling taxes. And some income from MLPs may be subject to taxation even in tax-sheltered retirement accounts.

An investment may generate attractive yield income, but that doesn’t mean it can take the place of bonds in a diversi� ed portfolio. One of the major appeals of bonds is that, barring default, they preserve capital. To be a true bond alternative, an investment would have to behave like a bond, and that means both providing steady income and o� ering something in the way of capital preservation.

Let’s take a closer look at some of the potential benefits and risks associated with preferred securities, REITs and MLPs.

PREFERRED SECURITIES� ese hybrid investments combine attributes of stocks and bonds. � ey tend to pay higher dividends than common stock but have less growth potential because, unlike common stock, they generally don’t increase in value if a company grows. As you can see in the chart, the average annualized total return on preferred securities was 9.23% from 2009–2013.

Despite frequent comparisons with high-yield bonds, preferred securities present a di� erent set of risks:

- Prices. Like bonds, preferreds’ prices are in� uenced by interest rates. However, their prices tend to be more volatile than those of bonds, making preferred securities more susceptible to short-term losses.

- Dividends. Companies can suspend or cancel a preferred dividend payment at will, without facing the consequences of a default.

- Principal. Unlike bonds, preferred securities never mature, meaning there’s no guaranteed return of principal.

- Value. Because they make � xed payments, preferred securities usually trade inversely to interest rates. If rates rise, preferred securities generally depreciate.

Source: Schwab Center for Financial Research with data provided by Morningstar, Inc. The chart compares the risk and return features of various income-oriented investments, which are represented by the following indexes: Barclays U.S. 1–3 Year Treasury Bond Index, Barclays U.S. Intermediate Treasury Bond Index, Barclays U.S. Long Treasury Bond Index, Barclays U.S. Intermediate Corporate Bond Index, Barclays U.S. Corporate High Yield Index, BofA Merrill Lynch Fixed Rate Preferred Securities Index, Alerian MLP Index and the Dow Jones U.S. Select REIT Index. Risk is represented by the annualized standard deviation of monthly returns, and return is represented by the average annualized total return for the period 1/2009–12/2013. Bond returns assume reinvestment of bond principal and interest and are not adjusted for taxes. Past performance is no guarantee of future results.

Higher return tends to coincide with higher risk

RET

UR

N

RISK5% 10% 15% 20% 25% 30% 35%

5%

10%

15%

20%

25%

30%

LongTreasuries

IntermediateTreasuries

REITs

High-yield corporates

Preferredsecurities

ShortTreasuries

Intermediate-term investment-grade corporates

MLPs

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CC oming into 2014, many U.S. bond analysts were expecting a bond bear

market—in which prices fall and yields rise—amid anticipation of an

improving economy and the winding down of the Federal Reserve’s

bond-buying program. Such conditions would have been a welcome

relief for bond investors who have taken to the sidelines while they

wait for yields to rise.

Instead, U.S. bonds rallied in the fi rst half of the year, fueled largely by a

lagging economy, dimmer housing prospects and stagnant job creation.

Unrest in the Ukraine and Iraq also helped drive down yields as risk-averse

investors gravitated toward the perceived safety of bonds.

The low-yield environment has encouraged some investors to consider substituting bonds

with income-oriented investments, such as preferred securities, real estate investment trusts (REITs)

and master-limited partnerships (MLPs). But where there is additional return or yield, there is usually

added risk, as illustrated in the chart at right.

dOI_Wi14_27-29_FT_BondYields.indd 28 10/8/14 9:20 AM

OI-Wi14-Q4-29



NEXT STEPSFor help choosing fi xed income investments, call 866-893-6699 to speak with a Schwab Fixed Income Specialist.

ANSWERS TO COMMON QUESTIONS

REITSA REIT is a special corporation that invests in real estate properties, mortgages or both. Some specialize in speci� c property types such as shopping malls or o� ce buildings, others invest in geographic regions, and some are diversi� ed and invest across property types, regions or both.

Fixed income investors may be attracted to REITs because they generally distribute a portion of their income as dividends to shareholders. Such distributions helped push the average annualized total return on the Dow Jones U.S. Select REIT Index to 16.36% in the 2009–2013 period.

Again, it is important to note that such returns come with added risk. Because REITs o� en trade like stocks on major exchanges, their prices can be volatile—of the eight asset classes compared in the chart at le� , REIT prices exhibited the highest risk during the 2009–2013 period. (For more on REITs, see “Capitalizing on Global Real Estate” on page 20.)

MLPSMLPs are a niche sector in the income world—most of them are oil and gas partnerships. MLPs trade like stocks on an exchange and distribute most of their cash � ow to unit holders, who are technically considered limited partners in the business. Returns on MLPs can be high—the Alerian MLP Index had an average annualized total return of 29.55% during the 2009–2013 period. But these products also involve risks and potential complications that must be weighed carefully.

For example, distributions can be diluted if an MLP issues additional units to raise capital, and energy-linked MLPs are sensitive to changes in fuel prices. Also, because MLPs don’t pay corporate income taxes, unit-holders, as limited partners, pay income taxes on their share of the distributions. � is avoids the problem of double taxation that arises with dividends, but it also means additional complexity when � ling taxes. And some income from MLPs may be subject to taxation even in tax-sheltered retirement accounts.

An investment may generate attractive yield income, but that doesn’t mean it can take the place of bonds in a diversi� ed portfolio. One of the major appeals of bonds is that, barring default, they preserve capital. To be a true bond alternative, an investment would have to behave like a bond, and that means both providing steady income and o� ering something in the way of capital preservation. -

What about high-yield bonds?High-yield bonds, often derided as “junk,” are sub-investment-grade corporate bonds that offer higher yields than investment-grade bonds to compensate for their lower credit quality. High-yield bonds generally have stronger correlations with stocks than other types of bonds—meaning that when stocks fall, high-yield bonds will often fall, as well. That relationship diminishes some of the diversifi cation benefi ts that bonds can offer as part of a portfolio.

Another factor to consider is that when yield-hungry investors pile into high-yield bonds, their prices rise—which pushes down yields. This dynamic was on display last summer, when the benchmark Barclays U.S. Corporate High Yield Bond Index hovered around 5%, not too far from its all-time low of 4.95% back in May 2013. In other words, investors in such bonds aren’t getting much of a premium over more highly rated bonds, even as they’re taking on more default risk.

When will Treasuries yield 5% again? That’s the most common question investors ask Kathy Jones, Vice President, Fixed Income Strategist at the Schwab Center for Financial Research. Her response: Don’t hold your breath. “It could take a long while for Treasury yields to rise and, even then, 4–4.5% seems a more likely range than the 5–6% range of the last decade.”

She urges investors considering preferreds, REITs or MLPs to recognize that such products aren’t true bond alternatives and may add risk to their portfolios.

Since interest rates appear poised to rise—albeit slowly—over the next few years, Kathy cautions investors against remaining sidelined in short-term, low-yielding securities. “If you’re stuck in those investments, you may miss out on generating and compounding income, thereby reducing your cumulative total returns,” she says.

Instead, investors may want to consider extending their bond portfolio’s duration—or the amount of time it takes for the cash fl ows from a bond to cover its purchase price—as interest rates move up. (To learn more about Kathy’s suggestions for bond investors, see “Infl ation Pressure?” on page 12.)

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att

oming into 2014, many U.S. bond analysts were expecting a bond bear

market—in which prices fall and yields rise—amid anticipation of an

improving economy and the winding down of the Federal Reserve’s

bond-buying program. Such conditions would have been a welcome

relief for bond investors who have taken to the sidelines while they

wait for yields to rise.

Instead, U.S. bonds rallied in the fi rst half of the year, fueled largely by a

lagging economy, dimmer housing prospects and stagnant job creation.

Unrest in the Ukraine and Iraq also helped drive down yields as risk-averse

investors gravitated toward the perceived safety of bonds.

The low-yield environment has encouraged some investors to consider substituting bonds

with income-oriented investments, such as preferred securities, real estate investment trusts (REITs)

and master-limited partnerships (MLPs). But where there is additional return or yield, there is usually

added risk, as illustrated in the chart at right.

dOI_Wi14_27-29_FT_BondYields.indd 29 10/2/14 12:15 PM

When it comes to managing your money, what is most important to you? Perhaps it’s

having a personal relationship with a dedicated financial professional who understands your preferences and goals. Maybe it’s understanding fees, or knowing where and how your money is being invested.

At Schwab, you don’t have to settle for one or the other. With our modern approach to wealth management, you can expect:


Wealth management refers to products and services available through the operating subsidiaries of The Charles Schwab Corporation, among which there are important differences, including, but not limited to, the type of advice and assistance provided, fees charged, and the rights and obligations of the parties. It is important to understand the differences when determining which products and/or services to select.

The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC), offers investment services and products, including Schwab brokerage accounts. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides deposit and lending services and products.

There are eligibility requirements to work with a dedicated Financial Consultant.

(1114-4780)

Schwab Fundamental Global Real Estate Index FundOur new fund offers an innovative approach to global real estate investing.

Hallocations. As an asset class, global real estate has historically delivered solid growth and attractive returns while offering a diversified way of participating in global economic growth—including in potentially faster-growing emerging economies.

That’s why we’re offering an innovative approach to global real estate investing with the Schwab Fundamental Global Real Estate Index Fund (SFREX)—the first U.S.-based real estate fund to apply the Fundamental IndexAffiliates, LLC, to a portfolio of broad-based global real estate securities.

employs a unique approach to indexing by selecting and weighting companies based on three fundamental characteristics:

1Schwab’s short-term redemption fee of $49.95 will be charged on redemption of funds purchased through Schwab’s Mutual Fund OneSourcefunds with no transaction fee) and held for 90 days or less. Schwab reserves the right to exempt certain funds from this fee, including Schwab Fundsseparate redemption fee, and funds that accommodate short-term trading. For each of these trade orders placed through a broker, a $25 service charge applies. Funds are also subject to management fees and expenses.

Trades in no-load mutual funds available through the Mutual Fund OneSource service ( including Schwab Funds), as well as certain other funds, are available without transaction fees when placed through or our automated phone channels. Schwab reserves the right to change the funds we make available without transaction fees and to reinstate fees on any funds.

Charles Schwab & Co., Inc. (member SIPC) receives remuneration from fund companies for recordkeeping, shareholder services and other administrative services for shares purchased through its Mutual Fund OneSource service. Schwab also may receive remuneration from transaction fee fund companies for certain administrative services.2Information as of 6/30/2014.3The investment advisor and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain nonroutine expenses) of thefund to 0.49% for so long as the investment advisor serves as the advisor to the fund. This agreement may be amended or terminated only with the approval of the fund’s Board of Trustees. For the period from 10/21/2014–1/31/2015, the investment advisor has agreed to waive the fund’s net operating expenses to 0.00% (excluding interest, taxes and certain nonroutine expenses).



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.

(0814-4944)

Let’s taLkVisit a branch or call 888-484-5340 to schedule an appointment with a Schwab Financial Consultant. You can also learn more about Schwab’s approach to wealth management at schwab.com/OIwealthmanagement.

A Modern Approach to Wealth ManagementOur approach is rooted in transparency and accountability.

-- transparency. We’ll be open and honest in all aspects of our relationship, including what you pay for our services and the thinking behind our advice.

-- Value. We design our products and services with a goal of driving down costs, so investors have more money to invest.

If you have a financial advisor outside of Schwab, ask how their wealth management services compare. If their answers leave you uncertain about their strategies, fees or other aspects of their services, then maybe it’s time to make a change. When it comes to wealth management, no questions should go unanswered—because the best outcomes in life come from being fully engaged.

-- Partnering. You’re not just a client at Schwab. We believe in partnering with you and getting to know you so we can work together on your terms.

-- advice. We provide access to commentary and insights from Schwab experts and advice that is understandable, relevant and actionable.

-- Choice. We offer a broad range of investment options from leading asset managers across the industry, not just our own.

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Brokerage Products: Not FDIC Insured • No Bank Guarantee • May Lose Value

OI-Wi14-Q4-30

CharLes sChwab • WInTER 2014 30

dOI_Wi14_30-31_SpotLight.indd 30 10/10/14 1:07 PM


Schwab Fundamental Global Real Estate Index FundOur new fund offers an innovative approach to global real estate investing.

H ere at Schwab, we believe global real estate makes sense as part of many investors’ core portfolio

allocations. As an asset class, global real estate has historically delivered solid growth and attractive returns while offering a diversified way of participating in global economic growth—including in potentially faster-growing emerging economies.

That’s why we’re offering an innovative approach to global real estate investing with the Schwab Fundamental Global Real Estate Index Fund (SFREX)—the first U.S.-based real estate fund to apply the Fundamental Index® methodology developed by Research Affiliates, LLC, to a portfolio of broad-based global real estate securities.

This no-load, no-transaction-fee fund1 employs a unique approach to indexing by selecting and weighting companies based on three fundamental characteristics:

1Schwab’s short-term redemption fee of $49.95 will be charged on redemption of funds purchased through Schwab’s Mutual Fund OneSource® service (and certain other funds with no transaction fee) and held for 90 days or less. Schwab reserves the right to exempt certain funds from this fee, including Schwab Funds®, which may charge a separate redemption fee, and funds that accommodate short-term trading. For each of these trade orders placed through a broker, a $25 service charge applies. Funds are also subject to management fees and expenses.

Trades in no-load mutual funds available through the Mutual Fund OneSource service ( including Schwab Funds), as well as certain other funds, are available without transaction fees when placed through schwab.com or our automated phone channels. Schwab reserves the right to change the funds we make available without transaction fees and to reinstate fees on any funds.

Charles Schwab & Co., Inc. (member SIPC) receives remuneration from fund companies for recordkeeping, shareholder services and other administrative services for shares purchased through its Mutual Fund OneSource service. Schwab also may receive remuneration from transaction fee fund companies for certain administrative services. 2Information as of 6/30/2014. 3The investment advisor and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain nonroutine expenses) of the fund to 0.49% for so long as the investment advisor serves as the advisor to the fund. This agreement may be amended or terminated only with the approval of the fund’s Board of Trustees. For the period from 10/21/2014–1/31/2015, the investment advisor has agreed to waive the fund’s net operating expenses to 0.00% (excluding interest, taxes and certain nonroutine expenses).



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.

(0814-4944)

Next StepSLearn more about the Schwab Fundamental Global Real Estate Index Fund at schwab.com/ OIglobalrealestate.

adjusted sales, retained operating cash flow, and dividends plus buybacks.

If you are looking for an innovative way to gain exposure to global real estate, then the Schwab Fundamental Global Real Estate Index Fund could be right for you.

Here are some of the features:

-- Access to global real estate. The fund invests in securities of residential and commercial real estate companies and real estate investment trusts (REITs) in both developed and emerging economies around the globe.

-- Opportunity to diversify. The fund provides exposure to more than 200 securities in 20 countries, including the United States and countries in Asia and Europe.2

-- Competitive expenses. The fund offers a 0.49% expense ratio. As an introductory offer, Schwab will waive operating expenses until January 31, 2015.3

-- Income potential. By investing in REITs—many of which distribute a portion of their revenue to shareholders in the form of dividends—the fund offers the potential for dividend income.

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OI-Wi14-Q4-31

WIntER 2014 • ON INveStINg 31

dOI_Wi14_30-31_SpotLight.indd 31 10/10/14 1:08 PM

Past performance is no guarantee of future results. Investors should carefully consider the investment objectives, risks, charges and expense of a fund. This Past performance is no guarantee of future results. Investors should carefully consider the investment objectives, risks, charges and expense of a fund. This Past performance is no guarantee of future results. Investors should carefully

and other important information about a fund is contained in the fund’s 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 consider the investment objectives, risks, charges and expense of a fund. This

prospectus. For more complete information about these Value Line Funds and other important information about a fund is contained in the fund’s prospectus. For more complete information about these Value Line Funds and other important information about a fund is contained in the fund’s

and a copy of a prospectus, contact Schwab at 800-435-4000 or go to 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 prospectus. For more complete information about these Value Line Funds

www.schwab.com/mutualfunds, or contact your financial advisor. Read the 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 and a copy of a prospectus, contact Schwab at 800-435-4000 or go to

prospectus carefully before you invest or send money.www.schwab.com/mutualfunds, or contact your financial advisor. Read the prospectus carefully before you invest or send money.www.schwab.com/mutualfunds, or contact your financial advisor. Read the

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 (XXXX-XXXX).

Trusted By Investors For Over 60 Years

Income and Growth Fund

Small Cap Opportunities Fund

Value Line Funds Availablethrough Charles Schwab:

Brokerage Products: Not FDIC-Insured • No Bank Guarantee • May Lose Value

* The guarantee applies to the following investment advisory services (“Participating Services”) and associated program fees: (i) Schwab Private Client™ (“SPC”); (ii) Schwab Managed Portfolios™ (“SMP”); and (iii) Managed Account Connection® (“Connection”) for accounts that are managed by investment advisors affiliated with Charles Schwab & Co., Inc. (“Schwab”)—Windhaven Investment Management, Inc., ThomasPartners, Inc. and Charles Schwab Investment Management, Inc.

The guarantee does not apply to (i) accounts managed by investment advisors that are not affiliated with Schwab; (ii) accounts managed by Schwab-affiliated advisors outside of the SPC, Connection, and SMP programs; or (iii) any other product or service made available by Schwab or its affiliates. SPC, SMP, and Connection are wrap fee programs sponsored by Schwab.

If at any time or for any reason you are not completely satisfied with a Participating Service, at your request Schwab will refund the associated program fee for the previous calendar quarter applicable to the Participating Service. The program fee is a percentage of the eligible assets in your Participating Service account(s). You will receive a credit to your Participating Service account(s) within approximately four weeks of your request. No other fees, commissions, charges, expenses, or market losses will be refunded. If Schwab is unable to address your concerns after consulting with you and refunding your program fee, Schwab will work with you to help meet your financial goals. Schwab reserves the right to change this guarantee in the future after providing notice. For additional information regarding associated program fees, please see the disclosure brochure for the Participating Service, available at the time you enroll or upon your request.The Charles Schwab Corporation provides a full range of securities, brokerage, banking, money management, and financial advisory services through its operating subsidiaries. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC), offers investment services and products, including Schwab brokerage accounts. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides deposit and lending services and products.©2014 The Charles Schwab Corporation. All rights reserved. CS18839-15 (0214-0124) ADP78337-00 (01/14)

To learn more about portfolio management services, talk to your Financial Consultant

or visit schwab.com/accountability.

Introducing the Schwab Accountability Guarantee.

If for any reason you’re not happy with one of

our participating investment advisory services,

we’ll refund your program fee from the previous

quarter. While it’s no guarantee against loss,

and other fees and expenses may still apply,

we stand by our word and will work with you to

make things right. If accountability matters to

you, talk to us today.

Chuck Schwab Chairman and Founder

Accountability. Yes, it exists.

The Schwab Accountability Guarantee™ for participating investment

advisory services*

ADP78337-00_H20900_1b.ai01.13.14EpsonDS

H20900x01A_3u.tif

OI-Wi14-Q4-32dOI_Wi14_32-33_Spotlight_Ads.indd 32 10/2/14 12:18 PM

Past performance is no guarantee of future results. Investors should carefully consider the investment objectives, risks, charges and expense of a fund. This Past performance is no guarantee of future results. Investors should carefully consider the investment objectives, risks, charges and expense of a fund. This Past performance is no guarantee of future results. Investors should carefully

and other important information about a fund is contained in the fund’s 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 consider the investment objectives, risks, charges and expense of a fund. This

prospectus. For more complete information about these Value Line Funds and other important information about a fund is contained in the fund’s prospectus. For more complete information about these Value Line Funds and other important information about a fund is contained in the fund’s

and a copy of a prospectus, contact Schwab at 800-435-4000 or go to 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 prospectus. For more complete information about these Value Line Funds

www.schwab.com/mutualfunds, or contact your financial advisor. Read the 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 and a copy of a prospectus, contact Schwab at 800-435-4000 or go to

prospectus carefully before you invest or send money.www.schwab.com/mutualfunds, or contact your financial advisor. Read the prospectus carefully before you invest or send money.www.schwab.com/mutualfunds, or contact your financial advisor. Read the

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 (1114-6469).

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Life is Often Complex.

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Value Line Asset Allocation Fund

(VLAAX)Included on the

Q4 2014 Mutual Fund OneSource

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1993

1993

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:

MECHJOB INFORMATION

PROJ. NO.: 7982381/603053970

JOB NAME: IM MKG McNulty MorningStar Ad

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CLIENT NAME: McNulty, CatherinePROJECT MGR.: Mitzner, JulieCOST CENTER: D838

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Please consider the investment objectives, risks, charges and expenses of funds carefully before investing. The prospectus contains this and other information about the funds. To obtain a prospectus, go to schwab.com/mutualfunds. Please read the prospectus carefully before investing.There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, and you can lose money by investing in this Fund.

Morningstar Awards Winner (2013) © Morningstar, Inc. All Rights Reserved. Dennis Lynch awarded Domestic-Stock Fund Manager of the Year in the U.S. To qualify for the Domestic-Stock Fund Manager of the Year award, a manager’s funds must have not only posted impressive returns for the year, but the manager also must have had a record of delivering outstanding long-term risk-adjusted performance and of aligning their interests with shareholders. Nominated funds must be Morningstar Medalists — a fund that has garnered a Morningstar Analyst RatingTM of Gold, Silver, or Bronze. Morningstar Analyst Ratings are based on Morningstar’s current expectations about future events and therefore involve unknown risks that may cause Morningstar’s expectations not to occur or to differ significantly from what was expected. In addition, Morningstar Analyst Ratings are based on qualitative evaluation and are thus subjective in nature and should not be used as the sole basis for an investment decision. The Fund Manager of the Year award winners are chosen based on Morningstar’s proprietary research and in-depth qualitative evaluation by its fund analysts.

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 1114-6490

© 2014 Morgan Stanley & Co. LLC. Member SIPC. CRC 1005878 09/14

We congratulate our colleague Dennis Lynch on being named Morningstar’s 2013 U.S. Domestic Stock Fund Manager of the Year. Dennis and his team exemplify conviction, insight, and long-term thinking — the values we strive to provide to our clients each day.

Morgan Stanley Institutional Fund Growth Portfolio (MSEGX) is included on the Q4 2014 Mutual Fund OneSource Select List®

CeLeBRATING oUR MoRNINGSTARMANAGeR oF The YeAR, DeNNIS LYNCh

advisors affiliated with Charles Schwab & Co., Inc. (“Schwab”)—Windhaven Investment Management, Inc., ThomasPartners, Inc. and Charles Schwab Investment Management, Inc.

The guarantee does not apply to (i) accounts managed by investment advisors that are not affiliated with Schwab; (ii) accounts managed by Schwab-affiliated advisors outside of the SPC, Connection, and SMP programs; or (iii) any other product or service made available by Schwab or its affiliates. SPC, SMP, and Connection are wrap fee programs sponsored by Schwab.

If at any time or for any reason you are not completely satisfied with a Participating Service, at your request Schwab will refund the associated program fee for the previous calendar quarter applicable to the Participating Service. The program fee is a percentage of the eligible assets in your Participating Service account(s). You will receive a credit to your Participating Service account(s) within approximately four weeks of your request. No other fees, commissions, charges, expenses, or market losses will be refunded. If Schwab is unable to address your concerns after consulting with you and refunding your program fee, Schwab will work with you to help meet your financial goals. Schwab reserves the right to change this guarantee in the future after providing notice. For additional information regarding associated program fees, please see the disclosure brochure for the Participating Service, available at the time you enroll or upon your request.The Charles Schwab Corporation provides a full range of securities, brokerage, banking, money management, and financial advisory services through its operating subsidiaries. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC), offers investment services and products, including Schwab brokerage accounts. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides deposit and lending services and products.

OI-Wi14-Q4-33dOI_Wi14_32-33_Spotlight_Ads.indd 33 10/21/14 10:56 AM

RESEARCH

How Funds Are Selected

To build the Schwab Mutual Fund OneSource 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 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 Affiliate 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.

Eligibility RequirementsEach OneSource 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 list, 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.

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.

“Leading Schwab Affiliate Funds” sections of the 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 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 sections of the Select List feature only Schwab Affiliate Funds. These sections include 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 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.

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.

Mutual Fund OneSource 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.

Mutual Fund OneSource Select List® 34ETF Select List® 43

Argus 47

CHARLES SCHWAB • WINTER 201434

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 List selection, nor does any fund pay Schwab to be included in any Select List. Eligible funds are selected based solely on the quantitative and qualitative criteria described on pages 34 and 35.

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. (0914-6132)


RESEARCH

LARGE-CAP U.S. STOCK FUNDSPerspectives and Third Quarter 2014 SummaryIn the short-term, escalated global fears could continue to foster volatility for the U.S. equity markets and the recent rally in the dollar may be hardest felt in earnings of larger, multi-national corporations. Moreover, Federal Reserve policy uncertainty can add to investor consternation. However, it is important to keep the longer-term picture in mind, which we believe is positive. The U.S. economy is improving, monetary policy remains quite loose, and in general, a stronger dollar is likely to be both economic and market positive.

Large cap U.S. stocks rose modestly, with the Standard & Poor’s 500 Composite Index edging 1.13% higher. Stronger economic data, an uptick in M&A activity and strong corporate earnings buoyed returns in domestic large cap stocks.

Large-cap U.S. stocks outperformed small- and mid-cap stocks with returns in flat-to-positive territory. Large-cap Growth Category returned gains of 0.68%, while Large-cap Blend and Large-cap Value were lower with returns of -0.08% and -0.55%, respectively.

All perspectives are as of October 14, 2014 For the latest up-to-date perspectives, please visit schwab.com

FOR THE QUARTER ENDED SEPTEMBER 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 20.91 22.79 14.30 8.35 8.39 100.76 105.62 0.73 0.73 2,268

Laudus U.S. Large-Cap Growth Fund (10/14/97) Large Growth LGILX 15.80 22.15 16.80 10.93 6.39 100.01 110.50 0.77 0.77 2,173

Schwab Dividend Equity Fund (09/02/03) Large Value SWDSX 17.25 21.56 14.75 8.04 9.14 97.90 109.25 0.89 0.89 2,015

FUNDAMENTAL INDEX FUNDS

Schwab Fundamental U.S. Large Co Index Fund (04/02/07) Large Value SFLNX 18.74 23.46 15.42 — 7.56 102.62 104.84 0.41 0.35 4,211

MARKET CAP-WEIGHTED INDEX FUNDS

Schwab S&P 500 Index Fund (05/20/97) Large Blend SWPPX 19.63 22.85 15.60 8.07 6.87 99.64 100.28 0.09 0.09 19,872

LEADING 3RD PARTY FUNDS

Janus Contrarian T (2/29/00) Large Blend JSVAX 25.17 27.40 13.30 10.16 7.87 105.61 69.21 0.76 0.76 4,163

Parnassus Core Equity Investor (9/1/92) Large Blend PRBLX 18.32 22.74 15.42 10.20 10.85 93.98 78.50 0.87 0.87 9,811

TIAA-CREF Social Choice Eq Retail (3/31/06) Large Blend TICRX 16.62 21.98 14.97 8.22 7.07 98.06 104.58 0.48 0.48 2,479

Oakmark I (8/5/91) Large Blend OAKMX 20.01 25.66 17.10 9.28 13.25 108.61 102.44 0.95 0.95 15,830

Glenmede Large Cap Core Port (2/27/04) Large Blend GTLOX 22.04 25.71 17.79 9.51 9.02 111.67 114.21 0.86 0.86 637

Lord Abbett Growth Leaders A (6/30/11)e Large Growth LGLAX 8.17 20.13 — — 12.67 95.37 86.89 1.24 0.85 1,183

Morgan Stanley Inst Growth A (1/2/96)e Large Growth MSEGX 11.76 20.35 16.87 10.04 8.75 100.77 108.79 0.96 0.96 3,254

TIAA-CREF Large-Cap Growth Retail (3/31/06) Large Growth TIRTX 18.31 23.22 16.06 — 7.94 101.21 102.13 0.85 0.85 2,571

Glenmede Large Cap Growth (2/27/04) Large Growth GTLLX 23.66 25.70 18.63 10.11 9.30 112.92 119.35 0.87 0.87 525

TIAA-CREF Growth & Income Retail (3/31/06) Large Growth TIIRX 17.87 22.51 14.84 9.83 9.06 100.28 107.05 0.79 0.79 4,321

American Century Equity Income Inv (8/1/94) Large Value TWEIX 13.82 16.74 12.22 7.28 10.80 74.27 73.97 0.93 0.93 9,594

Delaware Value® A (9/14/98)e Large Value DDVAX 13.61 21.69 16.29 7.97 7.23 95.08 65.95 1.02 1.02 5,828

Principal Equity Income A (5/31/39)e Large Value PQIAX 10.33 17.47 13.30 7.47 8.73 89.57 98.56 0.93 0.93 5,562

JPMorgan Equity Income A (2/18/92)e Large Value OIEIX 10.23 19.20 15.43 8.16 8.60 91.80 86.79 1.09 1.05 7,698

INTECH U.S. Value T (7/6/09) Large Value JRSTX 16.35 22.82 14.88 — 18.20 102.58 112.62 0.95 0.95 121

PERFORMANCE BENCHMARKS

Schwab 1000 Index® (Dividends Reinvested) 25.09 16.46 19.19 8.22 —

S&P 500 Index® (Dividends Reinvested) 19.73 22.99 15.70 8.11 —

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.


MID- AND SMALL-CAP U.S. STOCK FUNDSPerspectives and Third Quarter 2014 SummaryThe volatility and coinciding risk aversion amid the heightened global fears that has punished smaller domestic stocks may continue in the short term. However, indicators we look at still point to a renewed uptrend, and the U.S. economy’s relative global strength may be setting more domestically-oriented stocks up for rebound, bolstered by the potential positive impact of the dollar’s rally on earnings of these companies. We recommend sticking to your long-term portfolio asset allocations and not making market cap bets.

The Mid- and Small-cap Categories lagged during the quarter, with Mid-caps having relatively better performance to the Small-caps. Mid-cap Growth return -2.29%, followed by mid-cap blend at -3.30% and mid-cap value at -3.42%.

Small-cap stocks suffered a steep sell-off, sending the benchmark, Russell 2000® Index down 7.36%. The Small-cap Value Category at -7.14% posted the lowest returns relative to the small- and mid-cap universe, followed by Small-cap Blend with a return of -6.75%, and Small-cap Growth at -5.80%.




QUOTESYMBOL



GROSS EXPENSE

RATIOa

NETEXPENSE

RATIOa

TOTAL ASSETS

($M) 1

YEAR3

YEARS5

YEARS10

YEARSSINCE

INCEPTION


Schwab Small-Cap Equity Fund (07/01/03) Small Blend SWSCX 9.08 25.51 16.94 8.91 11.16 123.93 165.78 1.11 1.11 628 FUNDAMENTAL INDEX FUNDS

Schwab Fundamental U.S. Small Co Index Fund (04/02/07) Small Blend SFSNX 9.78 23.03 15.14 — 7.88 115.23 161.01 0.48 0.35 1,175 MARKET CAP-WEIGHTED INDEX FUNDS

Schwab Small-Cap Index Fund (05/20/97) Small Blend SWSSX 3.95 21.10 14.95 9.03 8.48 106.65 150.33 0.20 0.17 2,435 LEADING 3RD PARTY FUNDS

First Eagle Fund of America A (11/19/98)e Mid-Cap Blend FEFAX 11.96 21.58 15.37 9.82 8.92 97.27 80.34 1.42 1.42 2,989 Stewart Capital Mid Cap (12/29/06) Mid-Cap Blend SCMFX 16.66 21.71 16.90 — 9.37 94.66 94.09 1.56 1.21 86 Janus Enterprise T (9/1/92) Mid-Cap Growth JAENX 12.33 20.73 16.07 10.95 10.59 89.14 83.91 0.93 0.93 3,478 Morgan Stanley Inst Mid Cap Growth A (1/31/97)e Mid-Cap Growth MACGX 1.33 13.26 12.60 10.13 9.95 83.40 130.13 0.96 0.96 6,931 TIAA-CREF Mid-Cap Value Retail (10/1/02) Mid-Cap Value TCMVX 15.15 22.31 14.94 10.02 12.73 99.12 104.81 0.76 0.76 4,735 Victory Established Value A (5/5/00)e Mid-Cap Value VETAX 7.57 19.24 13.57 10.19 9.24 97.82 108.22 1.05 1.05 2,038 Nuveen NWQ Small/Mid-Cap Value A (12/15/06)b,e Small Blend NSMAX 1.52 17.43 14.38 — 2.87 98.95 135.85 1.32 1.32 50 Northern Small Cap Core (9/30/99) Small Blend NSGRX 5.68 22.00 16.02 9.30 6.89 106.65 139.21 0.86 0.75 180 Pax World Small Cap Individual Inv (3/27/08) Small Blend PXSCX 7.76 23.22 16.14 — 10.54 96.21 81.64 1.66 1.24 141 Touchstone Small Cap Value Opp A (7/31/03)e Small Blend TSOAX 5.55 22.22 13.02 8.21 10.42 114.04 136.51 2.47 1.51 174 Lazard US Small-Mid Cap Equity Open (1/30/97) Small Blend LZCOX 10.66 22.27 14.40 8.50 8.17 105.04 129.40 1.20 1.20 263 Janus Venture T (4/30/85) Small Growth JAVTX 6.31 22.13 17.55 10.66 12.24 97.56 100.80 0.94 0.94 2,315 Pioneer Oak Ridge Small Cap Growth A (1/3/94)e Small Growth ORIGX -2.64 16.70 13.77 8.82 10.04 82.99 80.35 1.40 1.40 2,087 Eaton Vance Tx-Mgd Small-Cap A (9/25/97)e Small Growth ETMGX -0.42 16.74 12.21 8.85 4.65 94.17 125.47 1.27 1.27 100 ASTON/LMCG Small Cap Growth N (11/3/10) Small Growth ACWDX 9.05 25.16 — — 15.00 111.76 121.28 2.04 1.36 46 Neuberger Berman Small Cap Growth A (5/27/09)e Small Growth NSNAX -3.55 15.97 12.08 8.07 15.12 90.13 118.99 1.83 1.26 79 Perritt Ultra MicroCap (8/31/04) Small Value PREOX 9.71 18.69 15.81 7.48 7.56 78.11 64.49 1.76 1.76 64 Wells Fargo Advantage Spec SmCp Val A (5/7/93)e Small Value ESPAX 4.19 19.68 12.77 7.91 11.23 103.83 127.04 1.41 1.34 655 Delaware Small Cap Value A (6/24/87)e Small Value DEVLX 3.86 18.32 14.46 8.39 11.34 99.42 126.46 1.25 1.25 2,482 Diamond Hill Small Cap A (12/29/00)e Small Value DHSCX 4.37 18.91 12.82 8.07 11.22 100.19 126.06 1.33 1.33 1,343 PERFORMANCE BENCHMARK

Russell 2000 Index® (Dividends Reinvested) 3.93 21.26 14.29 8.19 —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.



RESEARCH

INTERNATIONAL STOCK FUNDSPerspectives and Third Quarter 2014 SummaryOur outlook for international funds is mixed. Growth in Europe has weakened and remains at risk of a near-term recession, while in South America, Brazil, is expected to make only a slow recovery from recession. However, economic growth is stabilizing in China and rebounding in Japan. Finally, growth is strengthening in India and expected to remain strong elsewhere in emerging Asia, supporting our current outlook favoring emerging markets within a diversified international portfolio. Developed market non-U.S. equities, represented by the MSCI EAFE® Index, fell -5.88% during

the quarter, hampered by a surging dollar and faltering economic growth. The MSCI Japan Index was up 5.8% in local-currency returns on the back of a depreciating yen; down 2.3% in dollar-denominated terms. The Europe Stock category, the largest detractor, declined -7.54% amid weak economic growth, mounting deflationary pressures and a depreciating euro.

Emerging markets outperformed developed markets with better relative performance from China and India. The Diversified Emerging Markets Category declined 3.47% during the quarter amid concerns about the potential for tighter monetary policy in the U.S. and geopolitical instability. The China Region Category returned -0.38% on the back of stimulus measures and new reforms regarding state-owned enterprises, partly offsetting worries about slowing economic growth.




QUOTESYMBOL




NETEXPENSERATIOa

TOTAL ASSETS

($M) 1

YEAR3

YEARS5

YEARS10

YEARSSINCE

INCEPTION


Schwab® International Core Equity Fund (05/30/08) Foreign Large Blend SICNX 7.29 16.60 8.79 — 2.02 107.09 82.21 1.10 0.86 331 Laudus Mondrian International Equity Investor (06/17/08) Foreign Large Value LIEQX 8.27 12.01 5.79 — 0.24 94.61 89.11 1.19 1.19 76

FUNDAMENTAL INDEX FUNDS

Schwab Fundamental Emerg Mkts Lg Co Idx (01/31/08) Diversified Emerging Mkts SFENX -0.26 4.96 2.00 — 0.45 93.70 133.84 0.89 0.50 359 Schwab Fundamental Intl Large Co Idx (04/02/07) Foreign Large Value SFNNX 6.20 14.32 5.06 — 1.42 112.07 105.12 0.52 0.35 941 Schwab Fundamental Intl Small Co Idx (01/31/08) Foreign Small/Mid Blend SFILX 3.62 12.70 8.09 — 5.22 94.49 84.52 0.94 0.50 256 MARKET CAP-WEIGHTED INDEX FUNDS

Schwab International Index Fund (05/20/97) Foreign Large Blend SWISX 3.89 14.16 6.49 6.29 4.48 105.59 94.81 0.23 0.19 2,584 LEADING 3RD PARTY FUNDS

Matthews China Dividend Investor (11/30/09) China Region MCDFX 7.75 15.37 — — 9.87 86.31 53.04 1.24 1.24 144 Matthews China Small Companies (5/31/11) China Region MCSMX 7.28 13.54 — — -0.41 83.26 59.18 2.04 1.50 22 Baron Emerging Markets Retail (12/31/10) Diversified Emerging Mkts BEXFX 8.17 13.29 — — 5.11 103.10 95.87 1.90 1.50 1,133 Harding Loevner Emerging Markets Advisor (11/9/98) Diversified Emerging Mkts HLEMX 7.01 11.67 6.83 11.23 13.12 103.04 106.07 1.46 1.46 2,394 Matthews Asia Growth Investor (10/31/03) Diversified Pacific/Asia MPACX 5.63 13.80 11.27 10.16 10.17 88.15 66.28 1.12 1.12 807 JPMorgan Intrepid European A (11/2/95)e Europe Stock VEUAX 1.46 17.87 7.48 7.72 9.92 124.73 92.42 1.77 1.51 1,011 FMI International (12/31/10) Foreign Large Blend FMIJX 11.74 18.60 — — 11.55 78.07 18.00 1.15 1.00 473 Manning & Napier International S (8/27/92) Foreign Large Blend EXITX 3.06 10.47 6.16 7.70 8.37 101.19 110.58 1.14 1.11 633 Lazard International Strategic Eq Open (2/3/06) Foreign Large Blend LISOX 6.38 17.86 10.03 — 5.67 110.29 80.11 1.10 1.10 4,765 Aberdeen International Equity A (8/30/00)e Foreign Large Blend GIGAX -1.24 9.23 6.55 8.80 4.13 89.99 84.83 1.33 1.33 844 TIAA-CREF International Eq Retail (3/31/06) Foreign Large Blend TIERX 0.87 15.53 7.59 6.47 2.97 111.35 96.35 0.88 0.88 3,480 Artisan International Investor (12/28/95) Foreign Large Growth ARTIX 5.85 19.22 9.52 8.53 10.11 109.39 70.25 1.20 1.20 17,534 Scout International (9/14/93) Foreign Large Growth UMBWX 0.99 12.11 6.54 7.97 8.53 93.34 86.23 1.02 1.02 5,903 Federated Intl Strategic Val Div A (6/3/08)e Foreign Large Value IVFAX 1.57 9.77 6.48 — 0.49 91.32 84.29 1.29 1.11 868 Brandes International Equity I (12/27/96) Foreign Large Value BIIEX 5.74 13.40 5.29 5.62 8.85 103.71 96.26 1.03 1.00 501 Oberweis International Opportunities (2/1/07) Foreign Small/Mid Growth OBIOX 10.28 28.54 19.73 — 9.59 139.21 68.27 2.20 1.60 406 Lazard International Small Cap Eq Open (2/13/97) Foreign Small/Mid Growth LZSMX 4.88 15.93 10.15 6.06 6.67 95.37 65.67 1.48 1.43 63 ClearBridge International Small Cap A (10/1/10)e Foreign Small/Mid Value LCOAX 2.50 16.23 — — 9.90 94.89 48.60 3.61 1.45 76 Matthews Japan Investor (12/31/98) Japan Stock MJFOX 1.95 12.64 10.72 3.33 5.37 72.50 45.66 1.10 1.10 510 Deutsche Latin America Equity A (5/29/01)e Latin America Stock SLANX -5.62 2.16 -0.99 10.29 9.82 117.43 179.61 1.84 1.72 397 Matthews Asia Small Companies Inv (9/15/08) Pacific/Asia ex-Japan Stk MSMLX 18.75 14.70 13.40 — 17.30 93.36 69.83 1.47 1.47 615 Matthews Asian Growth & Inc Investor (9/12/94) Pacific/Asia ex-Japan Stk MACSX 4.08 11.48 8.74 10.37 10.48 75.99 59.49 1.08 1.08 4,469 Perkins Global Value T (6/29/01) World Stock JGVAX 10.74 14.70 10.60 6.75 7.04 72.77 32.90 1.03 1.03 282 PERFORMANCE BENCHMARKS

MSCI EAFE Index (Dividends Reinvested) 4.25 13.65 6.56 6.32 —New to the Select List this quarter

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.



SECTOR FUNDSPerspectives and Third Quarter 2014 SummaryWith the bifurcation of outlooks for global monetary policy and economic growth, which has underpinned the recent rally in the U.S. dollar, volatility for sectors related to dollar-priced commodities, such as oil and gold, is likely to remain elevated. Meanwhile, we believe the industrial sector should benefit from signs of general improvement in global manufacturing and accommodative monetary policies that should stimulate growth in the developed economies. Moreover, we see the positive trend for the technology sector continuing, bolstered by indications of a further acceleration in capital expenditures by companies.

The Specialty categories performed dismally across most sectors. Notably, the Energy (-10.19%) and Precious Metals (-19.11%) sectors experienced the most decline. Falling global oil prices and concerns over production growth held back returns in Refiners, Exploration and Production and Equipment & Services sub-sectors. Weakness in Silver and Platinum prices and Gold Mining Producers added to the woes of the Natural Resources sector already weighed down by a strengthening U.S. dollar. Utilities (-4.80%) and Financials (-1.41%) also posted marginally negative performance. Real Estate (-3.01%) also experienced negative performance, due to investor concerns that the end of quantitative easing in October will lead to rising interest rates. However, Health Care (4.58%) was the strongest performer for the quarter led by Biotechnology and Managed Health Care.




QUOTESYMBOL

AVERAGE ANNUALIZED TOTAL RETURNUPSIDE

MARKET CAPTURE


GROSS EXPENSE

RATIOa

NETEXPENSE

RATIOa

TOTAL ASSETS

($M) 1

YEAR3

YEARS5

YEARS10

YEARSSINCE

INCEPTION


FINANCIAL FUNDS (CATEGORY AVERAGE)† 26.50 31.23 20.70 12.27Schwab Financial Services (7/3/00) Financial SWFFX 14.85 24.29 10.83 3.75 4.97 116.06 74.20 1.03 0.94 80 LEADING 3RD PARTY FUNDS

EQUITY ENERGY FUNDS (CATEGORY AVERAGE)† 7.90 13.82 7.09 9.48BlackRock Natural Resources Inv A (10/21/94)e Equity Energy MDGRX 1.33 10.92 6.04 9.33 9.10 102.09 138.58 1.07 1.07 447 Guinness Atkinson Global Energy (6/30/04) Equity Energy GAGEX 11.77 15.15 7.76 11.97 12.96 122.85 170.64 1.35 1.35 82 EQUITY LIMITED PARTNERSHIP FUNDS (CATEGORY AVERAGE)† 24.41 17.50 — —Tortoise MLP & Pipeline Investor (5/31/11)e Energy Limited Partnership TORTX 22.59 24.31 — — 20.45 104.64 23.79 1.29 1.33 1,936 FINANCIAL FUNDS (CATEGORY AVERAGE)† 11.87 22.86 9.75 2.88Burnham Financial Services A (6/7/99)e Financial BURKX 5.20 21.01 8.24 4.98 11.78 83.32 -0.33 1.81 1.80 83 Hennessy Large Cap Financial Investor (1/3/97) Financial HLFNX 14.37 25.92 9.22 5.13 8.11 119.78 70.03 1.57 1.57 90 HEALTH FUNDS (CATEGORY AVERAGE)† 26.50 31.23 20.70 12.27Janus Global Life Sciences T (12/31/98) Health JAGLX 34.31 37.27 23.78 13.61 11.99 121.69 -16.63 0.95 0.95 2,617 Delaware Healthcare A (9/28/07)e Health DLHAX 15.63 27.47 20.82 — 18.68 117.53 30.54 1.38 1.38 405 NATURAL RESOURCES FUNDS (CATEGORY AVERAGE)† 4.95 8.74 6.13 8.34Putnam Global Natural Resources A (7/24/80)e Natural Resources EBERX -1.11 8.19 4.25 6.12 7.15 101.26 160.35 1.23 1.23 268 ICON Materials S (5/6/97) Natural Resources ICBMX 12.86 20.03 12.12 9.90 5.36 107.71 89.47 1.45 1.45 89 PRECIOUS METALS FUNDS (CATEGORY AVERAGE)† -11.10 -23.28 -10.39 2.08Tocqueville Gold (6/29/98) Equity Precious Metals TGLDX -5.66 -20.49 -5.47 5.19 11.74 -0.66 236.42 1.35 1.35 1,328 First Eagle Gold A (8/31/93)e Equity Precious Metals SGGDX -12.99 -21.53 -8.44 3.11 5.42 -9.50 209.72 1.25 1.25 1,226 GLOBAL REAL ESTATE FUNDS (CATEGORY AVERAGE)† 5.75 15.02 9.64 6.12Janus Global Real Estate T (7/6/09) Global Real Estate JERTX 12.02 17.67 11.54 — 16.32 102.66 97.32 1.13 1.13 193 REAL ESTATE FUNDS (CATEGORY AVERAGE)† 12.64 15.77 15.05 7.70Lazard US Realty Income Open (7/30/08) Real Estate LRIOX 12.38 15.62 15.97 — 12.40 71.65 35.72 1.24 1.24 144 Cohen & Steers Realty Shares (7/2/91)b Real Estate CSRSX 13.38 15.71 14.77 9.05 12.02 84.62 68.57 0.97 0.97 5,577 TECHNOLOGY FUNDS (CATEGORY AVERAGE)† 18.69 20.18 14.33 9.71Janus Global Technology T (12/31/98) Technology JAGTX 14.62 20.57 15.07 11.09 6.55 109.38 89.07 0.97 0.97 1,054 Matthews Asia Science and Tech Inv (12/27/99) Technology MATFX 22.19 19.96 13.10 11.07 2.62 113.14 103.87 1.18 1.18 178 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.



RESEARCH

TAXABLE BOND FUNDSPerspectives and Third Quarter 2014 SummaryIn the third quarter, short- and intermediate-term Treasury bond yields moved higher as investors anticipate the first Fed rate hike sometime next year. However, long-term Treasury bond yields moved lower, ending the quarter at 2.49%. We continue to see risks in the lower-rated segments of the market, like sub-investment grade bonds. We think most investors should focus on a core portfolio of high quality investments, and those reaching for yield in the riskier parts of the market should consider moving up in quality.

Overall, taxable fixed income funds had relatively flat performance in the third quarter – Barclays U.S. Agg Bond Index returned just 0.17% – but there were still a few standout categories worth noting. The long end of the curve had the strongest tailwind as 30 year U.S. Treasuries fell by 19bps. Bond prices move inversely to yields and Long Government funds took advantage of this appreciation with an average return of 2.59%, followed by Long-Term Bond funds at 0.66%.

Riskier spread sectors performed worse this quarter. Emerging Markets Bond funds were the biggest laggard, returning -2.92%. They were followed by High Yield Bond funds (-2.03%) Multisector Bond funds (-1.02%) and Bank Loan funds (-0.67%). Also, modest US GDP growth, low interest rates and weak inflation expectation brought down Inflation-Protected Bond funds by -2.16%.




QUOTESYMBOL


MARKET CAPTURE



NETEXPENSERATIOa

AVG. WEIGHTED MATURITY

(YRS)

TOTAL ASSETS

($M) 1

YEAR3

YEARS5

YEARS10

YEARSSINCE

INCEPTION

LEADING SCHWAB AFFILIATE FUNDSe

Schwab GNMA Fund (03/03/03) Intermediate Gov’t SWGSX 3.26 1.55 3.41 4.38 4.08 74.63 85.27 0.62 0.57 5.82 290 Schwab Intermediate-Term Bond Fund (10/31/07) Intermediate-Term SWIIX 2.42 1.88 3.93 — 4.67 75.19 73.26 0.63 0.46 4.31 368

MARKET CAP-WEIGHTED INDEX FUNDS

Schwab Total Bond Market Fund (03/05/93) Intermediate-Term SWLBX 3.77 2.12 3.72 3.13 4.95 95.58 103.76 0.56 0.29 6.82 1,222 LEADING 3RD PARTY FUNDS

RidgeWorth Seix Floating RT High Inc I (3/1/06) Bank Loan SAMBX 3.44 6.36 6.08 — 4.54 115.86 -21.02 0.61 0.61 5.25 7,149 Lord Abbett Floating Rate A (12/31/07)e Bank Loan LFRAX 0.94 6.15 5.38 — 4.21 118.46 -38.82 0.80 0.80 — 7,606 Lord Abbett Income A (12/31/81)e Corporate Bond LAGVX 7.10 6.63 7.39 6.37 8.22 191.79 87.00 0.88 0.78 — 2,020 BMO TCH Corporate Income Y (12/22/08) Corporate Bond MCIYX 8.47 7.15 7.47 — 10.11 197.18 108.51 0.76 0.60 9.91 228 TCW Emerging Markets Income N (3/1/04) Emerging Markets TGINX 6.38 8.75 9.17 9.11 9.16 230.71 113.84 1.10 1.10 6.19 5,328 DoubleLine Emerging Markets Fixed Inc N (4/6/10) Emerging Markets DLENX 11.68 7.66 — — 7.17 196.69 88.51 1.17 1.17 8.50 654 RidgeWorth Seix High Yield I (12/29/00) High Yield Bond SAMHX 7.39 10.02 9.47 6.53 7.53 228.96 63.66 0.56 0.56 7.14 791 TIAA-CREF High-Yield Retail (3/31/06) High Yield Bond TIYRX 6.78 9.97 9.41 — 7.79 237.37 81.78 0.65 0.65 7.00 2,535 American Century ShDur Infl Prot Bd Inv (5/31/05) Inflation-Protected APOIX -0.21 0.68 3.44 — 3.72 50.76 72.82 0.57 0.57 3.33 1,225 American Century Infl-Adj Bond Inv (2/10/97) Inflation-Protected ACITX 0.87 0.81 3.96 4.27 5.42 142.72 247.59 0.47 0.47 8.66 3,201 American Century Ginnie Mae Inv (9/23/85) Intermediate Gov’t BGNMX 3.02 1.58 3.45 4.38 6.54 70.78 76.26 0.55 0.55 6.74 1,459 American Century Government Bond Inv (5/16/80) Intermediate Gov’t CPTNX 2.38 0.96 2.94 4.23 6.91 67.06 93.72 0.47 0.47 6.21 1,193 USAA Income (3/4/74)b Intermediate-Term USAIX 5.45 4.38 5.68 5.32 8.32 126.44 75.95 0.58 0.58 7.05 5,288 RidgeWorth Total Return Bond I (12/30/97) Intermediate-Term SAMFX 4.30 2.69 4.47 5.09 5.44 104.22 98.03 0.41 0.41 7.78 1,089 Baird Core Plus Bond Inv (9/29/00) Intermediate-Term BCOSX 5.03 4.06 5.89 5.64 6.27 130.02 95.36 0.55 0.55 7.00 4,820 Metropolitan West Total Return Bond M (3/31/97) Intermediate-Term MWTRX 4.81 5.50 7.05 6.56 7.05 138.99 57.26 0.68 0.68 7.89 37,747 DoubleLine Total Return Bond N (4/6/10) Intermediate-Term DLTNX 4.72 4.68 — — 8.65 110.29 32.76 0.72 0.72 5.06 37,426 PIMCO Income D (3/30/07) Multisector Bond PONDX 8.61 11.34 12.48 — 9.99 213.37 -15.08 0.79 0.79 6.62 38,601 Loomis Sayles Bond Retail (12/31/96) Multisector Bond LSBRX 7.40 9.21 9.19 7.68 8.40 217.44 71.12 0.92 0.92 6.32 24,362 Federated Adjustable Rate Secs Instl (12/3/85) Short Government FEUGX 0.71 0.61 0.96 2.52 4.62 11.66 -1.59 1.00 0.64 — 714 Loomis Sayles Ltd Term Govt and Agency A (1/3/89)e Short Government NEFLX -1.60 0.48 1.82 3.09 5.00 46.86 32.24 0.82 0.82 3.23 745 Lord Abbett Short Duration Income A (11/4/93)e Short-Term Bond LALDX 0.42 3.20 3.76 4.27 4.43 78.93 -2.23 0.58 0.58 — 37,165 Metropolitan West Low Duration Bond M (3/31/97)b Short-Term Bond MWLDX 1.86 3.78 5.18 3.28 4.25 66.04 -19.66 0.63 0.63 3.32 3,708 RidgeWorth US Gov Sec Ultra-Short Bd I (4/11/02) Ultrashort Bond SIGVX 1.07 0.92 1.23 2.77 2.60 13.86 -9.66 0.38 0.38 3.74 1,775 PIMCO Foreign Bond (USD-Hedged) D (4/8/98) World Bond PFODX 8.65 6.88 7.04 6.22 6.02 150.40 26.99 0.92 0.90 6.82 7,203 Dreyfus/Standish Global Fixed Income A (12/2/09)e World Bond DHGAX 1.99 3.21 4.10 5.59 3.86 119.12 45.19 0.88 0.88 7.67 683 PERFORMANCE BENCHMARKS

Barclays U.S. Aggregate Bond Index (Dividends Reinvested) 3.96 2.43 4.12 4.62 —New to the Select List this quarter

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.


NOTES: ALL DATA SHOWN IS AS OF SEPTEMBER 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 Third Quarter 2014 SummaryWe believe that credit conditions in the municipal market continue to improve despite some headline cases. Investors in tax-free funds should continue to earn an attractive after-tax distribution relative to Treasuries and taxable bonds, in our view. For investors who can accept some price volatility but are looking to earn a higher after-tax return, we favor intermediate-term funds. For more risk adverse investors, or those with a need for principal in the near term, we would suggest shorter-term funds.

As a whole, municipal bond funds have been standout performers in 2014, and that trend continued through the third quarter as the Barclays Municipal Index returned 1.49%. The municipal market continues to be strong from both a technical and fundamental point of view – supply has been limited, demand is recovering and credit trends are improving as defaults are on the decline. Contrary to the taxable bond market, High Yield Muni funds outperformed all other categories with a quarterly return of 2.43%. Muni California Long funds were close behind, returning an average of 2.20%.

Over half the municipal bond categories outperformed the aggregate index, and no categories had a negative return. However, the weakest quarterly performers were Muni National Short and Muni Single State Short, returning just 0.29% and 0.78%, respectively.




QUOTESYMBOL


MARKET CAPTURE



NETEXPENSERATIOa

AVG. WEIGHTED MATURITY

(YRS)

TOTAL ASSETS

($M) 1

YEAR3

YEARS5

YEARS10

YEARSSINCE

INCEPTION


Schwab Tax-Free Bond Fund (09/11/92) Muni National Interm SWNTX 6.35 3.88 4.44 4.28 5.27 82.86 79.74 0.56 0.49 5.78 632

LEADING 3RD PARTY FUNDS

American Century IntermTrm Tx-Fr Bd Inv (3/2/87) Muni National Interm TWTIX 5.17 3.27 3.63 4.01 5.09 80.68 92.54 0.47 0.47 8.88 3,430

USAA Tax Exempt Intermediate-Term (3/19/82)b Muni National Interm USATX 6.63 4.77 4.92 4.49 6.92 91.45 73.65 0.55 0.55 8.96 3,734

Northern Intermediate Tax-Exempt (3/31/94) Muni National Interm NOITX 5.84 3.56 3.58 3.85 4.49 90.25 106.72 0.50 0.46 8.80 2,534

BMO Intermediate Tax-Free Y (2/1/94) Muni National Interm MITFX 6.47 4.32 4.58 4.54 4.66 88.26 79.27 0.62 0.56 4.83 1,524

Baird Intermediate Muni Bd Inv (3/30/01) Muni National Interm BMBSX 3.98 2.34 3.00 3.72 4.34 64.14 81.40 0.55 0.55 5.51 1,129

USAA Tax Exempt Long-Term (3/19/82)b Muni National Long USTEX 9.27 5.92 5.51 4.64 7.59 119.23 105.47 0.54 0.54 17.02 2,363

Northern Tax-Exempt (3/31/94) Muni National Long NOTEX 9.36 4.85 4.61 4.61 5.34 114.72 126.22 0.50 0.46 16.86 791

Federated Shrt-Interm Dur Muni Instl (9/4/81) Muni National Short FSHIX 2.65 1.95 2.41 2.63 4.38 38.07 31.23 0.80 0.47 — 1,161

Wells Fargo Advantage S/T Muni Bd Inv (12/31/91) Muni National Short STSMX 1.78 1.58 2.24 3.01 3.84 21.13 1.97 0.79 0.63 1.84 6,459

American Century High-Yield Muni Inv (3/31/98) High Yield Muni ABHYX 10.06 6.45 6.25 4.10 4.81 131.55 119.01 0.60 0.60 19.11 359

Western Asset Municipal High Income A (11/6/92)e High Yield Muni STXAX 6.52 4.94 5.03 5.16 5.00 129.86 114.54 0.80 0.80 12.52 768

PERFORMANCE BENCHMARKS

Barclays Municipal Bond Index (Dividends Reinvested) 7.93 4.56 4.67 4.72 —

New to the Select List this quarter

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.



RESEARCH

ADDITIONAL FUND CATEGORIES FOR THE QUARTER ENDED SEPTEMBER 30, 2014


QUOTESYMBOL


MARKET CAPTURE



NETEXPENSERATIOa

TOTAL ASSETS

($M) 1

YEAR3

YEARS5

YEARS10

YEARSSINCE

INCEPTION

BALANCED FUNDS—LEADING SCHWAB AFFILIATE FUNDSd

Schwab Balanced Fund (11/18/96) Moderate Allocation SWOBX 10.98 13.71 10.11 6.22 6.61 102.21 77.56 0.73 0.63 193 BALANCED FUNDS—LEADING 3RD PARTY FUNDS

Oakmark Equity & Income I (11/1/95) Aggressive Allocation OAKBX 10.39 15.02 9.97 8.15 10.92 108.87 76.59 0.77 0.77 19,854 Value Line Asset Allocation (8/24/93) Aggressive Allocation VLAAX 7.67 15.15 12.56 7.71 9.83 109.42 76.24 1.19 1.09 233 American Century One Choice® VryCnsrvInv (9/30/04) Conservative Allocation AONIX 5.57 6.22 5.58 4.90 4.90 52.22 50.67 0.64 0.64 369 JPMorgan Income Builder A (5/31/07)e Conservative Allocation JNBAX 2.52 10.32 8.51 — 5.17 100.74 101.17 1.13 0.75 10,984 Janus Balanced T (9/1/92) Moderate Allocation JABAX 11.77 15.24 9.93 8.57 10.05 109.43 74.73 0.83 0.83 11,908 Greenspring (7/1/83)b Moderate Allocation GRSPX 0.58 10.73 7.57 6.67 9.59 87.46 81.98 0.94 0.94 742 First Eagle Global A (4/28/70)e World Allocation SGENX 2.47 10.17 8.76 9.22 11.92 107.80 122.33 1.13 1.13 48,608 Morgan Stanley Instl Global Strat A (11/1/96)e World Allocation MBAAX 3.29 12.40 9.42 6.71 6.53 104.55 72.73 1.11 1.09 445 TARGET DATE FUNDS—LEADING SCHWAB AFFILIATE FUNDSd

Schwab Monthly Income Fund—Max (03/28/08) Retirement Income SWLRX 4.70 3.78 4.47 — 3.82 32.56 32.78 0.66 0.45 56 Schwab Target 2015 Fund (03/12/08) Target Date 2011-2015 SWGRX 7.26 10.75 8.50 — 5.44 86.49 78.74 0.72 0.58 110 Schwab Target 2020 Fund (07/01/05) Target Date 2016-2020 SWCRX 8.64 13.01 9.73 — 6.12 104.20 95.47 0.70 0.65 486 Schwab Target 2025 Fund (03/12/08) Target Date 2021-2025 SWHRX 9.57 14.70 10.68 — 7.36 117.58 108.68 0.79 0.71 332 Schwab Target 2030 Fund (07/01/05) Target Date 2026-2030 SWDRX 10.27 16.02 11.26 — 6.92 127.62 118.17 0.78 0.74 708 Schwab Target 2035 Fund (03/12/08) Target Date 2031-2035 SWIRX 10.86 17.22 11.90 — 7.94 137.10 127.82 0.87 0.78 272 Schwab Target 2040 Fund (07/01/05) Target Date 2036-2040 SWERX 11.39 18.14 12.31 — 7.48 143.87 133.84 0.84 0.80 743 Schwab Target 2045 Fund (01/23/13) Target Date 2041-2045 SWMRX 11.51 — — — 14.47 — — 1.83 0.75 38 Schwab Target 2050 Fund (01/23/13) Target Date 2046-2050 SWNRX 11.84 — — — 14.92 — — 2.13 0.76 31 TARGET DATE FUNDS—LEADING 3RD PARTY FUNDS

American Beacon Retire Inc & Apprec Inv (7/1/03) Retirement Income AANPX 4.75 4.93 4.85 4.76 4.61 40.98 38.53 1.11 1.11 102 American Century One Choice 2015 Inv (8/31/04) Target Date 2011-2015 ARFIX 8.18 10.77 8.60 6.39 6.47 85.90 76.56 0.79 0.79 1,219 American Century One Choice 2020 Inv (5/30/08) Target Date 2016-2020 ARBVX 8.69 11.61 9.11 — 5.48 92.38 82.35 0.82 0.82 1,335 American Century One Choice 2025 Inv (8/31/04) Target Date 2021-2025 ARWIX 9.12 12.50 9.64 6.89 7.00 99.70 90.10 0.85 0.85 2,119 American Century One Choice 2030 Inv (5/30/08) Target Date 2026-2030 ARCVX 9.75 13.53 10.21 — 5.50 107.41 96.67 0.87 0.87 1,303 Manning & Napier Target 2030 K (3/28/08) Target Date 2026-2030 MTPKX 10.49 15.31 10.63 — 6.85 121.57 111.04 1.16 1.11 196 American Century One Choice 2035 Inv (8/31/04) Target Date 2031-2035 ARYIX 10.42 14.68 10.88 7.36 7.51 115.76 103.44 0.90 0.90 1,648 American Century One Choice 2040 Inv (5/30/08) Target Date 2036-2040 ARDVX 11.21 15.81 11.51 — 5.97 124.28 111.27 0.93 0.93 964 Manning & Napier Target 2040 K (3/28/08) Target Date 2036-2040 MTTKX 11.66 17.68 11.05 — 7.11 144.54 143.18 1.21 1.12 125 American Century One Choice 2045 Inv (8/31/04) Target Date 2041-2045 AROIX 11.85 16.63 11.90 7.72 7.89 130.92 118.38 0.97 0.97 1,169 American Century One Choice 2050 Inv (5/30/08) Target Date 2046-2050 ARFVX 12.16 17.07 12.10 — 5.81 134.45 122.16 0.98 0.98 533 Manning & Napier Target 2050 K (3/28/08) Target Date 2046-2050 MTYKX 12.04 18.16 11.50 — 7.62 148.27 146.83 1.38 1.12 61 American Century One Choice 2055 Inv (3/31/11) Target Date 2051+ AREVX 12.36 17.38 — — 10.07 136.57 123.55 0.99 0.99 128 ALTERNATIVE FUNDS—LEADING SCHWAB AFFILIATE FUNDSd

Schwab Hedged Equity Fund (09/03/02) Long/Short Equity SWHEX 13.49 13.36 8.39 5.75 6.86 62.16 68.86 2.52 1.33 199 ALTERNATIVE FUNDS—LEADING 3RD PARTY FUNDS

PIMCO Convertible D (5/2/11) Convertibles PCVDX 18.13 13.62 11.57 6.99 7.61 106.16 91.32 1.11 1.05 214 Gateway A (12/7/77)e Long/Short Equity GATEX 0.28 5.03 4.13 3.45 7.57 33.53 36.01 1.03 0.94 7,930 Glenmede Total Market (12/21/06) Long/Short Equity GTTMX 20.08 23.22 15.61 — 5.41 111.77 144.81 2.29 1.20 56 PIMCO CommoditiesPLUS® Strategy D (5/28/10) Commodities Broad Basket PCLDX -4.52 0.90 — — 4.80 101.98 87.34 1.37 1.24 6,995 Goldman Sachs Commodity Strategy A (3/30/07)e Commodities Broad Basket GSCAX -11.50 -2.72 -0.13 — -5.13 98.61 95.44 1.10 0.97 1,275 Merger Investor (1/31/89) Market Neutral MERFX 3.39 4.06 3.23 3.82 6.69 71.20 -20.35 1.65 1.30 5,397 Arbitrage R (9/18/00) Market Neutral ARBFX 1.01 1.04 1.78 3.45 4.51 9.99 -22.11 2.17 1.44 2,504 PERFORMANCE BENCHMARKS

S&P 500 Index® (Dividends Reinvested) 19.73 22.99 15.70 8.11 —Barclays U.S. Aggregate Bond Index (Dividends Reinvested) 3.96 2.43 4.12 4.62 —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.


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. Schwab ETFs are the only funds available on Schwab ETF OneSource in certain categories. 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 67 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. Schwab ETFs are the only funds available on Schwab ETF OneSource in certain categories. 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.


RESEARCH

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 Dow Jones U.S. Large Cap Total Stock Market Index 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 Dow Jones U.S. Large Cap Growth Total Stock Market Index 0.07% $0† ETF has diversified exposure to large growth names such

as Apple, Berkshire Hathaway and Google

Large Value SCHV Schwab U.S. Large-Cap Value Dow Jones U.S. Large Cap Value Total Stock Market Index 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 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 MidCap 400 Growth S&P MidCap 400 Growth Index 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 MidCap 400 Value S&P Mid Cap 400 Value Index 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 Dow Jones U.S. Small Cap Total Stock Market Index 0.08% $0† Focuses on over 1700 small-cap companies; index

excludes the smallest micro-cap stocks

Small Growth SLYG SPDR S&P SmallCap 600 Growth S&P Small Cap 600 Growth Index 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 SmallCap 600 Value S&P Small Cap 600 Value Index 0.25% $0† Holds stocks with value characteristics selected from the S&P 600 Small Cap 600 index

Total Stock Market SCHB Schwab U.S. Broad Market ETF Dow Jones U.S. Broad Stock Market Index 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 Index 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 Index 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 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 6000 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 largest Japanese stocks by market-cap, including Toyota, Mitsubishi and Honda

China Stock GXC SPDR S&P China S&P China BMI Index 0.59% $0† Tracks a broad, cap-weighted index of investable Chinese shares. The fund’s holdings stretch across all cap sizes

New to the ETF Select List this quarter


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. Schwab ETFs are the only funds available on Schwab ETF OneSource in certain categories. 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. (1014-7132)




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 1500 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 about 60 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

at least $250 million of outstanding face value

Intermediate Corporate CORP PIMCO Investment Grade Corporate Bond

B of A Merrill Lynch U.S. Corporate Index 0.20% $0† Tracks a market-weighted index of U.S. dollar

denominated investment-grade corporate bonds

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 69 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 Muni MLN Market Vectors Long Municipal Barclays AMT-Free Long Continuous Municipal Index 0.24% $8.95 Holds tax-exempt municipal bonds issued within the last

5 years with nominal maturities of at least 17 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 (TIPS) Index (Series-L) 0.07% $0† ETF highlights Treasury securities which are designed to

adjust for and help protect against inflation

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

Emerging Markets PCY PowerShares Emerging Mkts Sovereign Debt

DB Emerging Market USD Liquid Balanced Index 0.50% $0† Holds U.S. dollar denominated government bonds issued

by 22 emerging market countries

Preferred Stock PGX PowerShares Preferred Portfolio B of A 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 Equal Weight Index Consumer Discretionary Index 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 Equal Weight Consumer Staples Index 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 each


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 each


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 each


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 each


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 each


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 US utilities stocks where each holding

is rebalanced quarterly to equal weightNew to the ETF Select List this quarter


RESEARCH

EXCHANGE-TRADED FUNDSFOR THE QUARTER ENDED SEPTEMBER 30, 2014



GROSSEXPENSES*

ONLINECOMMIS-

SION DESCRIPTION

REAL ASSETS

Commodities Broad USCI United States Commodity Index SummerHaven Dynamic Commodity Index Total Return 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 Gold Spot 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 Silver, Gold, Platinum and Palladium Spot 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 12 Month Light Sweet Crude Oil 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 financials

ALTERNATIVE WEIGHTED ETFs

EQUAL WEIGHTED ETFs

U.S. Large Weighted Equal RSP Guggenheim S&P 500 Equal Weight S&P 500 Equal Weight Index 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 measures 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 monthsU.S. Small Weighted Low Volatility XSLV PowerShares S&P Small Cap

Low VolatilityS&P SmallCap 600 Low Volatility Index 0.34% $8.95 Tracks a volatility weighted index of the 120 least volatile

securities from the S&P SmallCap 600 IndexInternational 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.


RESEARCH: ARGUS RESEARCH CO.

International Paper Co. - IP - Basic MaterialsFord Motor Co. - F - Consumer DiscretionaryGannett Co Inc. - GCI - Consumer DiscretionaryLowe’s Companies Inc. - LOW - Consumer DiscretionaryArcher Daniels Midland Co. - ADM - Consumer StaplesClorox Co. - CLX - Consumer Staples PepsiCo Inc. - PEP - Consumer Staples ConocoPhillips Co. - COP - EnergyMarathon Oil Corp. - MRO - Energy Noble Corporation PLC - NE - Energy Paragon Offshore PLC - PGN - Energy Boston Properties Inc. - BXP - FinancialChubb Corp. - CB - Financial HCP Inc. - HCP - Financial JPMorgan Chase & Co. - JPM - FinancialEli Lilly & Co. - LLY - HealthcareGlaxoSmithKline PLC - GSK - Healthcare Johnson & Johnson - JNJ - Healthcare Caterpillar Inc. - CAT - Industrials General Electric Co. - GE - Industrials Harsco Corp. - HSC - Industrials Cisco Systems Inc. - CSCO - Technology Seagate Technology PLC - STX - Technology Symantec Corp. - SYMC - Technology Xilinx Inc. - XLNX - Technology AT&T Inc. - T - TelecommunicationsVerizon Communications Inc. - VZ - TelecommunicationsGreat Plains Energy Inc. - GXP - Utility PG&E Corp. - PCG - Utility Spectra Energy Corp. - SE - Utility UIL Holdings Corp. - UIL - Utility

Dow Chemical Co. - DOW - Basic Materials Weyerhaeuser Co. - WY - Basic Materials Las Vegas Sands Corp. - LVS - Consumer DiscretionaryTime Warner Inc. - TWX - Consumer DiscretionaryWilliams-Sonoma Inc. - WSM - Consumer DiscretionaryCostco Wholesale Corp. - COST - Consumer StaplesHershey Co. - HSY - Consumer Staples Procter & Gamble Co. - PG - Consumer StaplesWhole Foods Market Inc. - WFM - Consumer StaplesHollyFrontier Corp. - HFC - EnergyOccidental Petroleum Corp. - OXY - Energy Schlumberger Ltd. - SLB - EnergyAmerican Express Co. - AXP - FinancialBank of New York Mellon Corp. - BK - FinancialFederated Investors Inc. - FII - FinancialPrudential Financial Inc. - PRU - Financial Amgen Inc. - AMGN - HealthcarePfi zer Inc. - PFE - HealthcareStryker Corp. - SYK - HealthcareCummins Inc. - CMI - IndustrialsGeneral Electric Co. - GE - IndustrialsMasco Corp. - MAS - IndustrialsUnited Parcel Service Inc. - UPS - IndustrialsApple Inc. - AAPL - TechnologyBroadcom Corp. - BRCM - TechnologyCorning Inc. - GLW - TechnologyEMC Corp. - EMC - TechnologyConsolidated Edison Inc. - ED - UtilityOneok Inc (New) - OKE - Utility

See page 2 for important information.The research is prepared by Argus, independent 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 8/13/2014.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Schwab and/or affi liates 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. 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.

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EQUITY INCOME3%12%

11%

10%

10%

13%11%

11%

13%

6%

Ashland Inc. - ASH - Basic MaterialsBed Bath & Beyond Inc. - BBBY - Consumer DiscretionaryDick’s Sporting Goods Inc. - DKS - Consumer DiscretionaryLions Gate Entertainment Corp. - LGF - Consumer DiscretionaryPep Boys-Manny Moe & Jack - PBY - Consumer DiscretionaryScripps Networks Interactive Inc. - SNI - Consumer DiscretionaryCoca-Cola Enterprises Inc. - CCE - Consumer StaplesEstee Lauder Companies Inc. - EL - Consumer StaplesKeurig Green Mountain Inc. - GMCR - Consumer StaplesApache Corp. - APA - EnergyDevon Energy Corp. - DVN - EnergyNoble Corporation PLC - NE - EnergyParagon Offshore PLC - PGN - EnergyAmerican Campus Communities Inc. - ACC - FinancialCME Group Inc. - CME - FinancialAmerisourceBergen Corp. - ABC - HealthcareCerner Corp. - CERN - HealthcareIncyte Corp. - INCY - HealthcarePerrigo Company PLC - PRGO - HealthcareAecom Technology Corp. - ACM - IndustrialsEaton Corp Pub Ltd Co. - ETN - IndustrialsJetBlue Airways Corp. - JBLU - 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 - TechnologyCIENA Corp. - CIEN - TechnologyeBay Inc. - EBAY - TechnologyIHS Inc. - IHS - TechnologyVishay Intertechnology Inc. - VSH - TechnologyAqua America Inc. - WTR - UtilityMDU Resources Group Inc. - MDU - Utility

MID-CAP GROWTH4%5%

14%

8%

10%

6%

14%

13%

26%

GROWTH & INCOME

6%6%

10%

13%

11%

14%10%

12%

17%

A s a service to clients, we provide access to a variety of third-party research, such as that from

Argus Research Co., an independent investment-research � rm that o� ers forecasts and ratings on the U.S. economy, interest rates and blue-chip companies.

ARGUS RESEARCH

Log in to schwab.com/OIresearch anytime to access:

- Timely market updates: Argus publishes a variety of intraday, daily and weekly updates that examine current market conditions, ratings changes, earnings estimates and more.

- Monthly digest: The Argus Update offers commentary on recent market and economic conditions paired with a model portfolio of 30 stocks Argus favors to suit the current environment.

- Argus Model Portfolios: These three model portfolios (shown below) focus on equity income, growth and income, and mid-cap growth. Changes to the portfolios are executed monthly.

BASICMATERIALS

CONSUMERDISCRETIONARY

CONSUMER STAPLES

ENERGY

FINANCIAL

HEALTHCARE

INDUSTRIALS

TECHNOLOGY

TELE-COMMUNICATIONS

UTILITY

OI-Wi14-Q4-47


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OI-Wi14-Q4-48


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At Schwab, we believe investors deserve respect from the financial professionals who serve them. We believe in relationships built on trust and engagement. We encourage tough questions and honor our clients’ demands for accountability. And we are constantly looking for ways to deliver better investment offerings and service.

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We call this wealth management, and it’s all about providing transparent, trustworthy guidance to help you take ownership of your financial life. If you’re interested in this type of guidance, come talk to us. We’ll share with you our passion for creating a better investing experience through a modern and more engaging approach to wealth management.

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The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC), offers investment services and products, including Schwab brokerage accounts. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides deposit and lending services and products.

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1. 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 the Charles Schwab Pricing Guide for additional 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 1-800-435-4000. 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. 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).

Charles Schwab & Co., Inc., receives remuneration from third-party ETF companies participating in Schwab ETF OneSource™ for recordkeeping, shareholder services, and other administrative services, including program development and maintenance.

Schwab ETFs are distributed by SEI Investments Distribution Co. (SIDCO). SIDCO is not affi liated with Charles Schwab & Co., Inc. Learn more at schwab.com/SchwabETFs.

Third-party Schwab ETF OneSource shares purchased may not be immediately marginable at Schwab.

Charles Schwab Investment Management, Inc., is the investment advisor for Schwab ETFs and an affi liate of the Charles Schwab Corporation.

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PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Invesco PowerShares and Invesco Distributors, Inc., are indirect, wholly owned subsidiaries of Invesco Ltd.

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“ETF Securities” is a registered trademark of ETF Securities Limited. The “ETF Securities” logo is a registered trademark of ETF Securities Limited.

Brokerage Products: Not FDIC-Insured • No Bank Guarantee • May Lose Value

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