INFLATION: Should You Be Worried? PAGE 10

STRATEGIES & IDEASOn FOR THE CHARLES SCHWABInvesting COMMUNITY • FALL 2013

Examine What’s In Your Index PAGE 14 Are Fees Eroding Your Returns? PAGE 28 Commodities: A How-To Guide PAGE 20

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From Schwab Bank Call 1-877-416-7138 to apply for a purchase loan by 10/31/13.1 There’s one source The right place. schwab.com/homepurchaseoffer for the most The right mortgage. commission-free Schwab ETF OneSource™. * Right now, ETFs. More than 110 commission-free exchange-traded funds (ETFs) across major asset classes and from save up to $1,000 leading providers. Plus tools and education on And only one. 6FKZDEFRPWKDWFDQKHOS\RX÷QGWKH(7)VWKDW on closing costs.1 might be right for you. Now it’s all in one place. Start trading at schwab.com/ETFOneSource.

When timing is essential, having the right resources at hand is critical. With Schwab Bank’s lending program through Quicken® Loans,® we’ll help make getting the home you want easier. T:10.5” Great service Faster closing Limited-time purchase offer A dedicated Quicken Loans team Our average closing time is 40 Get a $1,000 discount on closing will assist you through the entire days or less, and the process costs for a jumbo loan or $500 process and even help you get is made even simpler with off conforming or high-balance pre-approved the same day—free documents you can sign and loans when you apply by 10/31/13.1 of charge. upload electronically.2 Schwab ETF OneSource features ETFs from the following providers:

United States Quicken Loans was ranked “Highest in Customer Commodity Funds Satisfaction for Primary Mortgage Origination” in the U.S.—three years in a row by J.D. Power and Associates.3 Investors should carefully consider information contained in the prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by calling Schwab at 1-800-435-4000. Please read 1. In order to participate, you must agree that the lender, Quicken Loans, may share your information with Charles Schwab Bank. Offer available for purchase mortgages only and includes all rst mortgage loans offered through the prospectus carefully before investing. Schwab Bank’s home lending program provided by Quicken Loans. Purchase loan applications must be registered between 5/1/13 and 10/31/13 to receive the closing cost offer. A registered loan is one that has an assigned loan number and a purchase sales agreement. Your application date is printed on the Good Faith Estimate (GFE). You will receive a $500 closing cost credit for conforming and high-balance loans or a $1,000 closing cost credit *Conditions apply: Commission-free trades are only available for ETFs offered through Schwab ETF OneSource when placed online in a Schwab for jumbo loans. High-balance loan limits can differ among high-cost areas but currently cannot exceed $625,500. Larger loan limits are available in the states of Alaska and Hawaii. The closing cost credit will appear on the account. ETFs not available through Schwab ETF OneSource are subject to commissions. Service charges for all ETFs apply for trade orders borrower’s nal HUD-1 statement at closing. Offer is good only for mortgages that close. Additional details may apply. Nothing herein is or should be interpreted as an obligation to lend. Loans are subject to credit and property approval. This offer is subject to change or withdrawal at any time and without notice. placed through a broker ($25) or through our automated phone service ($5). An exchange processing fee applies to sell transactions. Certain 2. Average monthly closing time for purchase loans between October 2012 and May 2013 is 40 days or fewer from the date the interest rate is locked. types of Schwab ETF OneSource transactions are not eligible for the commission waiver, such as short sells and buys to cover (not including 3. Quicken Loans received the highest numerical score in the proprietary J.D. Power and Associates 2010–2012 U.S. Primary Mortgage Origination Satisfaction Studies.SM 2012 study based on 3,552 total responses measuring Schwab ETFs™). Schwab reserves the right to change the ETFs we make available without commissions. All ETFs are subject to management 19 lenders and measures opinions of consumers who originated a new mortgage. Proprietary study results are based on experiences and perceptions of consumers surveyed in July–August 2012. Your experiences may vary. Visit fees and expenses. Please see the Charles Schwab Pricing Guide for additional information. jdpower.com. Charles Schwab Bank and Charles Schwab & Co., Inc., are separate but af liated companies and subsidiaries of The Charles Schwab Corporation. Investment products are offered by Charles Schwab & Co., Inc. (member SIPC). Charles Schwab & Co., Inc. receives remuneration from third-party ETF companies participating in Schwab ETF OneSource for recordkeeping, Charles Schwab & Co., Inc., does not solicit, offer, endorse, negotiate, or originate any mortgage loan products and is neither a licensed mortgage broker nor a licensed mortgage lender. Home lending is offered and provided by Quicken shareholder services, and other administrative services, including program development and maintenance. Loans Inc., Equal Housing Lender. Quicken Loans Inc. is not af liated with The Charles Schwab Corporation, Charles Schwab & Co., Inc., or Charles Schwab Bank. Deposit and other lending products are offered by Charles Schwab Bank, Member FDIC and an Equal Housing Lender. 6FKZDE(7)VDUHGLVWULEXWHGE\6(,,QYHVWPHQWV'LVWULEXWLRQ&R Ü6,'&2Ý 6,'&2LVQRWDI÷OLDWHGZLWK7KH&KDUOHV6FKZDE&RUSRUDWLRQRU Quicken Loans is an Equal Housing Lender. Quicken Loans Inc. is a licensed mortgage lender. Arizona: Quicken Loans Inc., 16425 North Pima, Suite 200, Scottsdale, AZ 85260, Mortgage Banker License #BK-0902939; DQ\RILWVDI÷OLDWHV Arkansas: Quicken Loans Inc., 1050 Woodward Avenue, Detroit, MI 48226-1906, 1-888-474-0404; California: Licensed by the 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, Investing involves risk, including the possible loss of principal. Shares are bought and sold at market price, which may be higher or lower than 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 the net asset value (NAV). Lender License #ML-3030; Minnesota: Not an offer for a rate lock agreement; Mississippi: Licensed by the Mississippi Department of Banking and Consumer Finance; New Hampshire: Licensed by the NH Banking Department, #6743MB; New Jersey: Licensed Mortgage Banker—NJ Department of Banking, rst (and/or second) mortgages only; New York: Licensed Mortgage Banker—NYS Banking Department; Oregon: Quicken Loans Inc., License &KDUOHV6FKZDE,QYHVWPHQW0DQDJHPHQW,QFLVWKHLQYHVWPHQWDGYLVRUIRU6FKZDE(7)VDQGDQDI÷OLDWHRI7KH&KDUOHV6FKZDE&RUSRUDWLRQ #ML-1387; Pennsylvania: Licensed as a rst Mortgage Banker by the Department of Banking and licensed pursuant to the Pennsylvania Secondary Mortgage Loan Act; Rhode Island: Licensed Lender; Texas: Quicken Loans Inc., “SPDR” is a registered trademark of Standard & Poor’s Financial Services, LLC (“S&P”) and has been licensed for use by State Street 1050 Woodward Avenue, Detroit, MI 48226-1906; Virginia: Quicken Loans Inc., NMLS ID #3030 (www.nmlsconsumeraccess.org); Washington: Licensed by Consumer Loan Company License CL-3030. Quicken Loans Nationwide ® Mortgage Licensing System #3030. Rates are subject to change. Restrictions may apply. &RUSRUDWLRQ1R÷QDQFLDOSURGXFWRIIHUHGE\6WDWH6WUHHWRULWVDI÷OLDWHVLVVSRQVRUHGHQGRUVHGVROGRUSURPRWHGE\6 33RZHU6KDUHV 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. 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. USCF® and the United States Commodity Funds® are registered Charles Schwab Bank, 211 Main Street, San Francisco, CA 94105 trademarks of United States Commodity Funds LLC. All rights reserved. ©2013 Charles Schwab Bank. All rights reserved. Member FDIC. Equal Housing Lender. CLB (0913-5135) ADP75809-00 (09/13) ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. CS18903-01 (0913-4462) ADP74651-00 (07/13)

044312_Mortgage_Promo_Update_Ad_R2.indd 1 7/24/13 4:26 PM ADP74651-00.indd 1 7/9/13 10:22 AM Z20275_1a_OnInvesting.indd E20714_1b OIM-FA13-Qrt3-C2 fSW_FA13_C2-C4.indd 2 8/6/13 1:06 PM 07.12.2013 07/25/13 EPSON dh dh

Print Round Job # Filename Description None 044312 044312_Mortgage_Promo_Update_Ad_R2.indd Mortgage Promo Ad Scale No. 4 Last User / Previous User Last Modified Client Schwab Due Date None INITIALS DATE Mehnert, Michael / Mehnert, Michael 7-24-2013 3:41 PM Bleed 8.25” x 10.75” Project Mgr. Jane Fonts Rapp Printer Trim 8” x 10.5” Client Serv. Laura Charles Modern, ITC Franklin Gothic Std Xerox DC Fiery 560 Live 7” x 9.5” Production Kristy Colors

SETUP Mech built at 100% Art Director Flo Cyan, Magenta, Yellow, Black CONTENT PERSONNEL Color(s) 4 Copywriter Marc Placed Graphics Varnish n/a Proofreader QA JD_Power_Award_small.psd, LOG-CSBnk_QcknLns-Grayscale.eps, Equal_Housing_Lender_K.eps, SCHI- 03598.tif Paper Stock None Studio Artist Mike fdSW_FA13_1_TOC.indd 1 Cover Illustration: Eiko Ojala Apple, the logo,Apple iPad andiPhone aretrademarksof Apple, Inc., andothercountries. registered intheUnitedStates activepositionsinsecuritiesorcompanies discussedinthisissue.may have NSW73442Q313 includedfrom actionstakenbasedontheinformation inthismagazine. orsecuritydoesnotconstituteendorsement. Mention ofacompany SomecontributorstoOnInvesting POSTMASTER: SendaddresschangestoOnInvesting, CharlesSchwab&Co., Inc., P.O. Box52114, Phoenix, AZ 85072–2114. liabilityresulting On Investingdoesnotassumeany If youprefernottoreceiveOnInvesting, pleasecall877-908-0065. On Investing SIPC. (0913-4793) All rightsreserved.Member Charles Schwab&Co., Inc. to liability. Copyright©2013 is prohibitedandsubject transmission byfacsimile, Photocopying, including of Schwab(oritsaffiliates). prior writtenpermission any meanswithoutthe distributed toothersby may bereproducedor No partofthismaterial guaranteed. and reliabilitycannotbe accuracy, completeness reliable sources;however, from whatareconsidered Data hereinareobtained own particularsituation. strategy forhisorher transaction andinvestment to reviewasecurity Each investorneeds suitable foreveryone. mentioned maynotbe securities andstrategies advice. Thetypesof personalized investment recommendation or considered anindividualized only andshouldnotbe here isforgeneralpurposes The informationprovided the originalcost. more orlessthan worth when redeemed, may be andshares, fluctuate, Investment value will before investing. prospectus carefully 4000. Pleaseread the by calling800-435- request aprospectus and expenses. You can objectives, risks,charges including investment in theprospectus, information contained consider carefully Investors should (ISSN 1523-5327)ispublishedquarterly. Standard ismailedat This publication A postalrates.

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By AnthonyB.Davidow What’s inyourindex? Indexing By LizAnnSonders about inflation? Should youbeworried e Perspectives Women andinvesting. Community Pomerantz By CarrieSchwab- Life insuranceforlife. Ask Carrie Ask By WaltBettinger Staying truetoourroots. surveys andmore. consumer confidence Frontier markets, b conomy tocks ottom Line ottom eo rtments ’s ’s

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By Charles R. Schwab By CharlesR. Investors likeyou. o services fromSchwab. The latestproductsand s Active Active questions. top technicalanalysis Market Manageranswers A SchwabActiveTrader s r List o By JohnM.Eade to outperform? Can smallcapscontinue Argus Argus s s m s s chwab chwab elect List chwab chwab Income elect List ne potlight esearch n Your s utual utual 4 I ® s nvestI ource ource r fund fund esearch m etf t C utual utual rader tm ® ontents select select

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1 ceo’s note

Staying True to our Roots After four decades, we still strive to offer innovative products designed with our clients’ interests in mind.

hen Chuck Schwab started the traditional market-capitalization this company back in 1973, he strategy, which selects and weights based W set out with a singular goal: on the total market value of a company’s Advocate and innovate on behalf of Main shares. We believe fundamental indexing Street investors. Today, that premise still can serve as a complement to a portfolio defines who we are and what we do. of traditional capitalization-weighted We believe investors deserve to have investments or as a standalone strategy. access to products and services that have Either way, fundamental indexing Women and “on top of expanding clear goals and transparent fees—and can add to the diversification of your that are offered at a great value. In recent investment portfolio. You can learn Investing our offering of months, our clients have seen that all more about fundamental indexing commission-free Schwab offers education come together with the launch of Schwab from Anthony Davidow’s article, and resources for etFs, we’re also doing ETF OneSource™, a marketplace that “What’s in Your Index?” on page 14. our part in offering offers investors commission-free online These are just two of the ways we female clients. you more options in trading of more than 100 exchange- are continuing to innovate on your 1 the etF space.” traded funds from leading providers. behalf. We’re always striving to offer you ETF OneSource offers clients real choice products and services that allow you to y 2020, women will control and real value—a Schwab specialty. invest the way you want to—with choice, $22 trillion in investable assets, On top of expanding our offering of clarity and great value. B an 83% increase in less than a commission-free ETFs, we’re also doing decade.1 Therefore, it’s crucial for women our part in offering you more options Sincerely, to take an active role in managing overall in the ETF space. Recently, we launched family finances, including investments. six new ETFs based on fundamental “I’ve had many female clients come to indexing—an indexing strategy that me for help after experiencing a major selects and weights securities based on Walt Bettinger life change, such as divorce,” says Lindsey fundamental factors rather than using President & CEO Underwood, CFP®, a Portfolio Consultant at Schwab Private Client Investment 1Conditions apply: Trades in ETFs available through Schwab ETF OneSource™ (including Schwab ETFs™) are available without commissions when placed online in a Schwab account. Advisory, Inc. “The last thing they want 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 1 make available without commissions. All ETFs are subject to management fees and expenses. Please see Charles Schwab Pricing Guide for additional information. “Women and Wealth: The Invisible Opportunity,” First Clearing, November 2012. The testimonial may not be representative of the experience of other clients and is not a guarantee of future Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and performance or success. expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. Schwab Private Client Investment Advisory, Inc., is a registered investment advisor and an affiliate of 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. Charles Schwab & Co., Inc. Shares are bought and sold at market price, which may be higher or lower than the net asset value. ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3596) Diversification strategies do not assure a profit and do not protect against losses in declining markets. 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. Schwab ETFs are distributed by SEI Investments Distribution Co. (SIDCO). SIDCO is not affiliated with Charles Schwab & Co., Inc. Learn more atschwab.com/schwabETFs . coNNecT WITH US Charles Schwab Investment Management, Inc., is the investment advisor for Schwab ETFs and an affiliate of The Charles Schwab Corporation. ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3346)

2 cHaRleS ScHWaB • FALL 2013

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Staying true to our Roots After four decades, we still strive to offer innovative products designed with our clients’ interests in mind. the traditional market-capitalization strategy, which selects and weights based oninvesting on the total market value of a company’s shares. We believe fundamental indexing BoaRd of adviSoRS can serve as a complement to a portfolio Jonathan Craig of traditional capitalization-weighted Executive vice President Chief Marketing Officer investments or as a standalone strategy. Women and is to be burdened by the task of managing Either way, fundamental indexing their finances alone.” Mark W. Riepe, CFA can add to the diversification of your Schwab offers several workshops Senior vice President investment portfolio. You can learn investing and events to help women get started Schwab center for financial Research more about fundamental indexing Schwab offers education with investing, develop a financial plan from Anthony Davidow’s article, and much more. “Most women leave Helen Loh and resources for vice President “What’s in Your Index?” on page 14. feeling empowered,” Lindsey says. “They content & client marketing These are just two of the ways we female clients. really connect with the content and find are continuing to innovate on your themselves learning from others.” Larry Hanback behalf. We’re always striving to offer you Pam Johnson, a Schwab client, agrees vice President products and services that allow you to y 2020, women will control and finds value in the workshops she marketing Strategy & operations invest the way you want to—with choice, $22 trillion in investable assets, regularly attends at her branch. “I like EditoR in chiEf clarity and great value. B an 83% increase in less than a hearing questions and comments from Tamar Dorsey decade.1 Therefore, it’s crucial for women other workshop attendees,” says Pam. Sincerely, to take an active role in managing overall “The workshops keep me up to date on managing EditoR family finances, including investments. the market and motivate me to actively Jennifer Newton “I’ve had many female clients come to manage my portfolio.” - me for help after experiencing a major aSSociatE managing EditoR Caitlin White Walt Bettinger life change, such as divorce,” says Lindsey nExt StEPS President & CEO Underwood, CFP®, a Portfolio Consultant Find in-branch and at Schwab Private Client Investment online workshops at tRading EditoR Stephanie May 1Conditions apply: Trades in ETFs available through Schwab ETF OneSource™ (including Schwab ETFs™) are available without commissions when placed online in a Schwab account. Advisory, Inc. “The last thing they want schwab.com/oIworkshops. 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 contRiButoRS 1 make available without commissions. All ETFs are subject to management fees and expenses. Please see Charles Schwab Pricing Guide for additional information. “Women and Wealth: The Invisible Opportunity,” First Clearing, November 2012. Walt Bettinger Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and The testimonial may not be representative of the experience of other clients and is not a guarantee of future Anthony B. Davidow performance or success. John M. Eade expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. Schwab Private Client Investment Advisory, Inc., is a registered investment advisor and an affiliate of Charles R. Schwab 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. Charles Schwab & Co., Inc. Carrie Schwab-Pomerantz Shares are bought and sold at market price, which may be higher or lower than the net asset value. ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3596) Liz Ann Sonders Diversification strategies do not assure a profit and do not protect against losses in declining markets. 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. Schwab ETFs are distributed by SEI Investments Distribution Co. (SIDCO). SIDCO is not affiliated with Charles Schwab & Co., Inc. Learn more atschwab.com/schwabETFs . connEct With uS 800-435-4000 schwab.com facebook.com/ twitter.com/ oninvestingeditor@ Charles Schwab Investment Management, Inc., is the investment advisor for Schwab ETFs and an affiliate of The Charles Schwab Corporation. charlesschwab charlesschwab schwab.com ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3346)

FALL 2013 • on invESting 3

OIM-FA13-Qrt3-3 fdSW_FA13_2-3_CEO_Comm.indd 3 8/8/13 3:05 PM the bottom line

Searching for the next Frontier Frontier markets may make sense as part of a diversified portfolio.

merging markets— population and are poised for nations in the process rapid growth.2 e of rapid growth and But she cautions that these industrialization—are a economies come with unique common part of many investors’ risks—such as political instability, international investing murky regulatory regimes and, strategies. Lesser known are often, higher trade-processing frontier markets, a subset of fees that can drive up investing the emerging-market category costs. Therefore, they may be more that includes countries with volatile than established markets. lower market capitalization To help mitigate these risks, and liquidity, such as Vietnam, Michelle recommends taking a Nigeria and Qatar. diversified approach by investing Michelle Gibley, Director of through mutual funds or exchange- International Research at the traded funds, limiting exposure Schwab Center for Financial to frontier markets to a very small Research, says frontier markets allocation of your total portfolio are worth considering as part of and taking a long-term view. a diversified portfolio strategy. “Don’t be scared off by short-term For one, frontier-market stocks fluctuations,” she says. “Frontier outperformed global stocks overall markets have the potential for by 11% in the first quarter of 2013.1 promising long-term trends, making On top of that, frontier countries them an important component of a house nearly 30% of the world’s diversified portfolio.”-

1MSCI, Index Performance, Frontier Markets. 2Roben Farzad, “Are Frontier Markets Ready for Prime Time?” Bloomberg Businessweek, March 6, 2013. $120,000 Call US For funds, investors should carefully consider information contained in the prospectus, including investment $100,000 Discuss your objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. $80,000 $60,000 international Please read the prospectus carefully before investing. $40,000 investing strategy Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than the net asset value. $20,000 with a Schwab 0 Global Investing Past performance is no guarantee of future results. Specialist by calling 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 800-992-4685 an investment strategy for his or her own particular situation before making any investment decision. International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging or frontier markets may accentuate these risks. Diversification strategies do not assure a profit and do not protect against losses in declining markets. The MSCI Frontier Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of frontier markets. The MSCI Frontier Markets Index consists of the following 25 frontier market country indexes: Argentina, Bahrain, Bangladesh, Bulgaria, Croatia, Estonia, Jordan, Kenya, Kuwait, Lebanon, Lithuania, Kazakhstan, Mauritius, Nigeria, Oman, Pakistan, Qatar, Romania, Serbia, Slovenia, Sri Lanka, Tunisia, Ukraine, United Arab Emirates and Vietnam. Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

4 CharleS SChwab • FALL 2013

OIM-FA13-Qrt3-4 fdSW_FA13_4-6_BottomLine.indd 4 8/6/13 1:08 PM Younger workers are more likely to cash out of What’s in Your their retirement plans when changing jobs. Bond Fund? Some short-term bond funds are adding more risk to potentially generate yield. population and are poised for 53% 32% rapid growth.2 of plan owners of plan owners But she cautions that these in their 20s in their 50s hort-term bond funds—which usually cash out.1 cash out.2 economies come with unique invest in investment-grade government risks—such as political instability, S and corporate securities that mature in murky regulatory regimes and, five years or less—are often considered lower-risk often, higher trade-processing investments. But with short-term interest rates near fees that can drive up investing Cashing out retirement savings when zero, some bond funds have been adding riskier costs. Therefore, they may be more Roll It you leave a job can significantly reduce securities to their portfolios in hopes of generating volatile than established markets. lifetime savings, missing out on decades’ yield. During the past four years, short-term bond To help mitigate these risks, oveR worth of tax-deferred growth and funds tracked by Morningstar have almost doubled Michelle recommends taking a compound interest. It’s wiser to roll their average exposure to high-yield securities, 1 diversified approach by investing over into another retirement plan. from 3.7% in 2008 to 6.4% in late 2012. through mutual funds or exchange- While more high-yield holdings may help boost traded funds, limiting exposure performance, they also raise the overall risk of the to frontier markets to a very small You’re changing jobs and have $10,000 in a retirement bond fund. It’s important to understand what’s in allocation of your total portfolio fund. Should you cash out or roll it over? your bond fund in order to properly assess your and taking a long-term view. 3 portfolio’s exposure to risk. Before purchasing a “Don’t be scared off by short-term $10,000 bond fund, take a look at the fund’s holdings, which Spending 10% FedeRal penalty fluctuations,” she says. “Frontier FoR eaRly dIStRIbutIonS should be included in the fund’s prospectus. - the money — $1,000 4 markets have the potential for FRom a RetIRement plan may offer 25% FedeRal maRgInal NEXT STEPS promising long-term trends, making immediate — $2,500 InCome tax Rate For help researching bond funds, call them an important component of a gratification ... a Schwab Fixed Income Specialist at diversified portfolio.”- = $6,500 youR net5 877-563-7818.

... but rolling over your funds puts the power of 1Kirsten Grind, “Bond Funds: The Downside,” The Wall Street 1MSCI, Index Performance, Frontier Markets. tax-deferred growth to work for your retirement. Journal, December 28, 2012. 2Roben Farzad, “Are Frontier Markets Ready for Prime Time?” Bloomberg Businessweek, March 6, 2013. $120,000 Investors should carefully consider information For funds, investors should carefully consider information contained in the prospectus, including investment $100,000 contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. $80,000 objectives, risks, charges and expenses. You can Please read the prospectus carefully before investing. $60,000 request a prospectus by visiting schwab.com or 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 $40,000 calling Schwab at 800-435-4000. Please read the $20,000 than their original cost. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than the net asset value. prospectus carefully before investing. 0 Past performance is no guarantee of future results. Fixed income securities are subject to increased loss of

YEar 0 YEar 5 The information provided here is for general informational purposes only and should not be considered an individualized recommendation or YEar 10 YEar 15 YEar 20 YEar 25 YEar 30 YEar 35 YEar 40 principal during periods of rising interest rates. Fixed income personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review investments are subject to various other risks, including changes an investment strategy for his or her own particular situation before making any investment decision. Hypothetical account balance in future dollars—not subject to income tax until withdrawn. in credit quality, market valuations, liquidity, prepayments, early Assumes constant annual investment return of 6%. Actual investment returns will fluctuate redemption, corporate events, tax ramifications and other factors. International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical and, when redeemed, may be worth more or less than the original investment. risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging or frontier markets may accentuate these risks. Lower-rated securities are subject to greater credit risk, default risk Diversification strategies do not assure a profit and do not protect against losses in declining markets. 1“Leakage of Participants’ DC Assets: How Loans, Withdrawals and Cashouts Are Eroding and liquidity risk. Retirement Income,” Aon Hewitt, 2011. The information here is for general informational purposes only The MSCI Frontier Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance 2 of frontier markets. The MSCI Frontier Markets Index consists of the following 25 frontier market country indexes: Argentina, Bahrain, Ibid. and should not be considered an individualized recommendation 3The $10,000 comes from pre-tax contributions, so the entire amount is taxable. or personalized investment advice. The type of securities Bangladesh, Bulgaria, Croatia, Estonia, Jordan, Kenya, Kuwait, Lebanon, Lithuania, Kazakhstan, Mauritius, Nigeria, Oman, Pakistan, Qatar, 4 Romania, Serbia, Slovenia, Sri Lanka, Tunisia, Ukraine, United Arab Emirates and Vietnam. The 10% penalty only applies if the individual is under 55 when they leave their job mentioned may not be suitable for everyone. Each investor (assuming it’s a qualified retirement plan and is not a hardship withdrawal). needs to review a security transaction for his or her own Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. 5Additional state income taxes and penalties may also apply. particular situation. The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc. ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-4837) ©2013 Charles Schwab & Co., Inc. All rights reserved.

FALL 2013 • oN iNvESTiNg 5

oIm-Fa13-Qrt3-5 fdSW_FA13_4-6_BottomLine.indd 5 8/6/13 1:08 PM the bottom line

affect discretionary spending, Price consumers seem to have shrugged off the increase thus far, their spending bolstered by Check 3 lower costs for food and energy. Can retail stocks “The resilience of US consumers avoid a markdown? and their willingness to spend has been surprising,” says Brad arly this year, investors bought Sorensen, Director of Market and retail stocks like they were Sector Analysis at the Schwab egoing out of style. Retail sales Center for Financial Research. beat most analysts’ expectations, Retail shares may be able to lifting retail and consumer maintain their momentum, discretionary shares to a 21% year- Brad says, so long as commodity 1 over-year gain by mid-May. prices stay low and government 1Consumer Discretionary Sector, Standard & After paying down debts in budget talks don’t lead to higher Poor’s, May 21, 2013. 2 the wake of the credit crisis, taxes. While the improving Federal Reserve, May 7, 2013. N e x t S t e PS 3Tim Mullaney, “Consumers Beat Expectations consumers are reaching for the jobs picture is likely buoying Read about Despite Higher Payroll Tax,” USA Today, plastic once again. In the first three consumers’ spirits, investors Schwab’s February 24, 2013. months of the year, total consumer in retail stocks should watch viewpoint on each All expressions of opinion are subject to change installment credit recorded its for future rate increases from without notice in reaction to shifting market market sector at conditions. fourth consecutive quarterly gain, the Federal Reserve. “Higher schwab.com/ The Schwab Center for Financial Research is a 2 according to Federal Reserve data. borrowing costs could certainly oIsectorviews. division of Charles Schwab & Co., Inc. Although some retailers worried dull the recent enthusiasm,” ©2013 Charles Schwab & Co., Inc. All rights that the payroll tax increase would Brad cautions. - reserved. Member SIPC. (0913-3030)

methodologies, but both indexes ask Consumer Confidence Surveys consumers how they feel about the current Why they matter to investors. and future state of the economy, what they think about inflation and whether they have hy do economists, including plans for big-ticket purchases like homes. CONSumer iNdexeS those at the Federal Reserve, The confidence measures moved in Consumer Consumer W pay so much attention to opposite directions earlier this year, Confidencei ndex Sentiment index consumer confidence readings? Confident supporting the view that the economy was in (2013 Ratings) (2013 Ratings) consumers tend to spend more, and with their the midst of a mixed recovery. Investors may spending accounting for more than two-thirds want to take notice if both indexes start rising Jan 1 58.4 73.8 of gross domestic product, buyers’ level of on a consistent basis. This could mean changes confidence can mean the difference between in a variety of measures that can potentially - Feb an economy that is just recovering and one affect investors, including interest rates. 68 77.6 that is about to take off. The nation’s two best-known consumer learn more MaR confidence barometers—the Conference Get additional stock market 61.9 78.6 Board’s Consumer Confidence Index® and analysis, perspectives and ideas the Thomson-Reuters/University of Michigan from our team of experts by visiting apR I . 69 76.4 Consumer Sentiment Index—use different schwab.com/O marketinsight

1“Gross Domestic Product: First Quarter 2013 (Advance Estimate),” Bureau of Economic Analysis, US Department of Commerce, May April 26, 2013. 76.2 84.5 All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Schwab and/or affiliates may publish or otherwise express other viewpoints or opinions that also may be different from certain of the viewpoints or Source: The Conference Board, January 2013–May 2013. opinions expressed in these materials.

6 CharleS SChwab • FALL 2013

OIM-Fa13-Qrt3-6 fdSW_FA13_4-6_BottomLine.indd 6 8/6/13 1:10 PM BargaiN altHougH tHey’re usually price-coNscious, HuNtiNg maNy iNvestors doN’t sHop arouNd for BoNds investors look for the best deal these savvy for when shopping in general: shoppers are: BoNds? of respondents more likely to shop consider themselves around for barbecue 61% “bargain hunters.” 3X grills than for bonds.

a survey asked people WHat tHey sHop arouNd for:

airliNe BBq gas coNsumer cars tickets grills goods 80% 77% 51%

credit fiNaNcial mortgages cards BoNds goods 55% 48% 17%

BuyiNg iN tHe dark BoNd sHoppiNg comparisoN Nearly a quarter of those lower market price and transaction fees surveyed believe they should for bonds can potentially increase your unsure how compare prices for bonds, but return. let’s look at the same hypothetical to compare are unlikely to do so. Why? $50,000 bond from two different dealers. bond prices? A Schwab don’t know how to get market yield to total Fixed Income 53% the best price on bonds. price maturity paid Specialist dealer 1 $100.00 4.00% $50,000 can help. say it’s too complicated Call us at to price shop for bonds. dealer 2 $101.25 3.85% $50,625 43% 877-908-1075.

BuyiNg from dealer 2 results iN you speNdiNg aN extra $625

Source: Charles Schwab with research provided by Koski Research. The study surveyed 514 US investors ranging in age from 25 to 75. All data is self-reported by study participants and is not verified or validated. Investors participated in the study between May 16, 2013, and June 1, 2013. 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. Schwab reserves the right to act as principal on any bond transaction. In secondary-market principal transactions, the price will be subject to our standard mark-up (in the case of purchases) and a mark-down (in the case of sales), and also may include a profit or loss to Schwab. When trading as principal, Schwab may hold the security in its own account prior to selling it to you, or may resell it after buying from you and, therefore, may make (or lose) money separately from the mark-up on the transaction. The information provided here is for general purposes only and should not be considered an individualized recommendation or personalized investment advice. The types of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product. ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-5334)

FALL 2013 • oN iNvestiNg 7

OIM-FA13-Qrt3-7 fdSW_FA13_7_infographic.indd 7 8/14/13 9:23 AM fdSW_FA13_8-9_Carrie.indd 8 ask 8 C Ie arr C LeS harLeS —a r insurance? life need still kids areMy grown. DoI Dear Carrie, SC eader hwa w true that as you move as beyond that true But it’s also impact. the lessen help it can bill, abig tax with hit gets estate key.your be if Or can insurance life financially, you on there’s depends who someone If grown. are kids their after even it’s people, critical many For isn’t important. insurance goals, there are far better choices. want to invest for your long-term build up cash. But to me, ifyou college, or way evenagood to a way to save for retirement or insurance is agreat investment, loss. You may have heard that life to compensate for an economic oneinsurance purpose: serves to forget that, at its core, life life insurance it’s policies, easy Dear reader, That’s not to say that life life that That’ssay not to B •FALL 2013 OIM-FA13-Qrt3-8 to different types of attachedwhistles and bells the ith all

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8/6/13 1:27PM

©Ed Caldwell 2 of coverage of ©2013 CharlesSchwab&Co., Inc. All rightsreserved. (0913-3072) forsale. products arenotapproved financial conditionoftheinsurancecompany.available inallstates. are Notallproductsandproduct features jurisdictionwherethe inany Thisisnotanofferorsolicitation lifeinsurancecompanieslistedonthe website.participating underthepoliciesareexclusive andaresubjecttothe obligations ofthe insurance company Any obligations life insurancecompanies. Schwaband SBIAarenotaffiliated.agencies. Botharelicensedinsurance available areunderwrittenandissuedbythe Thetermlifeproducts Charles Schwab&Co., Inc. (Schwab), withSmallBusinessInsurance inassociation Agency (SBIA), providescustomerswithaccesstolifeinsuranceissuedbyparticipating Issuer guaranteesaresubjecttotheclaims-paying abilityof theinsurancecompany. appropriate, or consultwithaqualifiedtaxadvisor,specific adviceisnecessary CPA, financialplannerorinvestmentmanager. purposesonly. providedhereisforinformational The information Itisnotintendedtobeasubstituteforspecificindividualizedtax, legalorinvestmentplanningadvice. Where much you need: simple way to figure out how situation is unique, here’s a circumstances. While every coverage on your individual salary, it’s Ithink smarter to base six to eight your times annual have life insurance to equal of thumbrule says you should you need.Although an industry to how decide much coverage questions,these next the step is If you answered yes to any of appropriate level appropriate the Determine

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©Ed Caldwell fdSW_FA13_8-9_Carrie.indd 9 2 of coverage of ©2013 CharlesSchwab&Co., Inc. All rightsreserved. (0913-3072) forsale. products arenotapproved financial conditionoftheinsurancecompany.available inallstates. are Notallproductsandproduct features jurisdictionwherethe inany Thisisnotanofferorsolicitation lifeinsurancecompanieslistedonthe website.participating underthepoliciesareexclusive andaresubjecttothe obligations ofthe insurance company Any obligations life insurancecompanies. Schwaband SBIAarenotaffiliated.agencies. Botharelicensedinsurance available areunderwrittenandissuedbythe Thetermlifeproducts Charles Schwab&Co., Inc. (Schwab), withSmallBusinessInsurance inassociation Agency (SBIA), providescustomerswithaccesstolifeinsuranceissuedbyparticipating Issuer guaranteesaresubjecttotheclaims-paying abilityof theinsurancecompany. appropriate, or consultwithaqualifiedtaxadvisor,specific adviceisnecessary CPA, financialplannerorinvestmentmanager. purposesonly. providedhereisforinformational The information Itisnotintendedtobeasubstituteforspecificindividualizedtax, legalorinvestmentplanningadvice. Where much you need: simple way to figure out how situation is unique, here’s a circumstances. While every coverage on your individual salary, it’s Ithink smarter to base six to eight your times annual have life insurance to equal of thumbrule says you should you need.Although an industry to how decide much coverage questions,these next the step is If you answered yes to any of specific timeframe. living expensesfora amount neededtofund like amortgage,orthe could beafixedamount, financial need.This projected Calculate appropriate level appropriate the Determine should consider. insurance you amount oflife the minimum is roughly The remainder if provided. coverage, employer Subtract assets. accumulated value of Subtract

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8/8/13 3:07PM 9 PersPectives: economy

degree, it’s not necessarily adequate in terms “wage-price spiral” the US economy suffered of how the Federal Reserve attempts to control in the late 1970s and early 1980s. Based on Inflation: Should inflation. There is no question that there is the experience and trigger points of that often a big difference between how the Fed high-inflation era, we suspect income growth You Be Worried? views inflation and how we think about it as would need to increase by at least 5% in order consumers. We certainly hear that when we’re to spark inflation. Also, residential investment Despite the Federal Reserve’s loose out talking to investors. and consumer spending on durable goods— monetary policy, we don’t believe The “core” inflation rate—which excludes two factors that usually play a significant role inflation is a near-term threat. food and energy prices—is frequently quoted in rising wages and inflation—are both at in the press, which may leave the public historically low levels, although the former by liz ann sonders wondering why so much attention is paid to is now staging a healthy recovery. a rate that doesn’t factor in many prices that Furthermore, the US economy has been are critical in our lives. However, the core performing far below its potential ever since ver since the Federal Reserve inflation rate is simply one component of the 2008—a phenomenon known as the “output embarked on its extraordinary policy overall inflation rate. The core rate is used by gap,” which is the difference between potential e of quantitative easing (QE), concerns economists and monitored by the Fed because gross domestic product (GDP) and actual about inflation are everywhere. After all, factors unique to energy and food prices, GDP. When the output gap is more than 2.2, as Milton Friedman’s famous quote tells such as weather conditions and geopolitics, the Consumer Price Index (or CPI, a common us, “Inflation is always and everywhere a can often skew the overall inflation rate. The measure of inflation) tends to increase by 1.1 monetary phenomenon.”1 So, given the rationale for using “core” is to eliminate the points per annum, indicating an inflationary Fed’s loose monetary policy, many people volatility associated with these factors. environment. An output gap of less than –1.9, assume that higher inflation is an inevitable on the other hand, has historically coincided consequence. Rising inflation has a major Why inflation isn’t an with a CPI change of –1.5 points per annum— “Inflation impact on the economy, consumers and immediate concern indicating a disinflationary environment. As indicators investors, so the worry is understandable— The Federal Reserve may be increasing the you can see in the chart at right, the current but it’s also inappropriate, at least for the amount of money coursing through the output gap is –5.8. aren’t pointing near-term. financial system via several rounds of QE, higher, at least Inflation, as traditionally measured, has but there hasn’t been enough demand for Investment implications not for the remained relatively flat in recent years—at borrowing, or supply of lending, to promote Despite the lack of these inflationary signs, next year around 2%, which is not a level of major inflation. Historically, inflation hasn’t been some investors have been flocking to or two.” concern. And, looking ahead, inflation much of an issue without money changing investments that have historically provided indicators aren’t pointing higher, at least hands at a rapid pace—this is referred to as the a hedge against inflation, such as Treasury- not for the next year or two. “velocity of money,” which is extremely low at Inflation Protected Securities (TIPS) and real present. History shows that serious inflation estate investment trusts (REITs). However, What is inflation, really? has never erupted with such weak velocity. not all potential inflation hedges provide the Just because something is familiar does not Wage increases are another factor that same type of protection, and investors should mean it’s easily or generally understood. Most often leads to higher inflation, but growth in also consider whether the investment makes people think of inflation as a condition of pay has been fairly negligible in recent years. sense for their portfolios irrespective of what is rising prices, and while that’s correct to some As such, there is little risk of the kind of happening with inflation. We don’t anticipate a sharp rise in inflation in the next year or two. Typically, it takes What is quantitative easing? 1Friedman, Milton. Inflation: Causes and Consequences. ProQuest CSA Journal Division, 1963. Sometimes referred to as “loose money,” quantitative easing is a policy used Investing involves risk, including loss of principal. by t he F e der al Reser ve (and ot her nations ’ cent r al banks) to infl uence interes t r ates and s timul ate t he economy. Speci fic ally, t he F e d may purchase as set s All expressions of opinion are subject to change without notice in reaction to shifting market and economic conditions. from commercial banks and private institutions in order to increase available 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 needs to review a security transaction for his or her own particular situation. Data herein are obtained bank reser ves (t he “ monet ar y base ”) and promote lending . from what are considered reliable sources; however, accuracy, completeness or reliability cannot be guaranteed. ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3875)

10 charles schwab • FA L L 2 013

OIM-FA13-Qrt3-10 fdSW_FA13_10-11_PER_Sonders.indd 10 8/14/13 9:26 AM degree, it’s not necessarily adequate in terms “wage-price spiral” the US economy suffered Us economy performing below its potential of how the Federal Reserve attempts to control in the late 1970s and early 1980s. Based on 8 inflation. There is no question that there is the experience and trigger points of that Economy Above Potential—Inflationary often a big difference between how the Fed high-inflation era, we suspect income growth 6 views inflation and how we think about it as would need to increase by at least 5% in order 4 consumers. We certainly hear that when we’re to spark inflation. Also, residential investment out talking to investors. and consumer spending on durable goods— 2 The “core” inflation rate—which excludes two factors that usually play a significant role 0 food and energy prices—is frequently quoted in rising wages and inflation—are both at -2 in the press, which may leave the public historically low levels, although the former wondering why so much attention is paid to is now staging a healthy recovery. -4 a rate that doesn’t factor in many prices that Furthermore, the US economy has been Output Gap -6 are critical in our lives. However, the core performing far below its potential ever since Economy Below Potential—Disinflationary inflation rate is simply one component of the 2008—a phenomenon known as the “output -8 overall inflation rate. The core rate is used by gap,” which is the difference between potential 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 economists and monitored by the Fed because gross domestic product (GDP) and actual factors unique to energy and food prices, GDP. When the output gap is more than 2.2, such as weather conditions and geopolitics, the Consumer Price Index (or CPI, a common how oUtpUt gap coincides with inflation can often skew the overall inflation rate. The measure of inflation) tends to increase by 1.1 cpi points pace of frequency rationale for using “core” is to eliminate the points per annum, indicating an inflationary output gap per annum inflation of occurrence volatility associated with these factors. environment. An output gap of less than –1.9, on the other hand, has historically coincided more than 2.2 +1.1 Inflationary 20.0% Why inflation isn’t an with a CPI change of –1.5 points per annum— -1.9 to +2.2 +0.3 Neutral 54.5% immediate concern indicating a disinflationary environment. As

The Federal Reserve may be increasing the you can see in the chart at right, the current less than -1.9 -1.5 Disinflationary 25.5% amount of money coursing through the output gap is –5.8. financial system via several rounds of QE, Sources: FactSet, Federal Reserve, Ned Davis Research, Inc., as of March 31, 2013. Further distribution prohibited without prior permission. ©2013 Ned Davis Research, but there hasn’t been enough demand for investment implications Inc. All rights reserved. borrowing, or supply of lending, to promote Despite the lack of these inflationary signs, inflation. Historically, inflation hasn’t been some investors have been flocking to much of an issue without money changing investments that have historically provided some time for inflation to become embedded hands at a rapid pace—this is referred to as the a hedge against inflation, such as Treasury- in the economy and historically inflation “velocity of money,” which is extremely low at Inflation Protected Securities (TIPS) and real pressures have been associated with rising next steps present. History shows that serious inflation estate investment trusts (REITs). However, wages. We advise investors to watch for the Want more timely has never erupted with such weak velocity. not all potential inflation hedges provide the aforementioned early signs of a sharp rise in commentary from Wage increases are another factor that same type of protection, and investors should the inflation rate and to be prepared to revise Liz Ann? Log in often leads to higher inflation, but growth in also consider whether the investment makes their investing strategies accordingly. - to schwab.com/ pay has been fairly negligible in recent years. sense for their portfolios irrespective of what is oIinsightalerts As such, there is little risk of the kind of happening with inflation. Liz Ann Sonders is Senior Vice President to sign up to receive We don’t anticipate a sharp rise in inflation and Chief Investment Strategist at Charles email alerts as new in the next year or two. Typically, it takes Schwab & Co., Inc. content is published.

1Friedman, Milton. Inflation: Causes and Consequences. ProQuest CSA Journal Division, 1963. Investing involves risk, including loss of principal. All expressions of opinion are subject to change without notice in reaction to shifting market and economic conditions. 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 needs to review a security transaction for his or her own particular situation. Data herein are obtained from what are considered reliable sources; however, accuracy, completeness or reliability cannot be guaranteed. ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3875)

FA L L 2 013 • on investing 11

OIM-FA13-Qrt3-11 fdSW_FA13_10-11_PER_Sonders.indd 11 8/6/13 1:36 PM PersPectives: stocks

reg Thomas, Chief Investment Strategist by the general market indexes, and we try to Consistency at ThomasPartners, Inc., often turns to grow those income streams every year and G baseball to help explain why he began at rates higher than inflation. At the same investing in dividend-paying stocks 20 years ago. time, we employ a “value pricing discipline,” Matters A longtime Boston Red Sox fan, Greg points out which means all the stocks that populate our that a baseball team can win the game without portfolios are bought at prices discounted ThomasPartners’ dividend-focused winning all nine innings, so long as it scores to their intrinsic values, as measured by our strategy helps clients generate more runs in the innings it wins than it gives up algorithms for free cash-flow yield. steady income in volatile markets. in the innings it loses. He reasons that dividend- paying stocks offer a similar experience for OI: What do you make of the recent investors because, historically, they have gained influx into dividend-paying stocks? more relative performance in declining markets than they have lost in rising markets. Gt: Dividend-paying strategies don’t Today, his firm’s investment strategy remains work unless you’re actually collecting the focused on dividends as a means to generate dividends. What’s important isn’t the fact predictable streams of income, which can that these companies pay dividends, it’s the add to portfolios’ total returns and help offset dividends themselves—the cash collected and the impact of market volatility. Following accumulated over time. People who rush into Schwab’s recent acquisition of ThomasPartners, dividend-paying stocks simply because they’ve On Investing spoke with Greg about the merits performed well recently may just as soon rush of investing in dividend-paying and dividend- out and, therefore, never realize the potential growing stocks. value of owning such stocks over the long term. Next year’s stock market cannot take On Investing: We’ve heard it said that away dividends paid last year—a benefit that dividend-paying stocks tend to inhibit offers no value to investors who do not collect performance. Is that true? a lot of dividends.

Greg Thomas: That’s a long-standing myth, OI: Do you feel dividend-paying stocks and I have a favorite phrase that applies here: are generally overpriced now? “When the facts are in conflict with common wisdom, too many people challenge the facts Gt: I find it difficult to arrive at that and not the wisdom.” Yes, some stockbrokers conclusion because, unlike tech stocks in warn investors that buying dividend-paying the 1990s, dividend-paying stocks have a stocks will limit their potential for capital gains. self-correcting mechanism—if the stock But the facts do not support that “wisdom.” price gets too high, then the yield gets too Dividend-paying stocks have delivered better low and they lose their appeal. But I also total returns than non-dividend-paying stocks over time.1 And it’s not just because of the 1 dividends. Our research shows that, since 1972, Fayez Sarofim & Co.,Reasons to Consider Dividend-Paying Stocks, October 2011. 2Data are from March 31, 1972, to March 31, 2012, and are based on all publicly traded stocks with a minimum capitalization of $1 billion in 2012 dollars. dividend-paying stocks have enjoyed more Past performance is no guarantee of future results. capital gains performance than non-dividend- Issuers can stop paying dividends or reduce dividends at any time, and tax treatment of dividends can change. paying stocks, on average.2 All expressions of opinion are subject to change without notice in reaction to shifting market conditions. The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. OI: How do you construct portfolios? The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data here are obtained from what are considered reliable sources; however, accuracy, completeness or reliability cannot be guaranteed. Gt: We have two parallel, consistent Indexes are unmanaged, do not incur management fees, costs or expenses, and cannot be invested in directly. disciplines. First of all, we manage our ThomasPartners, Inc., is a registered investment advisor and an affiliate of Charles Schwab & Co., Inc. portfolios with the goal of generating dividend Please read the ThomasPartners, Inc., Disclosure Brochure for information and disclosures about this service.

12 charles schWab • FALL 2013

OIM-FA13-Qrt3-12 fdSW_FA13_12-13_PER_Thomb.indd 12 8/8/13 3:09 PM reg Thomas, Chief Investment Strategist by the general market indexes, and we try to think there’s something larger at work here. at ThomasPartners, Inc., often turns to grow those income streams every year and The popularity of dividend-paying stocks is G baseball to help explain why he began at rates higher than inflation. At the same likely to last a lot longer than most would investing in dividend-paying stocks 20 years ago. time, we employ a “value pricing discipline,” expect because it’s as much a result of Baby A longtime Boston Red Sox fan, Greg points out which means all the stocks that populate our Boomers aging as it is a function of the low- that a baseball team can win the game without portfolios are bought at prices discounted yield environment. And that’s a demographic winning all nine innings, so long as it scores to their intrinsic values, as measured by our shift that we have 20 years to run with. So more runs in the innings it wins than it gives up algorithms for free cash-flow yield. it doesn’t mean that dividend-paying stocks in the innings it loses. He reasons that dividend- are necessarily overpriced. It just means that “We seek to paying stocks offer a similar experience for OI: What do you make of the recent they’ve done better than other stocks, on provide dividend investors because, historically, they have gained influx into dividend-paying stocks? average, over recent history. income every more relative performance in declining markets month, dividend than they have lost in rising markets. GT: Dividend-paying strategies don’t OI: Are dividend-paying stocks a good income growth Today, his firm’s investment strategy remains work unless you’re actually collecting the fit for retirement planning? every year focused on dividends as a means to generate dividends. What’s important isn’t the fact predictable streams of income, which can that these companies pay dividends, it’s the GT: I think they’re a good fit for many and capital add to portfolios’ total returns and help offset dividends themselves—the cash collected and investors, not just retirees. However, the appreciation over the impact of market volatility. Following accumulated over time. People who rush into regular payouts dividend-paying stocks the years.” Schwab’s recent acquisition of ThomasPartners, dividend-paying stocks simply because they’ve can offer could make them particularly —GreG ThOmas, On Investing spoke with Greg about the merits performed well recently may just as soon rush attractive for investors in search of a steady Chief invesTmenT of investing in dividend-paying and dividend- out and, therefore, never realize the potential income stream. On top of that, many of the sTraTeGisT, growing stocks. value of owning such stocks over the long firms that pay dividends are often reluctant ThOmasParTners, inC. term. Next year’s stock market cannot take to reduce or eliminate them, meaning that On Investing: We’ve heard it said that away dividends paid last year—a benefit that many dividends tend to remain consistent dividend-paying stocks tend to inhibit offers no value to investors who do not collect regardless of market conditions. performance. Is that true? a lot of dividends. At ThomasPartners, we seek to provide Greg Thomas: That’s a long-standing myth, OI: Do you feel dividend-paying stocks dividend income every month, dividend and I have a favorite phrase that applies here: are generally overpriced now? income growth every year and capital “When the facts are in conflict with common appreciation over the years. That focus wisdom, too many people challenge the facts GT: I find it difficult to arrive at that resonates with our clients because they Call Us and not the wisdom.” Yes, some stockbrokers conclusion because, unlike tech stocks in can have a certain level of confidence in To learn more about warn investors that buying dividend-paying the 1990s, dividend-paying stocks have a where their portfolio income is coming ThomasPartners and its stocks will limit their potential for capital gains. self-correcting mechanism—if the stock from—mostly from the dividends—and dividend-focused managed But the facts do not support that “wisdom.” price gets too high, then the yield gets too they don’t have to rely on the irregularity portfolios, visit schwab.com/ Dividend-paying stocks have delivered better low and they lose their appeal. But I also of capital gains. - OIThomasPartners. total returns than non-dividend-paying stocks over time.1 And it’s not just because of the 1 dividends. Our research shows that, since 1972, Fayez Sarofim & Co.,Reasons to Consider Dividend-Paying Stocks, October 2011. 2Data are from March 31, 1972, to March 31, 2012, and are based on all publicly traded stocks with a minimum capitalization of $1 billion in 2012 dollars. dividend-paying stocks have enjoyed more Past performance is no guarantee of future results. capital gains performance than non-dividend- Issuers can stop paying dividends or reduce dividends at any time, and tax treatment of dividends can change. paying stocks, on average.2 All expressions of opinion are subject to change without notice in reaction to shifting market conditions. The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. OI: How do you construct portfolios? The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data here are obtained from what are considered reliable sources; however, accuracy, completeness or reliability cannot be guaranteed. GT: We have two parallel, consistent Indexes are unmanaged, do not incur management fees, costs or expenses, and cannot be invested in directly. disciplines. First of all, we manage our ThomasPartners, Inc., is a registered investment advisor and an affiliate of Charles Schwab & Co., Inc. portfolios with the goal of generating dividend Please read the ThomasPartners, Inc., Disclosure Brochure for information and disclosures about this service. income streams greater than those created iStockPhoto© ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3075)

FALL 2013 • On invesTinG 13

OIM-FA13-Qrt3-13 fdSW_FA13_12-13_PER_Thomb.indd 13 8/9/13 11:15 AM PERSPECTIVES: INDEXING

Same initial pool of stocks What’s In When creating an index, the rst step is to determine which group of stocks to use. Index providers, such as Russell Investments and Your Index? S&P Dow Jones, create a representative basket of stocks. Russell, for example, screens thousands A look at the differences of US-based stocks for attributes such as between market-cap and liquidity, share size and shares outstanding. fundamental indexing. e resulting 3,000 stocks make up the Russell 3000® Index, the parent index for all of the BY ANTHONY B. DAVIDOW company’s US stock indexes. is parent index is then broken up into sub-indexes based on capitalization size (stocks ranked 1–1,000 are large and mid caps; 1,001–3,000 are small caps). e eligible universe of stocks is the same for both market-cap and fundamental indexing. ince the mid-1970s, investors have However, fundamental indexing selects and ocked to index funds—investments weights stocks by fundamental factors rather S that track indexes—because they than by market cap. is can have a big impact provide access to a diversi ed group of on the stocks the index holds. securities without having to purchase the Take Apple, Inc., for example. Looking at the individual securities that comprise the index. table [at right], you’ll see the top 10 holdings Investors can, for example, gain exposure to the in the Russell 1000 Index and the Russell S&P 500® Index by buying shares of a single Fundamental US Large Cap Index. Apple has Fundamental index fund rather than initiating 500 distinct the second-largest weight in the Russell 1000 indexing is transactions. Seems simple enough, except for Index, due to its large market cap, but the often referred one problem: Not all indexes are alike. 70th-largest weight in the Russell Fundamental to as “smart Traditionally, most indexes are weighted by US Large Company Index. beta” market capitalization, meaning the company because with the largest total value of issued shares How stocks are selected it uses specifi c holds the largest weight in the index. is is How do you measure a company’s economic factors—such the methodology used by popular indexes contribution to an index? With market-cap like the S&P 500, Russell 1000® Source: Russell Investments and Research Affi liates, as of as a company’s Index and indexes, the stocks of the companies that are June 30, 2013. Holdings subject to change without notice. earnings, MSCI EAFE Index. most valued by market participants hold the For illustrative purposes only. This is not a recommendation book value or In recent years, however, we’ve seen some most weight. is assumes that the “biggest” to buy or sell any particular security. —to innovation in the way indexes are constructed. companies are the “best” companies. dividends It’s no longer just about market cap. For instance, Fundamental indexing, on the other hand, select and weight we’ve seen the growth of indexes that assign the is o en referred to as “smart beta” because stocks. same weight to all the stocks in an index, known Market-cap Fundamental it uses speci c factors—such as a company’s as “equal” weighting. earnings, book value and dividends—to select Portfolio Another idea that’s rapidly gaining traction is weighting Cap-weighting Factor-based and weight stocks. fundamental indexing. Here, stocks are selected Look at the Russell Fundamental Index® Portfolio Larger-cap tilt Value-tilt and weighted by fundamental factors— nancial construction series, for example. In constructing these metrics that assess some aspect of a company’s Portfolio Reconstitution indexes, Research A liates® and Russell use turn-over Reconstitution and rebalancing business or payout to shareholders—such as these three fundamental factors: Tax- - sales, cash ow and dividends. effi ciency Yes Yes Adjusted sales: e average sales for Intrigued? Here’s a look at how fundamental each company over a set period of time, Cost indexing works and how it di ers from structure Lowest cost Low cost adjusted to remove the e ects of any

market-cap indexing. © Curtis Parker leverage or debt used.

14 CHARLES SCHWAB • FALL 2013

OIM-FA13-Qrt3-14 fdSW_FA13_14-15_PER_Davidow.indd 14 8/8/13 3:33 PM Same initial pool of stocks ToP 10 HoldingS: Russell Fundamental When creating an index, the first step is to US Large Company Index determine which group of stocks to use. Index Company Weight providers, such as Russell Investments and 1. Exxon Mobil Corp. 4.82% S&P Dow Jones, create a representative basket of 2. ChEvron Corp. 2.51% stocks. Russell, for example, screens thousands 3. AT&T inC. 1.97% of US-based stocks for attributes such as 4. bAnk of AMEriCA 1.92% liquidity, share size and shares outstanding. 5. proCTEr & GAMblE 1.62% The resulting 3,000 stocks make up the Russell 6. GEnErAl ElECTriC Co. 1.62% ® 3000 Index, the parent index for all of the 7. ConoCophillips 1.61% company’s US stock indexes. This parent index 8. MiCrosofT Corp. 1.46% is then broken up into sub-indexes based on 9. WAl-MArT sTorEs inC. 1.45% capitalization size (stocks ranked 1–1,000 are 10. vErizon CoMMuniCATions inC. 1.41% large and mid caps; 1,001–3,000 are small caps). 20.39% The eligible universe of stocks is the same for both market-cap and fundamental indexing. However, fundamental indexing selects and ToP 10 HoldingS: Russell 1000 Index weights stocks by fundamental factors rather than by market cap. This can have a big impact Company Weight on the stocks the index holds. 1. Exxon Mobil Corp. 2.63% Take Apple, Inc., for example. Looking at the 2. ApplE inC. 2.58% table [at right], you’ll see the top 10 holdings 3. GEnErAl ElECTriC Co. 1.53% in the Russell 1000 Index and the Russell 4. ChEvron Corp. 1.46% Fundamental US Large Cap Index. Apple has 5. inTErnATionAl businEss MAChinEs Corp. 1.45% the second-largest weight in the Russell 1000 6. Johnson & Johnson 1.40% Index, due to its large market cap, but the 7. pfizEr inC. 70th-largest weight in the Russell Fundamental 1.35% US Large Company Index. 8. MiCrosofT Corp. 1.34% 9. AT&T inC. 1.34% How stocks are selected 10. proCTEr & GAMblE Co. 1.32% How do you measure a company’s economic 16.40% contribution to an index? With market-cap Source: Russell Investments and Research Affiliates, as of indexes, the stocks of the companies that are June 30, 2013. Holdings subject to change without notice. most valued by market participants hold the For illustrative purposes only. This is not a recommendation most weight. This assumes that the “biggest” to buy or sell any particular security. - Retained operating cash flow: The average companies are the “best” companies. cash generated from company operations Fundamental indexing, on the other hand, over a set period of time that can be is often referred to as “smart beta” because reinvested in the business. Market-cap Fundamental it uses specific factors—such as a company’s - Dividends and buybacks: Two measures earnings, book value and dividends—to select of how a company uses its cash. Dividends Portfolio weighting Cap-weighting Factor-based and weight stocks. are a portion of a company’s earnings that Look at the Russell Fundamental Index® are distributed to shareholders. Buybacks Portfolio Larger-cap tilt Value-tilt construction series, for example. In constructing these are the company’s repurchase of stocks in Portfolio Reconstitution indexes, Research Affiliates® and Russell use the marketplace. turn-over Reconstitution and rebalancing these three fundamental factors: Tax- - efficiency Yes Yes Adjusted sales: The average sales for Research Affiliates then crunches each company over a set period of time, the numbers and gives each company a Cost structure Lowest cost Low cost mages adjusted to remove the effects of any “fundamental score.” Russell uses these

FALL 2013 • on inveSTing 15

oiM-fA13-Qrt3-15 fdSW_FA13_14-16_PER_Davidow.indd 15 8/16/13 3:26 PM PersPectives

It’s also important to note that, because fundamental indexing selects and weights companies by fundamental factors, these indexes typically have a value tilt. However, they are not typical value indexes, as they also hold growth and core stocks. rebalancing and reconstituting the index Reconstitution is when stocks are added or deleted from an index; rebalancing is when the stocks’ weights are adjusted in an index. Fundamental indexing providers both reconstitute and rebalance, meaning they may change their stock holdings, as well as the weights of their holdings, over time. Market-cap indexes, on the other hand, only reconstitute. As Weighting the a result, mutual funds or exchange-traded funds fundamental factors (ETFs) based on fundamental indexing may Some fundamental indexing providers give have slightly higher turnover costs than those Do the research Learn more about equal weighting to all the factors, using based on market cap. ETFs and index the average of each fundamental factor to mutual funds based compile the list of stocks in the index. Other Why fundamental indexing? on fundamental index providers might assign more weight to With the innovation in index-based strategies, indexing at schwab. dividends or other factors. investors now have more choices in owning com/oIschwabetFs Regardless of these individual decisions, it’s slices of the market. Fundamental strategies, and schwab.com/ important to remember that the index provider available in either an index mutual fund or oIindexfunds. follows the same set of rules when constructing ETF, can provide another way to get cost- the index. This is how fundamental indexing effective exposure to the markets. - differs from actively managed strategies, where the investment manager might follow the Anthony Davidow, CIMA®, is Vice President of same screening process but also use his or her Alternative Beta and Asset Allocation Strategist judgment to tinker with the results. at the Schwab Center for Financial Research.

Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. 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 bought and sold at market price, which may be higher or lower than the net asset value (NAV). 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. 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. Russell Investments and Research Affiliates LLC have entered into a strategic alliance with respect to the Russell Fundamental Indexes. Subject to Research Affiliates’ intellectual property rights in certain content, Russell Investments is the owner of all copyrights related to the Russell Fundamental Indexes. Russell Investments and Research Affiliates jointly own all trademark and service mark rights in and to the Russell Fundamental Indexes. Charles Schwab & Co., Inc., is not affiliated with Russell Investments or Research Affiliates. The S&P 500 Index is a market-capitalization weighted index that consists of 500 widely traded stocks chosen for market size, liquidity and industry group representation. The Russell 3000 Index measures the performance of the largest 3,000 US companies representing approximately 98% of the investable US equity market. The large-cap segment is represented by the Russell 1000 Index, while the Russell 2000 Index represents the small-cap segment. The MSCI EAFE Index is an equity index which captures large and mid-cap representation across developed-market countries around the world, excluding the US and Canada. Indexes are unmanaged, do not incur management fees, costs or expenses, and cannot be invested in directly. The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

16 charles schWab • FALL 2013

OIM-FA13-Qrt3-16 fdSW_FA13_14-16_PER_Davidow.indd 16 8/16/13 3:27 PM ACTIVE TRADER

Lee Bohl, a Schwab Active Trader Market Manager and host of Schwab’s weekly online I Own the Stock— technical analysis seminar, gets this question all the time. Lee knows that it’s easy for traders to become overwhelmed. Now What? “Technical analysis can help you manage A Schwab Active Trader Market Manager risk and provide clues that a change in trend might become more likely,” says Lee. “But you answers top technical analysis questions. can quickly fall prey to analysis paralysis if you don’t know what to look for.” If you nd yourself deluged by data, Lee suggests you employ three basic tools: a trend indicator like a moving average, a volume indicator such as the On-Balance Volume ith technical analysis—the chart- (OBV) indicator, and a momentum indicator based study of market data— like the Relative Strength Index (RSI). (See W there’s such a thing as too much “Technical analysis glossary” on page 19 for information. How do you choose between more information about each of these tools.) the many different technical indicators As traders become more comfortable with when you’re deciding whether to buy, sell these tools, they can expand their toolboxes to

FALL 2013 • ON INVESTING 17

OIM-FA13-Qrt3-17 fdSW_FA13_17-19_ATb.indd 17 8/16/13 3:29 PM ACTIVE TRADER

demand and the stock is pushed down to the ANALYZING TREND LINES bottom of the range. What you’re looking for in Former an oscillator is an indication that an overbought lows or oversold condition is starting to reverse itself. 21 day For instance, when the stock stays at the bottom moving average of the range for a while, but the oscillator starts Trend heading higher, the stock may be strengthening. line OI: Should my trading timeframe inﬂ uence which indicators I use?

LB: Absolutely. Technical analysis relies on historical trading information, and you want the data to align as closely as possible with your own “Don’t think trading timeframe. I generally suggest using a of technical moving average of 2 to 2.5 times your trading analysis as the timeframe. So, if you’re an intermediate trader Holy Grail of with an investing timeframe of one month, or stock research, about 20 trading days, you will want to employ but rather as a 50-day moving average. Selecting a moving average of shorter duration may give you false a means of Source: StreetSmart Edge® from November 29, 2012, to May 30, 2013. indications about where a stock is headed identifying because you’re not seeing a broader picture. For positive or instance, it may seem like a good idea to buy a negative What are some other common questions let’s say that you own a stock that continues to stock or add to your position a er a rebound. behavior in a Lee gets? Here’s his short list: achieve new highs; however, you also see that However, the longer view might reveal that the stock’s price.” the moving average remains above the trend rebound is just one of a series of rebounds that is On Investing: Which tools can help me line while the OBV has stopped following the part of an established downtrend. –LEE BOHL, decide when to sell a stock? trend. is is known as a “divergence,” and it SCHWAB ACTIVE should get your attention because it means the Lee’s last tip TRADER MARKET Lee Bohl: e rst step is to identify the stock’s stock might have lost some of its strength and Don’t think of technical analysis as the Holy MANAGER support levels. A good way to do this is to look could be poised for a retreat. In that case, you Grail of stock research, but rather as a means at trend lines, moving averages and former lows. might consider selling some of your shares to of identifying positive or negative behavior in a When a stock falls below one of these indicators, take a pro t on those shares. But if I saw that stock’s price and gaining some insight into where it may be facing additional downward pressure. stock break through the moving average, I future price in ection points might occur. - Watch it to see if the price breaks below might consider selling the entire position. the point where all three indicators line up (as shown in the example in the chart above). OI: Which indicator type should I consult at’s generally considered to be a very strong when a stock is conﬁ ned to a tight sell signal. If the stock moves slightly below the trading range? moving average but stays above the trend line, I’m less worried, though still watchful. LB: Oscillators, such as the RSI, measure the extent to which a stock is overbought OI: How do you know when to sell your or oversold, and can be used as buy or sell Schwab’s StreetSmart Edge® is available for Schwab Active Trading clients. Access to NASDAQ TotalView® is provided free of charge to non-professional clients who have whole position instead of reducing it? signals when a stock is range bound. Using the made 120 or more equity and/or options trades in the last 12 months, have made 30 or more equity and/or options trades in either the current or previous quarters, or maintain $1 million or more in household balances at Schwab. Schwab Active Trading clients who do not meet these requirements can subscribe to NASDAQ TotalView for midpoint of the trading range as a starting point, a quarterly fee. Professional clients may be required to meet additional criteria before obtaining a subscription to NASDAQ TotalView. This offer may be subject to additional LB: Some investors make the mistake of the oscillator moves up when the demand for restrictions or fees, and may be changed at any time. thinking of their stock holdings as all-or- the stock exceeds the supply and the price is The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. nothing propositions. In some cases, it makes pushed higher to the top of the range. Likewise, Schwab does not recommend the use of technical analysis as a sole means of investment research. sense to just pare back a position. For example, the oscillator moves lower when supply exceeds ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3039)

18 CHARLES SCHWAB • FALL 2013

OIM-FA13-Qrt3-18 fdSW_FA13_17-19_ATb.indd 18 8/8/13 4:20 PM demand and the stock is pushed down to the bottom of the range. What you’re looking for in an oscillator is an indication that an overbought or oversold condition is starting to reverse itself. For instance, when the stock stays at the bottom Technical analysis glossary of the range for a while, but the oscillator starts Divergence: Occurs when the price of a stock and a heading higher, the stock may be strengthening. technical analysis indicator move in opposite directions. For example, if a stock increases in value but an indicator OI: should my trading timeframe stays flat, this may signal a future stock move lower. influence which indicators I use? Moving average: Also known as a “rolling” or “running” lB: Absolutely. Technical analysis relies on average, it is the average price of a security for a specified historical trading information, and you want the time period. It is used to view a stock’s price trend by data to align as closely as possible with your own reducing the effect of short-term fluctuations. trading timeframe. I generally suggest using a on-Balance voluMe: Measures buying and selling moving average of 2 to 2.5 times your trading pressure as a cumulative indicator that adds volume on timeframe. So, if you’re an intermediate trader days the stock trades up, and subtracts volume on days with an investing timeframe of one month, or the stock ends lower. It measures momentum for a stock. about 20 trading days, you will want to employ a 50-day moving average. Selecting a moving oscillaTor: An indicator that is generally used when a average of shorter duration may give you false stock is trading sideways. As the value of the oscillator indications about where a stock is headed approaches the top of the range, it may signal an because you’re not seeing a broader picture. For overbought stock, and as it reaches the lower range, instance, it may seem like a good idea to buy a it may signal an oversold stock. let’s say that you own a stock that continues to stock or add to your position after a rebound. overBoughT: Applies to an asset that may be achieve new highs; however, you also see that However, the longer view might reveal that the overvalued due to excessive buying, which may not be the moving average remains above the trend rebound is just one of a series of rebounds that is supported by the asset’s underlying financial position. line while the OBV has stopped following the part of an established downtrend. trend. This is known as a “divergence,” and it oversolD: Applies to an asset that may be undervalued should get your attention because it means the lee’s last tip due to excessive selling, which may not be supported by stock might have lost some of its strength and Don’t think of technical analysis as the Holy the asset’s underlying financial position. could be poised for a retreat. In that case, you Grail of stock research, but rather as a means might consider selling some of your shares to of identifying positive or negative behavior in a relaTive sTrengTh inDex: A momentum oscillator take a profit on those shares. But if I saw that stock’s price and gaining some insight into where that measures the speed and change of price movements. stock break through the moving average, I future price inflection points might occur.- It may signal overbought or oversold conditions for a stock. might consider selling the entire position. TrenD line: A line that connects two or more price learn More points on a chart. It is commonly used to gauge potential OI: Which indicator type should i consult Brush up on basic technical analysis support and resistance levels for a stock. when a stock is confined to a tight terms or learn intermediate and trading range? advanced trading strategies with Lee’s weekly online seminars at lB: Oscillators, such as the RSI, measure schwab.com/oItraderwebcasts. the extent to which a stock is overbought or oversold, and can be used as buy or sell Schwab’s StreetSmart Edge® is available for Schwab Active Trading clients. Access to NASDAQ TotalView® is provided free of charge to non-professional clients who have signals when a stock is range bound. Using the made 120 or more equity and/or options trades in the last 12 months, have made 30 or more equity and/or options trades in either the current or previous quarters, or maintain $1 million or more in household balances at Schwab. Schwab Active Trading clients who do not meet these requirements can subscribe to NASDAQ TotalView for midpoint of the trading range as a starting point, a quarterly fee. Professional clients may be required to meet additional criteria before obtaining a subscription to NASDAQ TotalView. This offer may be subject to additional the oscillator moves up when the demand for restrictions or fees, and may be changed at any time. the stock exceeds the supply and the price is The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. pushed higher to the top of the range. Likewise, Schwab does not recommend the use of technical analysis as a sole means of investment research. the oscillator moves lower when supply exceeds ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3039)

FALL 2013 • on invesTing 19

OIM-FA13-Qrt3-19 fdSW_FA13_17-19_ATb.indd 19 8/8/13 4:20 PM commodiTies: A How-To Guide

WHAT you sHould knoW AbouT invesTinG in commodiTies.

imber, gold, coffee, tin, cattle and hogs. If you have exposure to these commodities in your portfolio, you might be ahead of the curve. But for many investors, commodities are new investing terrain. In the past, it was difficult to invest in timberlands or coffee plantations. Gaining exposure to gold or oil would have meant figuring out where to stash the bullion or barrels. And owning cattle or hogs meant buying into T or operating a farm. © Rick Gayle 20 cHArles scHWAb • FALL 2013

OIM-FA13-Qrt3-20 fdSW_FA13_20-23_FT_Comm_b.indd 20 8/6/13 2:10 PM fig. 1 © Rick Gayle

FALL 2013 • on investing 21

OIM-FA13-Qrt3-21 fdSW_FA13_20-23_FT_Comm_b.indd 21 8/6/13 2:11 PM commodity, such as farm- equipment manufacturing and agricultural chemicals. Others hold an array of securities tied to several commodities, or commodity futures contracts. Others still may invest directly in a physical commodity.

ETFs 3 Though structured in “COMMODITIES AREN’T MEANT very di erent risks. Investors much the same way as a mutual g . 2 could have very di erent fund, ETFs tend to offer a TO ACCOUNT FOR A VERY LARGE experiences depending upon lower-cost, more transparent PORTION OF YOUR PORTFOLIO— how they gain exposure to a way to diversify. speci c commodity.” NO MORE THAN 5–10%.” Futures HOW CAN YOU INVEST 4 Financial contracts allow IN COMMODITIES? investors to purchase and Investors interested in gaining sell assets at a speci c price Now, there are several ways—such supply and demand or weather exposure to commodities can at a set point in time. Trading as purchasing mutual funds and conditions,” Tony says. “But not typically do so in four ways: futures can be risky, however, exchange-traded funds (ETFs), all commodities are a ected by and requires researching each or participating in the futures the same set of factors, and that’s Individual stocks contract and market individually. markets—for individuals to gain where choosing commodity 1Investors may choose to invest (For more, see “Trading exposure to various commodities. investments can get tricky.” in companies that have exposure commodity futures” above.) Because of these unique to commodities, though this WHY COMMODITIES? circumstances, investors should strategy won’t track the price of Of course, these approaches will Should you consider commodities carefully consider how they invest the commodities as closely as o er di erent results and exposure as part of your portfolio? Probably, in commodities. As Tony points owning the goods would. levels, so thorough research is says Tony Davidow, Vice President out, “Owning gold-mining stocks imperative, particularly when of Alternative Beta and Asset is not the same as owning gold Mutual funds Allocation Strategist at the Schwab bullion. ose two investments, Some funds invest in 2 Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and Center for Financial Research. while seemingly similar, have stocks related to a particular expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. “Commodities make sense for 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. many investors for a number of Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than the net asset value. reasons,” Tony says. “For one, Past performance is no guarantee of future results. commodities tend to have low Understanding contango Since sector- and commodity-specifi c funds are not diversifi ed and focus their investments entirely in a single sector, commodity or basket of commodities, the funds will correlations with stocks and involve a greater degree of risk than an investment in other diversifi ed fund types. bonds, so they have provided 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 attractive portfolio diversi cation Contango occurs when longer-term futures contracts are and signifi cantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations and economic conditions, regardless more expensive than nearer-term contracts for the same of the length of time shares are held. Investments in commodity-related products may subject the fund to signifi cantly greater volatility than investments in traditional bene ts over time. On top of that, material—a common phenomenon in the commodity markets. securities and involve substantial risks, including risk of loss of a signifi cant portion of their principal value. commodity prices usually rise Contango can be costly to investors because fund managers Schwab introduces its customers interested in trading futures to optionsXpress, Inc. Schwab and optionsXpress are affi liates and subsidiaries of The Charles Schwab when in ation is rising, so some have to sell the contracts and buy new ones (which can be Corporation. Certain requirements must be met to trade futures. Please read the Risk Disclosure Statement for Futures and Options prior to opening a futures trading account. Call 800-435-4000 for a copy. commodities have historically more expensive), or take delivery and store huge quantities of Diversifi cation strategies do not assure a profi t and do not protect against losses in declining markets. provided a hedge against the oil, cattle or other physical material. e ects of in ation.” This article is for informational purposes only and is not an offer, solicitation or recommendation that any particular investor should purchase or sell any particular security or pursue a particular investment strategy. The types of securities mentioned herein may not be suitable for everyone. Each investor needs to review a security transaction for his Of course, not all commodities “It’s a complicated scenario, but the effects of contango or her own particular situation. are created equal, and each may lead to a different investor experience than holding the All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Examples provided are for illustrative purposes only and are not comes with its own unique risks. underlying commodity,” Tony says. “That’s why ETFs that hold representative of intended results that a client should expect to achieve. “Commodity prices are impacted the asset usually are the best option for many investors.” The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

22 CHARLES SCHWAB • FALL 2013

OIM-FA13-Qrt3-22 fdSW_FA13_20-23_FT_Comm_b.indd 22 8/8/13 4:26 PM commodity, such as farm- equipment manufacturing and agricultural chemicals. Trading commodity futures DO THE Others hold an array of securities RESEARCH tied to several commodities, or Log in and commodity futures contracts. Prices for futures contracts can be volatile and may not follow search for Others still may invest directly the open market or spot price for certain commodities. In fact, commodity in a physical commodity. contango can impact individual futures contracts just as it investments at impacts futures-based ETFs. If you choose to trade commodity schwab.com/ futures, it’s important to understand that you’re competing I ETFs O research. against investment professionals. Prices and products can 3 Though structured in change quickly, so think about whether trading futures matches very di erent risks. Investors much the same way as a mutual your appetite for risk. could have very di erent fund, ETFs tend to offer a experiences depending upon lower-cost, more transparent how they gain exposure to a way to diversify. speci c commodity.” considering commodity futures. Keep in mind, though, that Futures However, Tony believes that ETFs precious metals are the only HOW CAN YOU INVEST 4 Financial contracts allow which invest directly in the physical commodities available as a physical IN COMMODITIES? investors to purchase and commodity typically make the asset instead of a futures contract. Investors interested in gaining sell assets at a speci c price most sense because they tend to be Non-precious metals, energy exposure to commodities can at a set point in time. Trading low-cost and fairly straightforward. commodities and agricultural typically do so in four ways: futures can be risky, however, On top of that, they avoid a commodities are available only and requires researching each speci c market condition known in ETFs that invest in futures. Individual stocks contract and market individually. as “contango,” which a ects Lastly, it’s important to note 1Investors may choose to invest (For more, see “Trading commodity futures and occurs that commodities aren’t meant to in companies that have exposure commodity futures” above.) when longer-term contracts for account for a very large portion to commodities, though this delivery of a commodity are more of your portfolio—no more than strategy won’t track the price of Of course, these approaches will expensive than near-term contracts 5–10%. More than that may reduce the commodities as closely as o er di erent results and exposure for the same material. (For more, the diversi cation bene ts, with owning the goods would. levels, so thorough research is see “Understanding contango” too much of your portfolio’s risk imperative, particularly when on previous page.) coming from commodities alone. - Mutual funds Some funds invest in 2 Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and stocks related to a particular expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. Investment returns will fl uctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, 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. Since sector- and commodity-specifi c funds are not diversifi ed and focus their investments entirely in a single sector, commodity or basket of commodities, the funds will involve a greater degree of risk than an investment in other diversifi ed fund types. 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 signifi cantly 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 signifi cantly greater volatility than investments in traditional securities and involve substantial risks, including risk of loss of a signifi cant portion of their principal value. Schwab introduces its customers interested in trading futures to optionsXpress, Inc. Schwab and optionsXpress are affi liates and subsidiaries of The Charles Schwab Corporation. Certain requirements must be met to trade futures. Please read the Risk Disclosure Statement for Futures and Options prior to opening a futures trading account. Call 800-435-4000 for a copy. Diversifi cation strategies do not assure a profi t and do not protect against losses in declining markets. This article is for informational purposes only and is not an offer, solicitation or recommendation that any particular investor should purchase or sell any particular security or pursue a particular investment strategy. The types of securities mentioned herein may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Examples provided are for illustrative purposes only and are not representative of intended results that a client should expect to achieve. The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

FALL 2013 • ON INVESTING 23

OIM-FA13-Qrt3-23 fdSW_FA13_20-23_FT_Comm_b.indd 23 8/6/13 2:11 PM fdSW_FA13_24-27_FT_Bonds_c.indd 24 24 CHARLES SCHWAB •FALL 2013 OIM-FA13-Qrt3-24 8/6/13 2:19PM

© Michael Austin Ronny Altman can tolerate risk. He developed it as the president of Altman Energy Inc., an Oklahoma-based oil and gas exploration and development company whose fate is o en tied to volatile fossil fuel prices. “I’ve always been accustomed to controlled risk,” says Ronny. Ronny’s comfort with risk- taking has come in handy in Don’t recent years as the Federal Reserve began its overt e ort to suppress interest rates, which drove yields on highly-rated US bonds to historic lows. Seeking higher returns, Ronny started Give moving the proceeds from maturing bonds into lower-rated corporate notes and municipal bonds, and even into master- limited partnerships, which he’s been investing in since 2000. He’s not abandoning bonds, Up though—as part of his asset allocation and investment strategy, he’s still holding many high-coupon munis that he plans to keep until they mature. Design: Suggest adding “Fortunately, I don’t need the arrows ( >> ) at the end On principal or income now, so I of the copy on this page. made a conscious decision to take a long-term view with some of Otherwise, if feels like I the municipal bonds,” says Ronny. should keep reading onto “I know I’m bringing a measure of the dek. additional risk into my portfolio, Bonds but I can live with it.” Despite today’s low interest rates, bonds still make sense for many investors. © Michael Austin

FALL 2013 • ON INVESTING 25

OIM-FA13-Qrt3-25 fdSW_FA13_24-27_FT_Bonds_c.indd 25 8/8/13 3:15 PM Of course, we don’t all have “Bonds remain a good source - Shorten duration. Investors Ronny’s tolerance for risk. Moving of income and generally have should stick with bonds or into higher-yielding xed income much less volatility than equity bond funds that have short securities introduces very real investments,” he says. “ ose or intermediate maturities— risks that aren’t appropriate for attributes help investors keep typically those between one many investors, particularly those their portfolios balanced, making and ve years. ese bonds are counting on their investments to bonds an important part of many generally less sensitive to rate generate income. But with interest investment plans.” changes than longer-term bonds, rates seemingly poised to rise—they Brett says investors shouldn’t and also can be reinvested more can’t stay this low forever—some compare bonds’ current-day quickly than long-term bonds investors are shi ing away from yields to where they’ve been when rates do rise. bonds to investments that involve historically. It makes more sense - Consider corporates. Overall, these greater risks. Others are to compare current bond yields to companies have strong balance cashing out their positions the current low level of in ation sheets and plenty of cash on altogether, preferring to sit on and to the returns from other hand, meaning corporate the sidelines rather than see their current investment opportunities. credit is on solid footing. “ e xed income returns languish. For example, savings accounts incremental yield of highly Hold on, says Brett Wander, and certi cates of deposit are rated corporate bonds is worth Chief Investment O cer of yielding far less than many bonds. it in a low-yield environment, Fixed Income at Charles Schwab “And stocks just have an entirely where every basis point helps,” Investment Management, Inc. di erent risk pro le,” he says. Kathy says. “ ese are valid concerns. Rates As for the threat of rates - Build ladders. is strategy are low and they might well be rising—a move that could reduce involves creating a portfolio of heading higher,” Brett says. “But the value of bonds—Brett says bonds that mature at regular there’s still a place for bonds in that investors should be somewhat intervals, such as annually. With just about every xed income concerned, but not overly so. “ e such a ladder, there is a bond investor’s portfolio.” investment community has been maturing at least every year. waiting for a rise in rates since If rates move up, the proceeds Why 2007,” he says. “If you’re embarking from the maturing bond can bonds still on a strategy with expectations that be reinvested at higher rates. make sense rates are going to rise sharply, you A ladder may not perform as Brett points out that the two might be waiting for some time.” well as more targeted strategies, fundamental features of bonds— Brett says that rates may stay and the bonds in the ladder will capital preservation and income low for a while longer. Because still move down in price when generation—still make them in ation is low, the US economy appealing investments, especially seems stuck in slow-growth mode Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and for those who need the reliability and the Fed appears intent on expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. of bond payments. And, he says, keeping rates down. 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. bonds help diversify portfolios, Past performance is no guarantee of future results. which is important when stock Preparing 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 indexes are volatile. for rising changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifi cations and other factors. interest rates Lower-rated securities are subject to greater credit risk, default risk and liquidity risk. So what should investors do with The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. this information? Kathy Jones, 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 “ Bonds remain a good source of income Vice President and Fixed Income before making any investment decision. Strategist at the Schwab Center All expressions of opinion are subject to change without notice in reaction to shifting market conditions. and generally have much less volatility for Financial Research, says most Diversifi cation strategies do not assure a profi t and do not protect against losses in declining markets. xed income investors shouldn’t The London Interbank Offer Rate (LIBOR) is a widely used benchmark for short-term interest rates. It is an interest rate at which banks borrow funds from other banks in the than equity investments.” London interbank market; the LIBOR is fi xed on a daily basis by the British Bankers’ Association and derived from a fi ltered average of the world’s most creditworthy banks’ abandon bonds. Instead, they interbank deposit rates for larger loans with maturities between overnight and a full year. —Brett Wander, Chief Investment Offi cer, Fixed Income, should consider strategies—such The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc. Charles Schwab Investment Management as those listed at right—that might Charles Schwab Investment Management, Inc., the investment advisor for Schwab’s proprietary funds, and Charles Schwab & Co., Inc., the distributor for Schwab Funds, are help boost returns and mitigate separate but affi liated companies and subsidiaries of The Charles Schwab Corporation. the impact of rising rates. ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3034)

26 CHARLES SCHWAB • FALL 2013

OIM-FA13-Qrt3-26 fdSW_FA13_24-27_FT_Bonds_c.indd 26 8/6/13 2:19 PM “Bonds remain a good source - shorten duration. Investors rates rise, but Kathy believes price fluctuating with changing of income and generally have should stick with bonds or the benefits of bond ladders interest rates. You’ll still receive much less volatility than equity bond funds that have short outweigh the disadvantages in a your promised coupon payments Call Us investments,” he says. “Those or intermediate maturities— low-interest-rate environment. and repayment of the principal To discuss the - Buy and hold. attributes help investors keep typically those between one As is the case at maturity (assuming, of course, potential impact of their portfolios balanced, making and five years. These bonds are with stocks, investors usually can the issuer doesn’t default in the rising rates on your bonds an important part of many generally less sensitive to rate benefit from taking a long-term meantime). You might not be bond investments, investment plans.” changes than longer-term bonds, approach to bonds. If you don’t able to invest in higher-interest call a Schwab Fixed Brett says investors shouldn’t and also can be reinvested more need to sell a bond before it bonds when rates increase, but Income Specialist at compare bonds’ current-day quickly than long-term bonds matures, you likely won’t need to it is unlikely that your current 877-563-7818. yields to where they’ve been when rates do rise. be as concerned about its market holding would lose value. - historically. It makes more sense - Consider corporates. Overall, to compare current bond yields to companies have strong balance the current low level of inflation sheets and plenty of cash on and to the returns from other hand, meaning corporate current investment opportunities. credit is on solid footing. “The What if rates rise? For example, savings accounts incremental yield of highly The most common question Kathy Jones hears these days is: “What happens and certificates of deposit are rated corporate bonds is worth when rates spike?” She doesn’t think a rise in interest rates is imminent, and yielding far less than many bonds. it in a low-yield environment, when rates eventually do move higher, the rise probably will be gradual. Still, she “And stocks just have an entirely where every basis point helps,” points out who and what could do well in a rising-interest-rate environment. -- Investors seeking income. People who rely on their investments for income can different risk profile,” he says. Kathy says. benefit from higher interest rates. They’ll be able to generate more income from As for the threat of rates - Build ladders. This strategy their investments and compound that income over time. rising—a move that could reduce involves creating a portfolio of -- Credit-related bonds. In a strong economy, interest rates have historically risen the value of bonds—Brett says bonds that mature at regular and the credit spread (or difference) between US Treasuries and other bonds that investors should be somewhat intervals, such as annually. With has tended to narrow. Kathy believes that, if the current recovery mirrors these concerned, but not overly so. “The such a ladder, there is a bond past trends, a decline in the credit spread of corporate bonds is likely to be less investment community has been maturing at least every year. significant than a price decline in Treasuries. waiting for a rise in rates since If rates move up, the proceeds -- Floating rate notes (FRNs). Some FRNs may appreciate in value, since most 2007,” he says. “If you’re embarking from the maturing bond can are indexed to a benchmark rate, such as the London Interbank Offered Rate, on a strategy with expectations that be reinvested at higher rates. that moves with the market. So if the Fed raises short-term rates, FRNs may rates are going to rise sharply, you A ladder may not perform as keep up with the hike. But FRNs may also be low in credit quality. For more on FRNs, read Collin Martin’s article, “Understanding Floating-Rate Bonds,” at might be waiting for some time.” well as more targeted strategies, schwab.com/OImarketinsight. Brett says that rates may stay and the bonds in the ladder will low for a while longer. Because still move down in price when inflation is low, the US economy seems stuck in slow-growth mode Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and and the Fed appears intent on expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. keeping rates down. 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. Preparing Past performance is no guarantee of future results. 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 for rising changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. interest rates Lower-rated securities are subject to greater credit risk, default risk and liquidity risk. So what should investors do with The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. this information? Kathy Jones, 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 Vice President and Fixed Income before making any investment decision. Strategist at the Schwab Center All expressions of opinion are subject to change without notice in reaction to shifting market conditions. for Financial Research, says most Diversification strategies do not assure a profit and do not protect against losses in declining markets. fixed income investors shouldn’t The London Interbank Offer Rate (LIBOR) is a widely used benchmark for short-term interest rates. It is an interest rate at which banks borrow funds from other banks in the London interbank market; the LIBOR is fixed on a daily basis by the British Bankers’ Association and derived from a filtered average of the world’s most creditworthy banks’ abandon bonds. Instead, they interbank deposit rates for larger loans with maturities between overnight and a full year. should consider strategies—such The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc. as those listed at right—that might Charles Schwab Investment Management, Inc., the investment advisor for Schwab’s proprietary funds, and Charles Schwab & Co., Inc., the distributor for Schwab Funds, are help boost returns and mitigate separate but affiliated companies and subsidiaries of The Charles Schwab Corporation. the impact of rising rates. ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3034)

FALL 2013 • ON INvestINg 27

OIM-FA13-Qrt3-27 fdSW_FA13_24-27_FT_Bonds_c.indd 27 8/6/13 2:19 PM Are Fees Eroding Your Returns? Understanding the true cost of your investments.

How high can that stock go? What’s the yield on that bond? I heard that manager has the best returns, so I should buy that fund, right?

ike Benstein, a Chicago- based Schwab Financial Consultant, fields questions like these all day long. When it Mcomes to investment fees, though, investors are strangely silent. “The true cost of an investment doesn’t seem to be top of mind for some investors,” says Mike. “Fees almost seem as if they are an afterthought.” Fees deserve far more attention, Mike says, because they can quickly erode your pro ts. Even a seemingly small di erence in investment fees can translate into large variations in returns. For example, consider a hypothetical $10,000 investment over 20 years. Assuming

this investment has annual operating Thinkstock©

28 CHARLES SCHWAB • FALL 2013

OIM-FA13-Qrt3-28 fdSW_FA13_28-31_FT_Fees_e.indd 28 8/8/13 4:28 PM expenses of 0.5% and an average 6% annual return, it would grow to $29,012 after fees during that time period, while an investment with annual operating expenses of 1.5% and the same annual return would grow to roughly $23,705— an 18% difference. Of course, you can’t avoid all investing fees and expenses; regulators mandate some fees, while other fees are necessary, such as those for processing trades or managing funds. Still, careful research can help you find investments with lower fees. Let’s take a look at some fees that might be eating away at your returns—and at what you can do about them.

Commissions Commissions come in many forms, but the most common are the fees charged to investors as a result of placing a trade with a broker, regardless of whether it is placed face to face, over the phone or online. Some brokerage firms charge a flat commission on each order, while others charge a commission based on a percentage of the value of a trade. These fees can quickly add up, particularly if you trade regularly, or if your advisor trades frequently on your behalf. What you Many brokerages, including Can do Schwab, offer online trading of certain commission-free exchange- traded funds (ETFs) and no-load mutual funds. Depending on your needs and trading activity, these investment choices could help you keep a significantly greater percentage of your returns.

Schwab ETF OneSource™ offers access to more than 100 commission-free ETFs.1 Visit LEarn morE schwab.com/oIEtFonesource Brush up on basic technical analysis to learn more. terms or learn intermediate and advanced trading strategies with Lee’s weekly online seminars at Discover no-load mutual funds schwab.com/oItradingseminars. easily with Schwab Mutual Fund OneSource®,2 available at schwab.com/oIonesource.

FALL 2013 • on invEsting 29

OIM-FA13-Qrt3-29 fdSW_FA13_28-31_FT_Fees_e.indd 29 8/9/13 2:46 PM Fee glossary You deserve to know what you are paying for Here are some frequently mentioned terms that investors your investments. And need to be aware of when they at Schwab, we make it consider fees: easy to see where your 12b-1: Fees paid by the fund money is going. Visit out of fund assets to cover the I costs of marketing and selling schwab.com/O fees fund shares. Sometimes these for a complete look at fees cover the costs of providing our fee structure. shareholder services.

Bid/ask spread: The difference between the price at which a security can be bought and the price at which it is being sold. more of a buy-and-hold investor, the commission and spread—both one-time Load: The amount some mutual costs—aren’t as important as the expense fund companies charge to ratio, which is a recurring fee. purchase shares of the fund, also WHAT YOU Consider trading known as the “front-end load.” CAN DO commission-free ETFs if This fee can be as high as 8.5%. o ered by your broker, as well as ETFs No-load: This term refers to with low expense ratios. And when you funds that investors can buy and are ready to trade, be certain to check the sell without incurring any sales bid/ask spread; a wide gap might end up charge or commission. No-load a ecting your investment. funds may carry redemption and other fees. They also have 1Conditions apply: Trades in ETFs available through Schwab ETF OneSource™ (including Schwab ETFs™) are available without commissions when placed online in a Schwab operating expenses. MUTUAL FUNDS funds charged 0.93%, on average. Index 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 On top of loads and transaction fees, mutual funds, which are considered “passive” 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 Operating expense ratio: Also fund investors are also charged a percentage because they try to mimic the performance called OER, this is the total information. of the fund’s average net assets—called the of an established index by trading securities 2Trades in no load funds available through Schwab Mutual Fund OneSource (including Schwab Funds®), as well as certain other funds, are available without transaction fees of an ETF’s or mutual fund’s operating expense ratio (OER)—to cover included in that index, charged investors when placed through schwab.com or our automated phone channels. Schwab’s short-term redemption fee of $49.95 will be charged on redemption of funds purchased annual fund operating expenses, 3 through Mutual Fund OneSource (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 presented as a percentage of the the fund’s management expenses. 0.13–0.14% in 2011, on average. fee, including Schwab Funds, which may charge a separate redemption fee, and funds that accommodate short-term trading. Funds are also subject to management fees and fund’s average net assets. This Each dollar spent on the OER means WHAT YOU Compare OERs before expenses. For each of these trade orders placed through a broker, a $25 service charge applies. 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 in the Mutual Fund OneSource ratio represents an apples-to- less return to the investor. And these fees CAN DO purchasing a fund. All OERs program for recordkeeping and shareholder services, and other administrative services. apples look into the costs a fund can vary, so investors should compare are listed in the fund prospectus, which 3The Investment Company Institute, 2012 Investment Company Fact Book, 52nd edition. charges and can help investors OERs, particularly on funds that are may be available online. Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and compare funds. very similar. It’s not unusual for smaller, expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. niche or global funds to have higher EXCHANGE-TRADED FUNDS 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. Redemption fees: A fee that OERs because of the extra work and cost Like mutual funds, ETFs have operating 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 some mutual funds charge when involved in researching and managing expenses that can vary and impact net asset value. investors sell or redeem shares. investments. But again, these fees eat performance. But investors may overlook Past performance is no guarantee of future results. away at returns, so it’s best to know what commissions and the bid/ask spread of The fee example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specifi c investment product. Dividends and interest are assumed to Transaction fees: The various have been reinvested, and the example does not refl ect the effects of taxes. costs charged by a broker to you’re paying for. the ETF, both of which can also affect Typically, actively managed funds, in overall returns. 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 execute an order. changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifi cations and other factors. which managers select the securities they If you trade ETFs frequently, the There is no centralized exchange or quotation service for most fi xed income securities. Prices in the secondary market generally refl ect activity by market participants or believe will produce the greatest returns, commission you’re charged on each dealers linked to various trading systems. Bonds available through Schwab may be offered at prices superior or inferior to other dealers’ prices for the same bonds. All prices tend to have the highest OERs—in 2011, transaction becomes more important, are subject to change without prior notice. Schwab reserves the right to act as principal on any bond transaction. In secondary market principal transactions, the price will be subject to our standard markup in the case of purchases, a markdown in the case of sales, and also may include a profi t or loss to Schwab in the form of a bid-ask spread. bond funds charged 0.66% and equity as does the bid/ask spread. But if you’re Thinkstock© ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3428) 30 CHARLES SCHWAB • FALL 2013

OIM-FA13-Qrt3-30 fdSW_FA13_28-31_FT_Fees_e.indd 30 8/16/13 1:48 PM INDIVIDUAL BONDS investment goals for the bene t of When you buy or sell bonds, your investors—incurs two primary You deserve to know transaction costs are either a at fee types of fees: or a percentage of an overall trade. - Annual fee: is is typically a set what you are paying for e yield on a bond is impacted by what percentage of assets, though it can your investments. And you pay for it, so nding the lowest vary from rm to rm based on at Schwab, we make it market price and transaction costs will what the advisor charges and the size easy to see where your increase its yield, all else being equal. of assets in your portfolio. WHAT YOU Shop around and - Fees for underlying investments: money is going. Visit CAN DO compare bond prices and ese include commissions and schwab.com/OIfees transaction fees from multiple dealers operating expenses. While some before purchasing a bond. While some portfolio management products for a complete look at brokerages may choose to disclose fees wrap these costs into the annual our fee structure. only as required by regulations, Schwab management fee, others may pass them provides more detailed information to along to investors. ese fees o en go our investors concerning fees on bond unnoticed—but when charged on top transactions. is includes markups, of an annual management fee, they can markdowns and our rep-assisted fee eat away at portfolio returns over time. more of a buy-and-hold investor, the at the point of sale. WHAT YOU When researching commission and spread—both one-time CAN DO professional portfolio costs—aren’t as important as the expense Examine bond prices with management, be sure to factor in all ratio, which is a recurring fee. the help of a Schwab Fixed management and transaction costs before WHAT YOU Consider trading Income Specialist. Call us at making an investment decision. For CAN DO commission-free ETFs if 877-908-1075. investments you already hold, review your o ered by your broker, as well as ETFs statements carefully, looking beyond with low expense ratios. And when you PORTFOLIO MANAGEMENT the annual management fee. Factor in are ready to trade, be certain to check the Portfolio management—professional all the costs you’re paying for portfolio bid/ask spread; a wide gap might end up management of certain securities or management and then decide if your a ecting your investment. assets designed to help meet speci ed total costs are worth it. -

1Conditions apply: Trades in ETFs available through Schwab ETF OneSource™ (including Schwab ETFs™) are available without commissions when placed online in a Schwab funds charged 0.93%, on average. Index 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 funds, which are considered “passive” 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 because they try to mimic the performance information. of an established index by trading securities 2Trades in no load funds available through Schwab Mutual Fund OneSource (including Schwab Funds®), as well as certain other funds, are available without transaction fees included in that index, charged investors when placed through schwab.com or our automated phone channels. Schwab’s short-term redemption fee of $49.95 will be charged on redemption of funds purchased 3 through Mutual Fund OneSource (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 0.13–0.14% in 2011, on average. fee, including Schwab Funds, which may charge a separate redemption fee, and funds that accommodate short-term trading. Funds are also subject to management fees and WHAT YOU Compare OERs before expenses. For each of these trade orders placed through a broker, a $25 service charge applies. Schwab reserves the right to change the funds we make available without CAN DO purchasing a fund. All OERs transaction fees and to reinstate fees on any funds. Charles Schwab & Co., Inc. (Member SIPC) receives remuneration from fund companies in the Mutual Fund OneSource program for recordkeeping and shareholder services, and other administrative services. are listed in the fund prospectus, which 3The Investment Company Institute, 2012 Investment Company Fact Book, 52nd edition. may be available online. Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. EXCHANGE-TRADED FUNDS 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. Like mutual funds, ETFs have operating 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 expenses that can vary and impact net asset value. performance. But investors may overlook Past performance is no guarantee of future results. commissions and the bid/ask spread of The fee example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specifi c investment product. Dividends and interest are assumed to the ETF, both of which can also affect have been reinvested, and the example does not refl ect the effects of taxes. overall returns. 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 ramifi cations and other factors. If you trade ETFs frequently, the There is no centralized exchange or quotation service for most fi xed income securities. Prices in the secondary market generally refl ect activity by market participants or commission you’re charged on each dealers linked to various trading systems. Bonds available through Schwab may be offered at prices superior or inferior to other dealers’ prices for the same bonds. All prices transaction becomes more important, are subject to change without prior notice. Schwab reserves the right to act as principal on any bond transaction. In secondary market principal transactions, the price will be subject to our standard markup in the case of purchases, a markdown in the case of sales, and also may include a profi t or loss to Schwab in the form of a bid-ask spread. as does the bid/ask spread. But if you’re Thinkstock© ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3428) FALL 2013 • ON INVESTING 31

OIM-FA13-Qrt3-31 fdSW_FA13_28-31_FT_Fees_e.indd 31 8/14/13 12:43 PM Diversiﬁ cation With a Focus on Downside Risk Management Windhaven® offers broad diversiﬁ cation while attempting to Schwab protect your portfolio from unexpected market downturns.

Mobile Apps or many investors, planning for the Access account and unexpected—both the opportunities and Fthe potential pitfalls—can be a challenge. market information But with Windhaven, Schwab clients have wherever you are. access to three broadly diversifi ed strategies that strive to capture growth in rising markets chwab offers two powerful apps for and reduce exposure in declining ones. our on-the-go clients: Schwab Mobile “Our philosophy goes beyond spreading S app and On Investing® app for iPad®. money across a lot of different asset classes,” Monitor your accounts, research investments, says Stephen Cucchiaro, Windhaven’s follow today’s market news and fi nd timely Chief Investment Offi cer. “We think hard perspectives to help you make informed about specifi c risks that could affect the investment decisions. entire portfolio and include asset classes that might do well should that risky scenario Schwab Mobile app take place.” Take control of your Schwab brokerage and Using an approach that is based on Schwab Bank accounts anytime, anywhere extensive research into the cause-and-effect with our Schwab Mobile app, available for relationships that drive the global capital download on the following devices: markets, Windhaven strategies are adjusted based on current economic conditions. This - AndroidTM - iPhone® dynamic approach has helped deliver long- - iPad - Kindle Fire term performance while attempting to reduce losses during turbulent bear markets.

On Investing app for iPad Stay on top of your trading when Access the latest Schwab insights, interactive you’re on the go with Schwab Mobile Please refer to Windhaven’s ADV Part 2 for investing checklists and more, all in one trading tools optimized for tablets and NEXT STEPS more information. place. Use customizable tools to annotate smartphones. Search for “Schwab Mobile” in your device’s app store. Past performance is no guarantee of future content and create investing reminders, or Symbols, price and volume data returns, and the value of investments and the save and share your favorite articles with shown here are for illustrative income derived from them can go down as well friends and family. And if something you read purposes only and do not constitute as up. Future returns are not guaranteed, and a inspires action, you can link directly to the a recommendation by Schwab to buy loss of principal may occur. Schwab Mobile app. or sell a particular security. Windhaven Diversifi ed strategies are available through Schwab’s Managed Account Connection™ program. Please read Schwab’s disclosure brochure for important information Brokerage Products: Not FDIC Insured • No Bank Guarantee • May Lose Value and disclosures relating to Schwab Managed Account Connection and Schwab Managed Account Services™. Functionality varies by device. Windhaven’s portfolio risk management process includes System availability and response times are subject to market conditions and mobile connection limitations. an effort to monitor and manage risk, but should not be confused with (and does not imply) low risk. Apple, the Apple logo, iPad, App StoreSM and iPhone are trademarks of Apple Inc., registered in the United States and other countries. App Store is a service mark of Apple Inc. Diversifi cation strategies do not assure a profi t and do not protect against losses in declining markets. Android is a trademark of Google Inc. Use of this trademark is subject to Google Permissions. Scan to Portfolio management is provided by Windhaven Investment Amazon, Kindle, Kindle Fire, and the Amazon Kindle logo are trademarks of Amazon.com, Inc., or its affi liates. Management, Inc. (“Windhaven”), a registered investment Charles Schwab & Co., Inc., and Charles Schwab Bank are separate but affi liated companies and subsidiaries download the advisor. Windhaven and Charles Schwab & Co., Inc., are of The Charles Schwab Corporation. Brokerage products and services are offered by Charles Schwab & Co., On Investing separate but affi liated companies and subsidiaries of Inc., Member SIPC. Deposit and lending products and services are offered by Charles Schwab Bank, Member app for iPad. The Charles Schwab Corporation. FDIC and an Equal Housing Lender. ©2013 Charles Schwab & Co., Inc. All rights reserved. ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3042) Member SIPC. (0913-4055)

32 CHARLES SCHWAB • FALL 2013

OIM-FA13-Qrt3-32 fdSW_FA13_32-34_SpotLight.indd 32 8/6/13 5:15 PM Diversification With a Focus on Downside Risk Management Windhaven® offers broad diversification while attempting to protect your portfolio from unexpected market downturns.

or many investors, planning for the unexpected—both the opportunities and Windhaven cumulative total returns, Fthe potential pitfalls—can be a challenge. 2002–March 31st, 2013 168.6% But with Windhaven, Schwab clients have access to three broadly diversified strategies 131.7% that strive to capture growth in rising markets and reduce exposure in declining ones. 100.1% 94.9% “Our philosophy goes beyond spreading 90.7% 90.9% money across a lot of different asset classes,” says Stephen Cucchiaro, Windhaven’s 82.5% 81.9% Chief Investment Officer. “We think hard 71.1% about specific risks that could affect the entire portfolio and include asset classes that might do well should that risky scenario take place.” Using an approach that is based on Diversified Conservative Diversified Growth Diversified Aggressive Barclays US Agg Bond Index 60/40 Blended Benchmark S&P 500® Total Return Index extensive research into the cause-and-effect Global Conservative Benchmark Global Growth Benchmark Global Aggressive Benchmark relationships that drive the global capital markets, Windhaven strategies are adjusted based on current economic conditions. This Windhaven compound annual returns dynamic approach has helped deliver long- Last Last Last Last Since term performance while attempting to reduce As of 3/31/2013: 1 year 3 years 5 years 10 years 1/1/2002 losses during turbulent bear markets. Windhaven Diversified Conservative 4.4% 4.5% 3.0% 6.0% 5.9% Barclays US Aggregate Bond Index 3.8% 5.5% 5.5% 5.0% 5.5% Please refer to Windhaven’s ADV Part 2 for Global Conservative Benchmark 4.9% 6.2% 4.5% 6.1% 5.9% more information. Windhaven Diversified Growth 7.5% 7.1% 3.6% 8.5% 7.8% Past performance is no guarantee of future Blended (60% US equities, 40% US bonds) 9.9% 10.1% 6.1% 7.4% 5.5% returns, and the value of investments and the Global Growth Benchmark 7.3% 7.1% 3.4% 7.7% 6.1% income derived from them can go down as well as up. Future returns are not guaranteed, and a Windhaven Diversified Aggressive 8.6% 7.7% 4.0% 10.1% 9.2% ® loss of principal may occur. S&P 500 Total Return Index 14.0% 12.7% 5.8% 8.5% 4.9% Global Aggressive Benchmark 6.8% 6.8% 1.5% 8.3% 6.4% Windhaven diversified strategies are available through Schwab’s Managed Account Connection™ program. Please read Schwab’s disclosure brochure for important information and disclosures relating to Schwab Managed Account Please visit schwab.com/windhaven for performance Connection and Schwab Managed Account Services™. information. do the Windhaven’s portfolio risk management process includes Performance data taken from January 1, 2002–March 31, 2013, which ReseaRch an effort to monitor and manage risk, but should not be is the longest time period for which all three Windhaven strategies Visit schwab.com/ confused with (and does not imply) low risk. existed concurrently. Performance is based on the actual return of each oIwindhaven to respective Windhaven Diversified Composite, net of all fees and expenses. Diversification strategies do not assure a profit and do not learn more about protect against losses in declining markets. The Global Conservative Benchmark comprises 20% MSCI All Country World Index (ACWI), 75% Barclays US Aggregate Bond Index, and 5% S&P Windhaven. Portfolio management is provided by Windhaven Investment GSCI Total Return Index (GSCI). Blended Benchmark comprises 60% S&P Management, Inc. (“Windhaven”), a registered investment 500® Total Return Index and 40% Barclays US Aggregate Bond Index. advisor. Windhaven and Charles Schwab & Co., Inc., are The Global Growth Benchmark comprises 55% MSCI ACWI, 40% Barclays separate but affiliated companies and subsidiaries of US Aggregate Bond Index, and 5% S&P GSCI Total Return. The Global The Charles Schwab Corporation. Aggressive Benchmark comprises 70% MSCI ACWI, 20% Citigroup World ©2013 Charles Schwab & Co., Inc. All rights reserved. Government Bond Index (CWGBI), and 10% S&P GSCI Total Return. Member SIPC. (0913-4055)

FALL 2013 • on investing 33

OIM-FA13-Qrt3-33 fdSW_FA13_32-34_SpotLight.indd 33 8/8/13 3:16 PM Schwab ETF Portfolio Builder™ Create a diversified ETF portfolio with our new tool.

f you’re looking to build a portfolio of exchange-traded from the Schwab ETF Select List™, a carefully compiled list funds (ETFs) but don’t know where to start, consider using representing our experts’ top ETF picks. I Schwab’s ETF Portfolio Builder—a robust new online tool that “The Schwab ETF Portfolio Builder offers a convenient, cost- allows you to design a diversified portfolio of ETFs. effective way to build a well-diversified portfolio,” says Beth Flynn, Investors can choose from one of five predefined portfolios Vice President of ETF Platform Development. “Self-directed clients based on their financial goals, risk tolerance and time horizon. can choose a risk profile and adjust the number of shares for each The predefined portfolios—ranging from conservative to ETF while viewing the impact on their portfolio. If they are happy aggressive allocations—are composed of ETFs drawn exclusively with the results, they can then purchase the entire portfolio online.”

Plan tyPe Moderately Moderately Conservative Conservative Moderate Aggressive Aggressive 5% 5% 5%

15% 10% 5% % % 30% 25 15 35% 25% 35% 45% 50% 5% 20% 50% % 50% 10 15% 10% 15% 20%

■ Large Cap ■ Small Cap ■ International ■ Fixed Income ■ Cash

time horizon Under 3-5 years Around 5 years Around 10 years At least 10 years More than 15 years

investment focus Current income Current income and Solid growth with Growth and value Growth and value and stability relative stability relative stability

risk Profile Want capital Want opportunity to Can tolerate fluctuations Good tolerance for Good tolerance preservation increase investments but less than overall risk, but less than overall for risk stock market stock market

For illustrative purposes only. Asset allocation models subject to change without notice.

Investors should consider carefully information contained in the prospectus, including investment Next StepS objectives, risks, charges, and expenses. You can request a prospectus by calling Schwab at Start using the Schwab 800-435-4000. Please read the prospectus carefully before investing. ETF Portfolio Builder Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be today by visiting worth more or less than their original cost. Shares are bought and sold at market price, which may be higher or lower than the schwab.com/OIetFpB. net asset value. Diversification strategies do not assure a profit and do not protect against losses in declining markets. ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3038)

34 charleS SchwaB • FALL 2013

OIM-FA13-Qrt3-34 fdSW_FA13_32-34_SpotLight.indd 34 8/8/13 3:17 PM research 35 Mutual Fund Onesource select List® 46 eTF select List™ 44 Income Mutual Fund select List™ 50 argus

Mutual Fund Onesource select List ® and Income Mutual Fund select List™ analysis and commentary on actively Managed Mutual Funds by charles schwab Investment advisory, Inc.

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

how Funds are selected selection criteria To build the Schwab Mutual Fund OneSource Select List and Actively Managed OneSource Funds, including Schwab Affiliate the Schwab Income Mutual Fund Select List, Charles Schwab Funds, are evaluated by CSIA based on a quantitative analysis of Investment Advisory, Inc. (CSIA) starts by analyzing the funds risk, performance, expenses, active share (when meaningful), tracked by Morningstar using quantitative and qualitative selection assets under management and asset flows. CSIA also may apply criteria described below. Then, based on its analysis, CSIA builds additional qualitative factors to its analysis to enhance its overall the Mutual Fund OneSource Select List and Income Select list by evaluation of a fund, including, for example, changes in a fund’s selecting the most favorably evaluated OneSource funds, including investment strategy or management structure, portfolio manager Schwab Funds and Laudus Funds (“Schwab Affiliate Funds”), within tenure, whether a fund’s investment style and portfolio holdings each Morningstar category. are representative of its investment category, portfolio Only actively managed OneSource funds are included in this version composition and turnover rates, consistency of a fund’s of the OneSource Select List. CSIA includes up to two index funds performance and CSIA’s evaluation of the fund over time, and for each of the large-cap, small-cap, international and taxable bond other risk and diversification considerations. asset classes on the electronic version of the OneSource Select List In addition, for the Income Select List, those funds with the best available on schwab.com. Index funds have separate selection capital preservation attributes and investment strategies that criteria. Visit the OneSource Select List on schwab.com to view focus on selecting income-generating securities will receive index funds and to learn more about how index funds are selected. preference when selecting from similarly rated funds with comparable yield characteristics. eligibility requirements “Leading Schwab Affiliate Funds” sections of the Select List and each Onesource select List and Income select List fund must: Income Select List feature eligible actively managed Schwab Be no-load and open to new investors at Schwab in all 50 states. Affiliate Funds that generally fall into the top 35 percent of all CSIA-evaluated funds (including OneSource and non-OneSource Have a minimum three-year performance track record (except funds) in their respective Morningstar categories. If two or more funds that are listed below the “Leading Schwab Affiliate Funds” Schwab Affiliate Funds that fit this criteria also have similar sections of the lists, which are eligible if they have a minimum 12 investment styles, CSIA may determine that only the most favorably months performance track record under their current evaluated fund(s) be included in the list. Because Schwab Affiliate management and/or current investment objectives and strategy). Funds included in the “Leading Schwab Affiliate Funds” section of Have at least $40 million in assets (except for small-cap value, the OneSource Select List and Income Select List are selected high yield, multisector bond, world bond, emerging market equity independently from other actively managed funds on the list, they and bond, diversified Pacific Asia, Pacific Asia ex-Japan, Europe, may have a less favorable evaluation overall than the funds listed in Japan, Latin America, convertibles, retirement income, target the “Leading Third-Party Funds” section of the list. date and specialty funds, which require at least $20 million in sections of the OneSource Select List assets). To meet this requirement, assets in multiple share “Leading Third-Party Funds” and Income Select List feature eligible actively managed third-party classes of the same fund may be aggregated. OneSource funds that generally fall within the top 35 percent of all additionally, each Income select List fund must: CSIA-evaluated funds within a given Morningstar category and that Demonstrate a track record of making income distributions in receive the most favorable evaluations in their respective categories. each of the prior five calendar years (or during every full calendar For the OneSource Select List, CSIA generally includes the five year since inception in the case of funds with less than a five-year most-favorably evaluated funds in each of the large-cap, small-cap, track record, including Schwab Affiliate Funds which may have a intermediate-term bond, municipal national intermediate and foreign 12-month track record). large blend asset categories and the two most favorably evaluated For fixed income funds, make income distributions on at least funds in all other asset categories. If two or more of the most a quarterly basis; and—with the exception of the high-yield, favorably evaluated funds within an asset category have similar multisector and emerging markets bond categories—not allocate investment styles, CSIA may substitute a less-favorably evaluated in excess of 30% to issues rated below investment grade. fund for one or more of those funds to provide a more diverse selection of fund investment strategies. For equity funds, offer a current yield in excess of their category average; and for equity funds with “dividend” or “income” in their For the Income Select List, CSIA generally includes no more than name, make income distributions at least quarterly. the two most favorably evaluated funds in each asset category, except for the intermediate-term bond category, which may feature With the exception of specialty sector (REITs) and fixed income up to five funds. funds, not allocate in excess of 33% to any single sector. (continued on page 36) FALL 2013 • On InvesTIng 35

OIM-FA13-Qrt3-35 CS1744_SL_FAL2013_OnInvesting_MECH_r1.indd 35 8/8/13 4:32 PM research

(continued from page 35) Large-cap U.s. stock FUnd The Index Fund section of the Select List features up to two index funds service is not considered in the Select Lists selection, nor does any for each of the large-cap, small-cap, international, and taxable bond fund pay Schwab to be included in the Select Lists. Eligible funds are asset classes. Index funds have similar selection criteria to actively selected based solely on the quantitative and qualitative criteria managed OneSource funds. These funds are evaluated by CSIA based described on pages 35 and 36. on a quantitative analysis of risk, performance, expenses, active share Schwab Affiliate Funds include Schwab Funds and Laudus Funds. (when meaningful), and assets under management. CSIA also may Schwab Funds and Laudus Funds are advised by Charles Schwab apply additional qualitative factors to its analysis to enhance its overall Investment Management, Inc. Schwab Funds and the Laudus evaluation of an index fund, including, for example, the breadth of the MarketMasters Funds are distributed by Charles Schwab & Co., Inc. index tracked by the fund, the index construction methodology, and the and Laudus Funds (except Laudus MarketMasters Funds) are tracking error of the fund to its underlying index. distributed by ALPS Distributors, Inc. The third-party index fund and Schwab affiliate index fund that receives the most favorable evaluation by CSIA in each asset class is included Investing in Mutual Funds at schwab on the Select List. If two index funds receive equal evaluations, CSIA Investors should consider carefully information contained in the will generally include the fund that has the lower expense ratio. prospectus, including investment objectives, risks, charges and expenses. You can obtain a prospectus by calling schwab at Important considerations when Building a portfolio for 800-435-4000. please read the prospectus carefully before investing. growth and Income Investment value will fluctuate and shares, when redeemed, may Schwab developed the Income Mutual Fund Select List to help be worth more or less than original cost. investors in or approaching retirement build or modify an investment portfolio that addresses their growth and income needs. Here are Trades in no-load mutual funds participating in the Mutual Fund some things to consider as you develop or fine-tune your portfolio: OneSource service (including Schwab Funds), as well as certain other funds, are available without loads or transaction fees when

asset allocation: As always, your portfolio’s asset allocation should placed through schwab.com or one of our automated phone be driven by your investment goals, time horizon and risk tolerance. channels. However, for each of these trades placed through a broker, FOR THE QUARTER ENDED JUNE 30, 2013 As your goals shift from accumulation to income, you can use the a $25 service charge applies. Additionally, Schwab will charge a loW HIgH AvErAgE ANNUAlIzED totAl rEtUrN funds on this list to help address your income and growth needs short-term redemption fee (STR) if you sell shares of OneSource gross NEt totAl from both bond and equity funds. MorNINgstAr QUotE 3 1 3 5 10 sINcE ExpENsE ExpENsE AssEts funds held for 90 days or less. Schwab reserves the right to exempt FUND NAME (FUND INcEptIoN DAtE) cAtEgory syMbol rIsk lEvEl Mos.c yEAr yEArs yEArs yEArs INcEptIoN rAtIoa rAtIoa ($M)

Diversification: Investors in or nearing retirement often believe that some funds from the STR fee, including certain Schwab Funds, which e they should be exclusively in bonds and other fixed income assets. may charge a separate redemption fee, and funds that accommodate lEADINg scHWAb AFFIlIAtE FUNDs While for some investors this might be an appropriate strategy, you short-term trading. Certain funds may charge a redemption fee laudus growth Investors U.s. large cap growth (10/14/97) large growth lgIlx 1.54 16.69 18.68 7.71 9.96 5.18 0.88 0.78 1,689 may want to consider keeping some percentage of your portfolio in separate, and in addition to, the OneSource STR. All other funds schwab Dividend Equity Fund (09/02/03) large value sWDsx 3.16 20.75 18.02 7.12 — 8.10 0.89 0.89 1,656 equities for the capital appreciation potential they provide. available at Schwab are subject to a transaction fee when bought lEADINg 3rD pArty FUNDs risk vs. return: Evaluate yields within the context of risk: different and sold and may be subject to fees assessed by the fund itself. categories or asset classes will reflect differing risk/reward trade- Schwab reserves the right to change the funds it makes available American century Equity growth Inv (05/09/91) large blend bEQgx 3.19 21.19 19.06 6.53 7.55 9.15 0.68 0.68 2,080 offs. Consider a mix of bond funds: government, municipal and without transaction fees and reinstate fees on any funds. Artisan value Fund Investor shares (03/27/06) large value Artlx 0.00 18.62 16.43 6.24 — 5.26 1.06 1.06 770 corporate. Also, a fund’s exposure to below-investment grade ® brown Advisory growth Equity Inv (06/28/99) large growth bIAgx 1.00 17.67 17.58 10.62 8.42 3.68 0.93 0.93 1,652 bonds is important to keep in mind. One of the selection criteria Information on the Mutual Fund onesource select List for fixed-income funds on the Income Select List is relatively low No mention of particular funds or fund families here should be glenmede large cap 100 (02/27/04) large blend gtlox 1.63 25.54 20.67 7.19 — 7.17 0.88 0.88 207 exposure to these types of securities, except for the high yield, construed as a recommendation, or considered an offer to sell, or glenmede large cap growth (02/27/04) large growth gtllx 1.83 21.54 19.68 7.59 — 7.11 0.89 0.89 137 multisector and emerging bond categories. (To see a fixed-income a solicitation to buy any securities. This information is provided for fund’s credit rating, click on the fund name, then the Portfolio tab.) general information purposes only and should not be considered an Janus contrarian t (02/29/00) large blend JsvAx 2.36 27.63 11.86 2.04 9.83 6.29 0.76 0.76 946 individualized recommendation or personalized investment advice. Bond funds with longer maturities can leave investors INtEcH U.s. growth t (07/06/09) large growth JDrtx 1.78 17.61 17.98 —— 17.94 0.83 0.83 14 Maturity: The securities listed may not be suitable for everyone. Each exposed to greater inflation and credit risk, so consider a balance Janus research t (05/03/93) large growth JAMrx 3.10 21.86 17.16 6.47 8.40 10.48 0.96 0.96 1,359 investor needs to review a security transaction for his or her own of maturities, from ultrashort to long. particular situation. Schwab or its employees may sometimes hold INtEcH U.s. value t (07/06/09) large value Jrstx 2.04 24.84 18.36 —— 18.50 0.89 0.89 0

distribution Frequency: Different funds provide payouts on positions in the securities listed here. Charles Schwab & Co. Inc. JpMorgan Equity Income A (02/18/92)f large value oIEIx -1.45 15.15 17.73 8.04 7.63 8.15 1.09 1.05 1,281 different schedules. Check the frequency of distributions to is the underwriter and distributor of Schwab Funds®. JpMorgan value Advantage A (02/28/05)f large value JvAAx -1.78 18.52 16.62 8.88 — 7.66 1.43 1.27 780 determine when you’ll receive income, if any, from the fund. Except as noted below, all data provided by Morningstar, Inc. ©2013 taxes: Remember tax implications. Income on investments in by Morningstar, Inc. All rights reserved. The information contained yacktman Focused svc (05/01/97) large blend yAFFx 4.04 21.10 17.61 16.81 11.26 9.68 1.25 1.25 7,426 nonretirement accounts is generally taxable; in tax-protected herein is the proprietary information of Morningstar, Inc., and may Morgan stanley Institutional growth p (01/02/96)f large growth MsEgx 0.42 10.34 15.89 5.44 7.55 7.40 0.97 0.97 146 retirement accounts, such as IRAs and 401(k)s, it’s less of a not be copied or redistributed for any purpose and may only be used parnassus Equity Income – Inv (09/01/92) large blend prblx 1.40 23.76 17.03 8.88 8.74 10.30 0.90 0.90 4,983 concern. Where appropriate, consider tax-free bond funds. for noncommercial, personal purposes. The information contained principal Equity Income A (05/31/39)f large value pQIAx -4.33 12.14 14.47 6.04 7.77 8.61 0.96 0.96 837 Schwab provides a range of easy-to-use tools, resources and herein is not represented or warranted to be accurate, correct, guidance at schwab.com for investors in or nearing retirement. complete, or timely. Morningstar, Inc., shall not be responsible for pErForMANcE bENcHMArks investment decisions, damages, or other losses resulting from use of schwab 1000 Index® (Dividends reinvested) 2.78 21.07 18.49 7.06 7.71 — additional Important Information the information. Morningstar, Inc., has not granted consent for it to s&p 500 Index® (Dividends reinvested) 2.91 20.60 18.45 7.01 7.30 — More than 3,500 funds participate in the Mutual Fund OneSource® be considered or deemed an “expert” under the Securities Act of service. Only these funds, including Schwab Affiliate Funds, are 1933. With respect to SchwabFunds, Charles Schwab Investment New to the select list this quarter eligible for the Select Lists. Schwab receives remuneration from fund Management, Inc. provides the following data: total net assets, companies, and/or their affiliates, in the Mutual Fund OneSource actual and average annual total returns, after-tax returns, annualized Asset Class and Performance Benchmark Definitions service, including Schwab Affiliate Funds, for record keeping, quarter-end performance, top ten holdings, portfolio breakdowns, large-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 shareholder services and other administrative services. Schwab expense ratios, and, for Schwab bond funds, credit ratings, average maturity, and 30-day SEC yield. “turnaround” or lower price-to-earnings or price-to-book ratios. blend funds invest in a combination of value and growth stocks. and its affiliates also receive fees from Schwab Affiliate Funds for 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. investment advisory and fund administration services. The aggregate Charles Schwab Investment Advisory (CSIA) is a separately registered 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 fees Schwab or its affiliates receive from Schwab Affiliate Funds (see investment advisor and an affiliate of Charles Schwab & Co., Inc. contractual waiver of fund expenses. please read the fund prospectus for details on limits or expiration dates for any such waivers. fund prospectuses for more details) are greater than the remuneration Among other functions, CSIA oversees the selection of investments Performance quoted is past performance and is no guarantee of future results. Current performance may be lower or higher. Visit schwab.com for Schwab receives from other fund companies participating in Schwab’s and ongoing monitoring of the Select List and produces market month’s end performance information. Investment value will fluctuate, and shares, when redeemed, may be worth more or less than original cost. Mutual Fund OneSource service. The amount of fees Schwab or its commentary and other investment advice for Schwab clients and affiliates receive from funds participating in the Mutual Fund OneSource financial consultants. (1111-7437)

36 charLes schwaB • FALL 2013

OIM-FA13-Qrt3-36 CS1744_SL_FAL2013_OnInvesting_MECH_r1.indd 36 8/16/13 3:48 PM Large-caP U.s. sTOck FUND

Perspectives and second Quarter 2013 summary Despite the likelihood of some short-term volatility as the Federal Reserve moves toward monetary policy normalization, we maintain our longer-term optimism for the U.S. economy. Moreover, the Fed made it clear that it will cut back on asset purchases only if the economy continues to improve, which we believe is ultimately a good thing for U.S. stocks. Housing remains a bright spot, while the labor market, a primary focus of the Fed, is also improving. Finally, although manufacturing data has been mixed, we believe the U.S. economy is enjoying a secular manufacturing resurgence. The strong gains witnessed at the start of 2013 were pared considerably going into the second quarter, as concerns around a pullback in China and a tapering of the quantitative easing program by the Federal Reserve acted to cool the markets. Large-cap U.S. stocks performed roughly equivalent to small- and mid-cap stocks. The large-cap value category had the best relative performance, returning gains of 3.30%, while large blend and large growth were lower with returns of 2.56% and 2.03%, respectively. All perspectives are as of July 19, 2013 For the latest up-to-date perspectives, please visit schwab.com

FOR THE QUARTER ENDED JUNE 30, 2013

loW HIgH AvErAgE ANNUAlIzED totAl rEtUrN gross NEt totAl MorNINgstAr QUotE 3 1 3 5 10 sINcE ExpENsE ExpENsE AssEts FUND NAME (FUND INcEptIoN DAtE) cAtEgory syMbol rIsk lEvEl Mos.c yEAr yEArs yEArs yEArs INcEptIoN rAtIoa rAtIoa ($M) lEADINg scHWAb AFFIlIAtE FUNDse laudus growth Investors U.s. large cap growth (10/14/97) large growth lgIlx 1.54 16.69 18.68 7.71 9.96 5.18 0.88 0.78 1,689 schwab Dividend Equity Fund (09/02/03) large value sWDsx 3.16 20.75 18.02 7.12 — 8.10 0.89 0.89 1,656 lEADINg 3rD pArty FUNDs American century Equity growth Inv (05/09/91) large blend bEQgx 3.19 21.19 19.06 6.53 7.55 9.15 0.68 0.68 2,080 Artisan value Fund Investor shares (03/27/06) large value Artlx 0.00 18.62 16.43 6.24 — 5.26 1.06 1.06 770 brown Advisory growth Equity Inv (06/28/99) large growth bIAgx 1.00 17.67 17.58 10.62 8.42 3.68 0.93 0.93 1,652 glenmede large cap 100 (02/27/04) large blend gtlox 1.63 25.54 20.67 7.19 — 7.17 0.88 0.88 207 glenmede large cap growth (02/27/04) large growth gtllx 1.83 21.54 19.68 7.59 — 7.11 0.89 0.89 137 Janus contrarian t (02/29/00) large blend JsvAx 2.36 27.63 11.86 2.04 9.83 6.29 0.76 0.76 946 INtEcH U.s. growth t (07/06/09) large growth JDrtx 1.78 17.61 17.98 —— 17.94 0.83 0.83 14 Janus research t (05/03/93) large growth JAMrx 3.10 21.86 17.16 6.47 8.40 10.48 0.96 0.96 1,359 INtEcH U.s. value t (07/06/09) large value Jrstx 2.04 24.84 18.36 —— 18.50 0.89 0.89 0 JpMorgan Equity Income A (02/18/92)f large value oIEIx -1.45 15.15 17.73 8.04 7.63 8.15 1.09 1.05 1,281 JpMorgan value Advantage A (02/28/05)f large value JvAAx -1.78 18.52 16.62 8.88 — 7.66 1.43 1.27 780 yacktman Focused svc (05/01/97) large blend yAFFx 4.04 21.10 17.61 16.81 11.26 9.68 1.25 1.25 7,426 Morgan stanley Institutional growth p (01/02/96)f large growth MsEgx 0.42 10.34 15.89 5.44 7.55 7.40 0.97 0.97 146 parnassus Equity Income – Inv (09/01/92) large blend prblx 1.40 23.76 17.03 8.88 8.74 10.30 0.90 0.90 4,983 principal Equity Income A (05/31/39)f large value pQIAx -4.33 12.14 14.47 6.04 7.77 8.61 0.96 0.96 837 pErForMANcE bENcHMArks schwab 1000 Index® (Dividends reinvested) 2.78 21.07 18.49 7.06 7.71 — s&p 500 Index® (Dividends reinvested) 2.91 20.60 18.45 7.01 7.30 — New to the select list this quarter

Asset Class and Performance Benchmark Definitions large-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.

FALL 2013 • ON INvesTINg 37

OIM-FA13-Qrt3-37 research

MID- aND sMaLL-caP U.s. sTOck FUNDs

Perspectives and second Quarter 2013 summary Our positive outlook for the U.S. economy carries over to small-and mid-cap space. The economy has been able to absorb sequestration without much pain to this point as consumers continue to show resilience, the situation in Europe has improved and rhetoric in Washington has simmered down. Meanwhile, profits for smaller, more domestically- focused companies may be bolstered by strength in the U.S. dollar as the Fed begins down the path of normalized policy. However, we believe these are the times when keeping long-term goals in mind is most important, and do not recommend making market cap bets. The largest gains from these categories were found in small-cap growth at 3.52%, followed by small-cap value at 2.71%, and mid-cap value which returned 2.65%. Mid- cap growth at 2.11% had the lowest returns relative to the small- and mid-cap universe, followed by mid-cap blend with a return of 2.20%, and small-cap blend at 2.57%. All perspectives are as of July 19, 2013 For the latest up-to-date perspectives, please visit schwab.com

FOR THE QUARTER ENDED JUNE 30, 2013

loW HIgH AvErAgE ANNUAlIzED totAl rEtUrN gross NEt totAl MorNINgstAr QUotE 3 1 3 5 10 sINcE ExpENsE ExpENsE AssEts FUND NAME (FUND INcEptIoN DAtE) cAtEgory syMbol rIsk lEvEl Mos.c yEAr yEArs yEArs yEArs INcEptIoN rAtIoa rAtIoa ($M) lEADINg scHWAb AFFIlIAtE FUNDse schwab small-cap Equity Fund (07/01/03)f small blend sWscx 4.23 31.02 22.28 9.29 — 10.64 1.12 1.12 490 lEADINg 3rD pArty FUNDs American century Mid cap value Inv (03/31/04) Mid-cap value AcMvx 3.20 25.04 17.33 11.56 — 9.80 1.01 1.01 2,743 First Eagle Fund of America A (11/19/98)f Mid-cap blend FEFAx -2.88 20.64 16.35 6.18 9.57 8.09 1.45 1.45 917 Janus Enterprise t (09/01/92) Mid-cap growth JAENx 2.55 22.09 19.27 6.98 11.08 10.25 0.96 0.96 985 tIAA-crEF Mid-cap growth retail (10/01/02) Mid-cap growth tcMgx 3.68 21.35 18.79 6.77 9.61 11.52 0.84 0.84 152 tIAA-crEF Mid-cap value retail (10/01/02) Mid-cap value tcMvx 2.00 23.77 18.39 7.10 11.01 12.20 0.81 0.81 320 touchstone Mid cap z (04/24/06) Mid-cap blend tMctx 2.13 31.92 22.67 6.06 — 3.28 3.67 1.21 12 AstoN/river road small cap value N (06/28/05) small blend Arsvx 3.37 22.71 15.96 6.57 — 7.17 1.46 1.46 54 baron small cap retail (09/30/97) small growth bscFx 1.66 23.89 18.82 9.39 9.77 9.69 1.31 1.31 3,392 Diamond Hill small cap A (12/29/00)b,f small value DHscx -1.63 24.05 13.71 7.40 10.50 10.94 1.31 1.31 487 DWs small cap value A (05/22/92)f small value kDsAx -4.09 17.42 11.88 5.48 10.24 9.90 1.19 1.19 850 gabelli small cap growth AAA (10/22/91) small blend gAbsx 2.73 29.80 19.32 10.52 11.72 13.09 1.41 1.41 1,941 Hancock Horizon burkenroad small cap A (12/31/01)f small blend HHbUx -2.11 21.78 21.95 9.77 12.39 11.82 1.42 1.40 353 HighMark geneva small cap gr A (06/12/09)f small growth HgAsx -0.69 17.17 19.57 —— 18.42 2.07 1.62 23 Hodges small cap (12/18/07) small blend HDpsx 4.02 31.12 24.53 10.56 — 10.62 1.48 1.41 513 clearbridge small cap growth A (07/01/98)f small growth sAsMx -3.04 16.46 20.06 8.14 10.24 9.86 1.32 1.28 802 skyline special Equities (04/23/87) small value sksEx 2.91 36.34 22.16 13.15 10.65 12.27 1.50 1.33 344 Nuveen NWQ small-cap value A (12/09/04)f small blend NscAx -1.59 20.09 19.53 6.06 — 5.96 1.44 1.44 10 pNc small cap A (04/02/04)f small growth ppcAx -0.35 24.52 21.67 9.87 — 6.83 1.56 1.29 26 scout small cap (11/17/86) small growth UMbHx 2.49 30.39 19.59 5.07 8.94 7.70 1.12 1.12 244 touchstone small cap value A (03/04/02)f small value tvoAx -3.12 18.03 17.73 5.16 9.35 9.22 1.78 1.44 33 pErForMANcE bENcHMArk russell 2000 Index® (Dividends reinvested) 3.08 24.21 18.67 8.77 9.53 — New to the select list this quarter

Asset Class and Performance Benchmark Definitions Mid-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. 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.

38 charLes schwaB • FALL 2013

OIM-FA13-Qrt3-38 INTerNaTIONaL sTOck FUNDs

Perspectives and second Quarter 2013 summary We continue to see a mixed international equity landscape, with Japan attractive for patient and disciplined investors, while we believe the eurozone may be bottoming. However, structural reforms in Japan are needed for a sustained recovery, while the impact of austerity, economic contraction, and high unemployment remain risks to the eurozone. Meanwhile, we believe China-related investments, including many emerging market stocks, will continue to encounter difficulty until investors have confidence about where and how China’s economy stabilizes. Finally, strength in the U.S. dollar could dampen returns for U.S. investors. The Japan Stock category continued to show strong relative performance (4.34%) and led with the highest returns in the International Equity categories, reflecting optimism that their economy is in a sustained growth period. The Latin America Stock category had the worst returns (-15.59%) across the International Equity categories, as growth concerns and a significant pullback in commodities impacted the region. Foreign fund investors had marginal losses across all categories, with Foreign Large Value recording the best performance (-0.22%). This was followed by Foreign Small/ Mid Growth (-0.38%), while Foreign Large Growth and Foreign Large Blend had lower relative returns of (-1.98%) and (-1.51%), respectively. All perspectives are as of July 19, 2013 For the latest up-to-date perspectives, please visit schwab.com FOR THE QUARTER ENDED JUNE 30, 2013

loW HIgH AvErAgE ANNUAlIzED totAl rEtUrN gross NEt totAl MorNINgstAr QUotE 3 1 3 5 10 sINcE ExpENsE ExpENsE AssEts FUND NAME (FUND INcEptIoN DAtE) cAtEgory syMbol rIsk lEvEl Mos.c yEAr yEArs yEArs yEArs INcEptIoN rAtIoa rAtIoa ($M) lEADINg scHWAb AFFIlIAtE FUNDse laudus Mondrian Emerging Mrkts – select (11/05/07)b,* Diversified Emerging Mkts lEMsx -10.56 3.56 4.69 0.49 — -0.46 1.66 1.52 20 schwab International core Equity (05/30/08) Foreign large blend sIcNx -1.17 20.32 12.70 0.51 — -1.00 1.17 0.87 112 laudus International MarketMasters – select (04/02/04)b,* Foreign large growth sWMIx -1.10 21.14 12.95 3.11 — 8.09 1.47 1.25 1,345 laudus Mondrian Intl. Equity – select (06/17/08)b,* Foreign large value lIEFx 1.34 15.69 9.59 -1.89 — -2.65 1.40 1.12 1 lEADINg 3rD pArty FUNDs Matthews china Dividend Investor (11/30/09) china region McDFx -1.75 15.68 9.59 —— 8.98 1.47 1.47 102 Matthews china Investor (02/19/98) china region McHFx -6.50 -0.52 -0.75 2.67 14.65 9.95 1.12 1.12 1,284 Acadian Emerging Markets Instl (06/17/93) Diversified Emerging Mkts AEMgx -10.01 4.72 5.19 -2.28 14.91 8.54 1.31 1.31 1,199 Harding loevner Emerging Markets Advisor (11/09/98) Diversified Emerging Mkts HlEMx -5.46 6.75 6.41 -0.06 14.36 13.34 1.47 1.47 1,805 Matthews Asia growth Investor (10/31/03) Diversifiedp acific/Asia MpAcx 2.30 23.72 12.30 9.13 — 10.31 1.16 1.16 445 Wells Fargo Advantage Asia pacific Inv (12/31/93) Diversifiedp acific/Asia sAspx -2.45 18.43 11.07 0.48 11.24 4.32 1.80 1.67 160 Artisan International Inv (12/28/95) Foreign large blend ArtIx -0.04 20.38 15.17 2.05 9.30 9.91 1.19 1.19 8,320 Harbor International Inv (11/01/02) Foreign large blend HIINx -1.78 13.80 10.60 0.32 10.58 11.20 1.15 1.14 4,662 lazard Intl strategic Equity open (02/03/06) Foreign large blend lIsox 0.88 23.65 15.04 3.58 — 4.48 1.13 1.13 496 Manning & Napier International s (08/27/92) Foreign large blend ExItx -1.89 16.15 8.41 2.79 8.92 8.25 1.19 1.12 553 oakmark International I (09/30/92) Foreign large blend oAkIx 3.76 34.59 14.35 9.92 11.08 10.59 1.06 1.06 16,745 Harding loevner International Eq Inv (09/30/05) Foreign large growth HlMNx -2.65 13.22 9.95 2.62 — 5.67 1.24 1.24 369 scout International (09/14/93) Foreign large growth UMbWx -1.59 16.86 10.82 1.80 9.59 8.67 1.00 1.00 9,202 brandes International Equity I (12/27/96) Foreign large value bIIEx 1.82 16.71 7.47 -1.13 7.47 8.37 1.05 1.00 382 Federated Intl strategic val Dividend A (06/03/08)f Foreign large value IvFAx -9.66 3.06 9.36 -0.57 — -2.28 1.47 1.11 189 Wasatch International growth (06/28/02) Foreign small/Mid growth WAIgx -1.35 27.56 19.32 9.26 13.04 12.28 1.57 1.56 1,101 Matthews Japan Investor (12/31/98) Japan stock MJFox 5.99 27.12 14.93 4.25 6.95 5.00 1.20 1.20 222 JpMorgan latin America A (02/28/07)f latin America stock JltAx -17.87 -4.58 0.00 -4.32 — 3.37 1.98 1.70 25 Matthews Asian growth & Inc Investor (09/12/94) pacific/Asia ex-Japan stk MAcsx -2.52 17.93 10.67 7.53 13.37 10.87 1.11 1.11 3,419 Matthews pacific tiger Investor (09/12/94) pacific/Asia ex-Japan stk MAptx -4.38 11.46 8.91 8.55 15.80 8.83 1.11 1.11 3,000 Artisan global opportunities Inv (09/22/08) World stock Artrx 0.64 20.06 20.19 —— 10.37 1.34 1.34 394 perkins global value t (06/29/01) World stock JgvAx 2.87 18.51 14.15 7.07 8.30 6.60 1.12 1.12 44 pErForMANcE bENcHMArks MscI EAFE Index (Dividends reinvested) -0.98 18.62 10.04 -0.63 7.67 — New to the select list this quarter * $50,000 initial minimum investment

Asset Class and Performance Benchmark Definitions Foreign 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. 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.

FALL 2013 • ON INvesTINg 39

OIM-FA13-Qrt3-39 research

secTOr FUNDs

Perspectives and second Quarter 2013 summary We have a positive outlook for somewhat business-reliant sectors of industrials and information technology. Moreover, we believe that more defensive areas of the market such as utilities and consumer staples will underperform in the near term. Meanwhile, we are neutral on financials as the sector faces the changing interest rate environment, while the continued improvement in the housing market should, in our view, bolster the group. Meanwhile, the real estate sector should see support as the improvement in the housing market is likely to continue, while the pressure on precious metals could remain as inflation concerns and risk aversion are likely to continue to be subdued. The Specialty categories were fairly mixed for the quarter, with positive performance evident in value-oriented categories such as Financials (4.55%), Health Care (4.45%) and Communications (3.42%), while growth-oriented categories such as Technology (2.84%) saw lower performance. Commodity-related categories saw dramatically lower performance, including Equity Precious Metals at -34.90% and Natural Resources at -7.23%. All perspectives are as of July 19, 2013 For the latest up-to-date perspectives, please visit schwab.com

FOR THE QUARTER ENDED JUNE 30, 2013

loW HIgH AvErAgE ANNUAlIzED totAl rEtUrN gross NEt totAl MorNINgstAr QUotE 3 1 3 5 10 sINcE ExpENsE ExpENsE AssEts FUND NAME (FUND INcEptIoN DAtE) cAtEgory syMbol rIsk lEvEl Mos.c yEAr yEArs yEArs yEArs INcEptIoN rAtIoa rAtIoa ($M) LeADIng SChwAB AffILIAte funDSe fInAnCIAL funDS (CAtegORY AVeRAge)† 3.00 27.45 12.41 4.64 2.71 schwab Financial services Fund (07/03/00) Financial sWFFx 5.81 29.67 13.70 3.23 4.42 4.11 1.10 0.94 60 heALth funDS (CAtegORY AVeRAge)† 2.95 25.85 22.35 12.36 9.58 schwab Health care Fund (07/03/00) Health sWHFx 2.06 29.01 22.64 12.26 12.77 7.87 0.85 0.82 698 LeADIng 3RD PARtY funDS equItY eneRgY funDS (CAtegORY AVeRAge)† -1.64 17.24 10.19 -7.40 11.91 IcoN Energy s (11/05/97) Equity Energy IcENx -2.70 23.64 15.18 -0.71 14.79 12.01 1.23 1.23 619 oppenheimer steelpath Mlp select 40 A (03/30/10)f Equity Energy MlpFx -2.49 16.66 11.30 —— 10.90 5.28 5.24 491 fInAnCIAL funDS (CAtegORY AVeRAge)† 3.00 27.45 12.41 4.64 2.71 burnham Financial services A (06/07/99)f Financial bUrkx -1.37 16.38 7.47 8.35 5.56 11.37 2.24 1.80 61 royce Financial services svc (12/31/03) Financial ryFsx 3.06 32.61 18.41 8.23 — 7.44 1.89 1.54 27 heALth funDS (CAtegORY AVeRAge)† 2.95 25.85 22.35 12.36 9.58 blackrock Health sciences opps Inv A (12/21/99)f Health sHsAx -3.63 20.66 17.29 11.02 12.76 14.10 1.30 1.30 1,394 Janus global life sciences t (12/31/98) Health JAglx 5.88 31.73 24.21 11.09 10.67 9.66 0.99 0.99 346 nAtuRAL ReSOuRCeS funDS (CAtegORY AVeRAge)† -8.50 1.71 6.08 -5.84 10.54 Dreyfus Natural resources A (10/31/03)f Natural resources DNlAx -9.80 9.40 8.57 -8.82 — 10.12 2.11 1.35 19 IcoN Materials s (05/06/97) Natural resources IcbMx 2.54 13.92 14.09 -0.56 12.11 4.34 1.39 1.39 55 PReCIOuS MetALS funDS (CAtegORY AVeRAge)† -35.81 -43.41 -20.93 -12.17 5.79 First Eagle gold A (08/31/93)f Equity precious Metals sggDx -35.63 -41.67 -17.41 -7.20 6.37 5.86 1.21 1.21 730 American century global gold Inv (08/17/88) Equity precious Metals bgEIx -34.50 -42.43 -20.08 -10.44 4.37 2.06 0.69 0.69 419 gLOBAL ReAL eStAte funDS (CAtegORY AVeRAge)† -5.79 13.23 13.57 3.07 9.07 Northern Multi-Manager glbl real Estate (11/19/08) global real Estate NMMgx -4.12 11.64 14.02 —— 21.25 1.47 1.10 1,068 third Avenue real Estate value Investor (12/31/09) global real Estate tvrvx 1.67 21.24 15.69 —— 11.86 1.34 1.34 90 ReAL eStAte funDS (CAtegORY AVeRAge)† -3.29 6.37 16.49 6.48 9.75 DWs rrEEF real Estate securities A (09/03/02)f real Estate rrrAx -6.93 1.05 15.39 5.66 10.17 10.67 0.99 0.99 511 Manning & Napier real Estate series (11/10/09) real Estate MNrEx -3.08 8.52 16.00 —— 16.83 1.10 1.10 171 teChnOLOgY funDS (CAtegORY AVeRAge)† 1.41 11.87 13.57 6.96 8.01 Janus global technology t (12/31/98) technology JAgtx 2.24 15.87 15.87 8.63 9.33 5.31 1.02 1.00 261 red oak technology select (12/31/98) technology rogsx 5.22 24.25 19.52 11.79 8.17 1.45 1.30 1.30 81 New to the select list this quarter † reflects load-adjusted returns

Asset Class and Performance Benchmark Definitions sector 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. 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. 40 charLes schwaB • FALL 2013

OIM-FA13-Qrt3-40 TaxaBLe BOND FUNDs

Perspectives and second Quarter 2013 summary Short-term bonds outperformed their longer-term counterparts during the second quarter, as they tend to be less sensitive to a rise in interest rates. Treasury bond yields rose for the quarter, with the 10-year Treasury ending the quarter 0.65% higher than where it began. A stronger-than-expected employment report released in early May led to an initial rise in rates, and the Fed’s June meeting opened the door to a possible tapering of bond purchases later this year, sending 10-year Treasury yields to their highest level in roughly two years. Most fixed income investors should focus on a core portfolio of intermediate-term, high quality mutual funds, and those reaching for yield in the lower- rated segments of the bond market should consider moving up in quality. The Taxable Fixed Income categories were mostly negative for the second quarter. Bank Loan was the top performer with a positive return of 0.19%. Long-Term Bonds returned -3.70% followed by returns of -2.61%, -0.91% and -0.25% for Intermediate, Short, and Ultra Short Bond. The Government category returns were moderately negative due to increasing rates. Emerging Market Bonds were the laggard in taxable fixed income with a quarterly return of -6.93% followed by -6.61% and -6.24% for Inflation-Protected Bonds and the Long Government categories. All perspectives are as of July 19, 2013 For the latest up-to-date perspectives, please visit schwab.com

FOR THE QUARTER ENDED JUNE 30, 2013

loW HIgH AvErAgE ANNUAlIzED totAl rEtUrN Avg. gross NEt WEIgHtED totAl MorNINgstAr QUotE 3 1 3 5 10 sINcE ExpENsE ExpENsE MAtUrIty AssEts FUND NAME (FUND INcEptIoN DAtE) cAtEgory syMbol rIsk lEvEl Mos.c yEAr yEArs yEArs yEArs INcEptIoN rAtIoa rAtIoa (yrs) ($M) LeADIng SChwAB AffILIAte funDSe schwab premier Income Fund (10/31/07) Interm-term sWIIx -1.96 -0.36 3.05 5.05 — 5.13 0.62 0.45 4.60 378 LeADIng 3RD PARtY funDS Eaton vance Floating-rate Advantage A (03/17/08)f bank loan EAFAx -2.30 5.05 7.11 6.23 — 7.13 1.42 1.01 — 1,628 ridgeWorth seix Floating rt High Inc I (03/01/06) bank loan sAMbx 0.02 6.97 6.98 5.23 — 4.67 0.65 0.62 4.40 6,603 tcW Emerging Markets Income N (03/01/04) Emerging Mkts tgINx -5.49 6.56 9.63 11.94 — 9.87 1.11 1.11 8.40 1,555 ridgeWorth seix High yield I (12/29/00) High yield bond sAMHx -1.49 9.50 9.99 8.52 6.72 7.57 0.57 0.57 7.70 1,549 tIAA-crEF High-yield retail (03/31/06) High yield bond tIyrx -1.85 7.62 10.09 9.80 — 7.96 0.70 0.70 7.90 424 American century Infl-Adj bond Inv (02/10/97) Infl-protected AcItx -7.51 -5.46 4.06 4.07 4.78 5.74 0.48 0.48 9.20 3,003 American century ginnie Mae Inv (09/23/85) Intermed gov’t bgNMx -2.72 -1.60 2.68 4.85 4.31 6.70 0.56 0.56 4.50 1,381 American century government bond Inv (05/16/80) Intermed gov’t cptNx -2.43 -2.03 2.40 4.40 4.08 7.10 0.48 0.48 5.20 978 baird core plus bond Inv (09/29/00) Interm-term bcosx -2.87 1.04 5.14 6.81 5.63 6.43 0.55 0.55 6.80 1,114 Doubleline total return bond N (04/06/10) Interm-term DltNx -1.65 3.59 8.43 —— 10.40 0.76 0.76 4.40 8,958 Metropolitan West total return bond M (03/31/97)b Interm-term MWtrx -2.34 4.51 6.19 8.43 6.77 7.23 0.62 0.62 6.40 10,668 pIMco total return D (04/08/98) Interm-term pttDx -3.67 0.91 4.37 6.95 5.65 6.45 0.75 0.75 6.70 18,178 ridgeWorth total return bond I (12/30/97) Interm-term sAMFx -2.50 -0.60 3.79 6.31 5.00 5.58 0.39 0.39 7.30 1,164 pIMco Income D (03/30/07) Multisector bond poNDx -1.39 13.78 12.60 12.40 — 10.33 0.91 0.75 5.40 4,408 putnam Diversified Income A (10/03/88)f Multisector bond pDINx -4.36 7.00 4.69 5.24 5.00 6.58 0.99 0.99 7.30 1,946 Federated Adjustable rate secs Instl (12/03/85) short government FEUgx -0.48 0.02 0.71 1.91 2.58 4.81 0.64 0.64 — 803 Federated Us govt 2-5 yr Instl (02/18/83) short government FIgtx -2.00 -1.40 1.33 3.27 3.27 6.41 0.85 0.58 3.70 520 Federated short-term Income Instl (07/01/86) short-term bond FstIx -0.54 1.38 2.22 3.54 3.24 5.10 0.84 0.53 1.80 636 Metropolitan West low Duration bond M (03/31/97) short-term bond MWlDx -0.25 4.81 4.70 4.35 3.43 4.43 0.58 0.58 2.90 1,238 pIMco short-term D (04/08/98) Ultrashort bond psHDx -0.51 1.21 1.31 2.15 2.46 3.26 0.71 0.70 1.30 515 ridgeWorth Us gov sec Ultra-short bd I (04/11/02) Ultrashort bond sIgvx -0.23 0.53 1.24 2.31 2.83 2.81 0.39 0.39 3.50 2,178 pIMco Foreign bond (Unhedged) D (04/30/04) World bond pFbDx -4.92 -4.10 4.88 5.25 — 5.55 0.90 0.90 9.60 650 pIMco global bond (Unhedged) D (07/31/08) World bond pgbDx -4.68 -2.39 5.16 —— 5.66 0.95 0.95 9.00 48 PeRfORMAnCe BenChMARKS barclays U.s. Aggregate bond Index (Dividends reinvested) -2.32 -0.69 3.51 5.19 4.52 — New to the select list this quarter

Asset Class and Performance Benchmark Definitions bond 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. FALL 2013 • ON INvesTINg 41

OIM-FA13-Qrt3-41 research

Tax-Free BOND FUNDs

Perspectives and second Quarter 2013 summary Tax-free bonds ended the quarter with losses due to rising Treasury yields following the Fed’s talk of tapering bond purchases later this year. Negative mutual fund June flows followed positive inflows throughout most of the year, helping to drive the negative performance of tax-free bonds for Q2 2013. Despite negative total returns, the tax-free sector of the bond market provides attractive yields compared to U.S. government and corporate bonds after accounting for the tax advantages. For investors who have been sitting on the sidelines in cash, this recent rise in interest rates may provide an investment window. Use short-term funds if you have a lower risk tolerance. The Tax Free categories all produced negative quarterly returns amid a broad pull back during the quarter. Intermediate issues slightly outperformed the longer issues in the national categories with Muni Intermediate returning -3.04% followed by -3.95% for Muni National Long. The Single State categories produced negative quarterly returns for the quarter. The Muni California Long returned -3.91% followed by -3.08% for Muni California Intermediate. Muni New York reflected the national categories with Intermediate Term returning -2.87% followed by -4.06% for Muni New York Long. Muni Single State Long returned -3.70% followed by -2.97% for Single State Intermediate. All perspectives are as of July 19, 2013 For the latest up-to-date perspectives, please visit schwab.com FOR THE QUARTER ENDED JUNE 30, 2013

Asset Class and Performance Benchmark Definitions tax-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. 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.

nOteS: ALL DAtA ShOwn IS AS Of June 30, 2013 a. Definitions: g ross 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. three-month (3-mos.) total return is not annualized. d. Investor shares™ are available at a lower minimum but with higher operating expenses than select shares®. e. 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. f. 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.

42 charLes schwaB • FALL 2013

OIM-FA13-Qrt3-42 aDDITIONaL FUND caTegOrIes FOR THE QUARTER ENDED JUNE 30, 2013

loW HIgH AvErAgE ANNUAlIzED totAl rEtUrN gross NEt totAl MorNINgstAr QUotE 3 1 3 5 10 sINcE ExpENsE ExpENsE AssEts FUND NAME (FUND INcEptIoN DAtE) cAtEgory syMbol rIsk lEvEl Mos.c yEAr yEArs yEArs yEArs INcEptIoN rAtIoa rAtIoa ($M) BALAnCeD funDS—LeADIng SChwAB AffILIAte funDSe schwab balanced Fund (11/18/96) Moderate Allocation sWobx 0.30 10.57 11.50 5.74 6.00 6.15 0.81 0.65 154 BALAnCeD funDS—LeADIng 3RD PARtY funDS American century one choice Agrsv Inv (09/30/04) Aggressive Allocation AogIx 0.35 14.15 13.60 4.82 — 6.99 1.01 1.01 813 value line Asset Allocation (08/24/93) Aggressive Allocation vlAAx 0.28 14.28 15.71 5.91 7.96 9.76 1.32 1.22 171 American century one choice vrycnsrvInv (09/30/04) conservative Allocation AoNIx -1.50 3.33 6.28 4.58 — 4.75 0.62 0.62 346 JpMorgan Income builder A (05/31/07)f conservative Allocation JNbAx -5.75 6.08 9.24 6.86 — 4.48 1.16 0.76 2,743 buffalo Flexible Income (08/12/94) Moderate Allocation bUFbx 0.66 12.89 14.45 6.81 8.85 7.53 1.04 1.04 1,027 oakmark Equity & Income I (11/01/95) Moderate Allocation oAkbx 0.99 12.29 10.19 4.80 7.93 10.62 0.78 0.78 17,301 blackrock global Allocation Inv A (10/21/94)f World Allocation MDlox -5.20 5.08 6.44 2.55 8.33 9.23 1.16 1.16 17,774 First Eagle global A (04/28/70)f World Allocation sgENx -5.63 6.31 9.90 5.57 10.76 11.95 1.15 1.15 17,302 tARget DAte funDS—LeADIng SChwAB AffILIAte funDSe schwab Monthly Income Fund - Enhanced (03/28/08) retirement Income sWkrx -1.14 3.72 6.34 4.71 — 4.25 0.75 0.57 94 schwab Monthly Income Fund - Maximum (03/28/08) retirement Income sWlrx -1.64 0.84 3.93 3.93 — 3.53 0.65 0.46 68 schwab Monthly Income Fund - Moderate (03/28/08) retirement Income sWJrx -0.67 6.55 8.18 5.01 — 4.50 1.11 0.67 39 schwab target 2015 Fund (03/12/08) target Date 2011-2015 sWgrx -0.69 9.09 10.05 4.89 — 4.59 0.80 0.61 90 schwab target 2020 Fund (07/01/05) target Date 2016-2020 sWcrx -0.24 11.70 11.71 5.59 — 5.38 0.73 0.67 377 schwab target 2025 Fund (03/12/08) target Date 2021-2025 sWHrx 0.08 13.61 12.88 6.48 — 6.22 0.82 0.72 205 schwab target 2030 Fund (07/01/05) target Date 2026-2030 sWDrx 0.37 15.11 13.69 6.39 — 5.96 0.80 0.75 549 schwab target 2035 Fund (03/12/08) target Date 2031-2035 sWIrx 0.71 16.69 14.52 6.87 — 6.51 0.92 0.79 162 schwab target 2040 Fund (07/01/05) target Date 2036-2040 sWErx 0.86 17.77 15.09 6.78 — 6.36 0.87 0.81 559 tARget DAte funDS—LeADIng 3RD PARtY funDS pIMco real Income 2019 D (10/30/09) retirement Income prlDx -3.86 -2.15 2.65 —— 3.12 0.79 0.79 3 pIMco real Income 2029 D (10/30/09) retirement Income porDx -7.98 -6.09 4.47 —— 5.18 0.79 0.79 8 American century one choice 2015 Inv (08/31/04) target Date 2011-2015 ArFIx -0.31 8.74 10.16 5.24 — 6.09 0.80 0.80 522 American century one choice 2020 Inv (05/30/08) target Date 2016-2020 Arbvx -0.27 9.51 10.78 5.43 — 4.43 0.83 0.83 363 American century one choice 2025 Inv (08/31/04) target Date 2021-2025 ArWIx -0.08 10.48 11.38 5.27 — 6.52 0.86 0.86 772 American century one choice 2030 Inv (05/30/08) target Date 2026-2030 Arcvx 0.18 11.65 12.01 5.27 — 4.12 0.88 0.88 314 American century one choice 2035 Inv (08/31/04) target Date 2031-2035 AryIx 0.50 13.13 12.91 5.21 — 6.87 0.91 0.91 544 American century one choice 2040 Inv (05/30/08) target Date 2036-2040 ArDvx 0.71 14.25 13.73 5.65 — 4.30 0.95 0.95 217 American century one choice 2045 Inv (08/31/04) target Date 2041-2045 AroIx 0.77 15.05 14.10 5.28 — 7.08 0.98 0.98 334 American century one choice 2050 Inv (05/30/08) target Date 2046-2050 ArFvx 0.89 15.44 14.39 5.32 — 3.87 1.00 1.00 108 JpMorgan smartretirement 2050 A (07/31/07)f target Date 2046-2050 JtsAx -3.89 11.71 12.32 5.49 — 3.27 1.43 1.04 153 COnVeRtIBLe, LOng-ShORt, COMMODItY AnD MARKet neutRAL funDS—LeADIng 3RD PARtY funDS putnam convertible securities A (06/29/72)f convertibles pcoNx -4.13 11.23 9.56 4.86 6.88 9.77 1.11 1.11 497 Diamond Hill long-short A (06/30/00)f long/short Equity DIAMx -1.72 12.79 9.54 1.86 7.37 6.21 1.75 1.41 665 Wasatch long/short Investor (08/01/03) long/short Equity FMlsx -0.13 16.95 11.88 6.42 — 6.62 1.51 1.27 1,298 goldman sachs commodity strategy A (03/30/07)f commodities broad basket gscAx -10.99 -4.50 1.70 -16.73 — -5.64 1.13 0.98 313 pIMco commodity real ret strat D (11/29/02) commodities broad basket pcrDx -15.37 -11.41 2.25 -9.63 4.32 5.79 1.35 1.19 860 Merger (01/31/89) Market Neutral MErFx 0.06 2.76 2.91 3.67 3.75 6.82 1.87 1.32 4,533 PeRfORMAnCe BenChMARKS s&p 500 Index® (Dividends reinvested) 2.91 20.60 18.45 7.01 7.30 — barclays U.s. Aggregate bond Index (Dividends reinvested) -2.32 -0.69 3.51 5.19 4.52 — New to the select list this quarter

Asset Class Definitions balanced 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. ©2013 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. FALL 2013 • ON INvesTINg 43

OIM-FA13-Qrt3-43 research

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

loW HIgH AvErAgE ANNUAlIzED totAl rEtUrN gross NEt Avg. totAl ANNUAl Most rEcENt MorNINgstAr QUotE 3 1 3 5 10 sINcE ExpENsE ExpENsE WEIgHtED AssEts pAyMENt DIvIDEND DIvIDEND 30-DAy FUND NAME (FUND INcEptIoN DAtE) cAtEgory syMbol rIsk lEvEl Mos.c yEAr yEArs yEArs yEArs INcEptIoN rAtIoa rAtIoa MAtUrIty(yrs) ($M) DAtE FrEQUENcy rEtUrN pAyMENt sEc yIElD LeADIng SChwAB AffILIAte funDSe laudus Mondrian Emerging Mrkts Fund – select (11/05/07)b,* Diversified Emerging Mkts lEMsx -10.56 3.56 4.69 0.49 — -0.46 1.66 1.52 — 20 12/6/12 Annually 2.44 0.21 — laudus Mondrian Intl. Equity Fund – select (06/17/08)b,* Foreign large value lIEFx 1.34 15.69 9.59 -1.89 — -2.65 1.40 1.12 — 1 12/6/12 Annually 3.18 0.24 — schwab International core Equity Fund (05/30/08) Foreign large blend sIcNx -1.17 20.32 12.70 0.51 — -1.00 1.17 0.87 — 112 12/6/12 Annually 2.53 0.21 — schwab premier Income Fund (10/31/07) Intermediate-term bond sWIIx -1.96 -0.36 3.05 5.05 — 5.13 0.62 0.45 4.60 378 6/28/13 Monthly 1.92 0.01 1.40 schwab Dividend Equity Fund (09/02/03) large value sWDsx 3.16 20.75 18.02 7.12 — 8.10 0.89 0.89 — 1,656 6/28/13 Quarterly 1.88 0.08 1.74 schwab tax-Free bond Fund (09/11/92) Muni National Interm sWNtx -2.46 0.04 4.29 5.53 4.03 5.28 0.59 0.49 6.10 700 6/28/13 Monthly 2.31 0.02 1.78 schwab Monthly Income Fund – Maximum payout (03/28/08) retirement Income sWlrx -1.64 0.84 3.93 3.93 — 3.53 0.65 0.46 — 68 6/17/13 Monthly 2.36 0.02 2.30 schwab Monthly Income Fund – Enhanced payout (03/28/08) retirement Income sWkrx -1.14 3.72 6.34 4.71 — 4.25 0.75 0.57 — 94 6/17/13 Monthly 2.42 0.02 2.34 schwab Monthly Income Fund – Moderate payout (03/28/08) retirement Income sWJrx -0.67 6.55 8.18 5.01 — 4.50 1.11 0.67 — 39 6/17/13 Monthly 2.51 0.02 2.39 LeADIng 3RD PARtY funDS DOMeStIC parnassus Equity Income - Inv (09/01/92)d large blend prblx 1.40 23.76 17.03 8.88 8.74 10.30 0.90 0.90 — 4,983 6/28/13 Quarterly 2.26 0.10 — tIAA-crEF social choice Eq retail (03/31/06) large blend tIcrx 2.61 24.20 17.39 7.28 — 5.27 0.49 0.49 — 272 12/7/12 Annually 1.66 0.21 — Jensen Quality growth J (08/03/92) large growth JENsx 2.10 19.79 15.18 8.01 6.42 7.96 0.91 0.91 — 2,490 6/25/13 Quarterly 1.03 0.08 — JpMorgan Equity Income A (02/18/92)f large value oIEIx -1.45 15.15 17.73 8.04 7.63 8.15 1.09 1.05 — 1,281 6/28/13 Monthly 1.97 0.03 1.35 principal Equity Income A (05/31/39)f large value pQIAx -4.33 12.14 14.47 6.04 7.77 8.61 0.96 0.96 — 837 6/28/13 Quarterly 2.44 0.12 2.52 American century Mid cap value Inv (03/31/04) Mid-cap value AcMvx 3.20 25.04 17.33 11.56 — 9.80 1.01 1.01 — 2,743 6/11/13 Quarterly 1.47 0.07 1.17 royce total return svc (01/03/02) small blend rytFx 0.89 23.65 16.21 7.50 8.87 8.39 1.44 1.44 — 455 6/6/13 Quarterly 0.87 0.03 — InteRnAtIOnAL Acadian Emerging Markets Instl (06/17/93) Diversified Emerging Mkts AEMgx -10.01 4.72 5.19 -2.28 14.91 8.54 1.31 1.31 — 1,199 12/28/12 Annually 1.81 0.32 — oakmark International I (09/30/92) Foreign large blend oAkIx 3.76 34.59 14.35 9.92 11.08 10.59 1.06 1.06 — 16,745 12/13/12 Annually 1.92 0.44 — Federated Intl strategic val Dividend A (06/03/08)f Foreign large value IvFAx -9.66 3.06 9.36 -0.57 — -2.28 1.47 1.11 — 189 6/27/13 Monthly 3.70 0.01 4.57 perkins global value t (06/29/01) World stock JgvAx 2.87 18.51 14.15 7.07 8.30 6.60 1.12 1.12 — 44 12/20/12 Annually 1.96 0.28 — SeCtOR DWs rrEEF real Estate securities A (09/03/02)f real Estate rrrAx -6.93 1.05 15.39 5.66 10.17 10.67 0.99 0.99 — 511 6/21/13 Quarterly 1.58 0.08 — third Avenue real Estate value Investor (12/31/09) global real Estate tvrvx 1.67 21.24 15.69 —— 11.86 1.34 1.34 — 90 12/18/12 Annually 2.99 0.84 — tAxABLe BOnD tcW Emerging Markets Income N (03/01/04) Emerging Markets bond tgINx -5.49 6.56 9.63 11.94 — 9.87 1.11 1.11 8.40 1,555 6/28/13 Monthly 5.85 0.06 5.13 ridgeWorth seix High yield I (12/29/00) High yield bond sAMHx -1.49 9.50 9.99 8.52 6.72 7.57 0.57 0.57 7.70 1,549 6/28/13 Monthly 6.22 0.05 4.12 tIAA-crEF High-yield retail (03/31/06) High yield bond tIyrx -1.85 7.62 10.09 9.80 — 7.96 0.70 0.70 7.90 424 6/28/13 Monthly 5.57 0.05 5.04 American century Infl-Adj bond Inv (02/10/97) Inflation-protected bond AcItx -7.51 -5.46 4.06 4.07 4.78 5.74 0.48 0.48 9.20 3,003 6/28/13 Quarterly 1.84 0.04 2.18 American century government bond Inv (05/16/80) Intermediate government cptNx -2.43 -2.03 2.40 4.40 4.08 7.10 0.48 0.48 5.20 978 6/28/13 Monthly 2.04 0.02 1.03 baird core plus bond Inv (09/29/00) Intermediate-term bond bcosx -2.87 1.04 5.14 6.81 5.63 6.43 0.55 0.55 6.80 1,114 6/25/13 Monthly 2.89 0.03 2.23 Doubleline total return bond N (04/06/10) Intermediate-term bond DltNx -1.65 3.59 8.43 —— 10.40 0.76 0.76 4.40 8,958 6/28/13 Monthly 5.11 0.04 — Metropolitan West total return bond M (03/31/97)b Intermediate-term bond MWtrx -2.34 4.51 6.19 8.43 6.77 7.23 0.62 0.62 6.40 10,668 6/28/13 Monthly 3.31 0.02 2.39 pIMco total return D (04/08/98) Intermediate-term bond pttDx -3.67 0.91 4.37 6.95 5.65 6.45 0.75 0.75 6.70 18,178 6/28/13 Monthly 3.57 0.02 1.55 ridgeWorth total return bond I (12/30/97) Intermediate-term bond sAMFx -2.50 -0.60 3.79 6.31 5.00 5.58 0.39 0.39 7.30 1,164 6/28/13 Monthly 1.79 0.02 1.76 pIMco Income D (03/30/07) Multisector bond poNDx -1.39 13.78 12.60 12.40 — 10.33 0.91 0.75 5.40 4,408 6/28/13 Monthly 5.93 0.05 2.97 Federated Adjustable rate secs Instl (12/03/85) short government FEUgx -0.48 0.02 0.71 1.91 2.58 4.81 0.64 0.64 — 803 6/28/13 Monthly 0.70 — 0.56 Federated short-term Income Instl (07/01/86) short-term bond FstIx -0.54 1.38 2.22 3.54 3.24 5.10 0.84 0.53 1.80 636 6/28/13 Monthly 1.85 0.01 1.33 Metropolitan West low Duration bond M (03/31/97)b short-term bond MWlDx -0.25 4.81 4.70 4.35 3.43 4.43 0.58 0.58 2.90 1,238 6/28/13 Monthly 2.63 0.01 1.55 ridgeWorth Us gov sec Ultra-short bd I (04/11/02) Ultrashort bond sIgvx -0.23 0.53 1.24 2.31 2.83 2.81 0.39 0.39 3.50 2,178 6/28/13 Monthly 0.73 0.01 0.62 pIMco Foreign bond (Unhedged) D (04/30/04) World bond pFbDx -4.92 -4.10 4.88 5.25 — 5.55 0.90 0.90 9.60 650 6/28/13 Monthly 3.01 0.02 1.57 tAx-fRee BOnD American century Intermtrm tx-Fr bd Inv (03/02/87) Muni National Interm tWtIx -2.51 0.11 3.80 4.75 3.79 5.15 0.47 0.47 8.80 1,957 6/28/13 Monthly 2.51 0.02 1.27 bMo Intermediate tax-Free y (02/01/94) Muni National Interm MItFx -2.76 0.44 4.34 5.54 4.15 4.62 0.70 0.55 5.60 957 6/28/13 Monthly 2.58 0.02 1.67 Northern tax-Exempt (03/31/94) Muni National long NotEx -3.91 -0.46 4.32 5.16 4.13 5.21 0.87 0.47 15.40 1,068 6/24/13 Monthly 2.94 0.03 2.78 Federated shrt-Interm Dur Muni Instl (09/04/81) Muni National short FsHIx -1.06 0.57 2.39 2.94 2.51 4.46 0.80 0.47 — 483 6/28/13 Monthly 1.65 0.01 1.04 RetIReMent InCOMe pIMco real Income 2029 D (10/30/09) retirement Income porDx -7.98 -6.09 4.47 —— 5.18 0.79 0.79 9.00 8 6/28/13 Monthly 5.91 0.05 1.72 New to the select list this quarter * $50,000 initial minimum investment Definitions 30-day sEc yield: based on a fund’s most recently reported portfolio holdings, this measure shows the income an investor would earn if invested in that fund for the subsequent 12 months. Although a fund’s holdings are likely to change over that time, the sEc yield provides a yardstick for comparing the income potential across funds within the same category. Annual Dividend return: this measure looks back at the actual payouts of an equity fund over the past 12 months. It provides an accurate picture of the fund’s recent short-term distributions without any forward anticipation. the Income select list shows the 12-month dividend return for each equity fund in the form of a percentage of its share price (also known as “payout ratio”). 44 charLes schwaB • FALL 2013

OIM-FA13-Qrt3-44 Whether you need income monthly, quarterly or annually, you have a number of fund choices. The funds on the Income Select List provide different types of income: fixed-income funds generally pay interest measured by yield; equity funds pay dividends measured by dividend return or payout ratio. FOR THE QUARTER ENDED JUNE 30, 2013 loW HIgH AvErAgE ANNUAlIzED totAl rEtUrN gross NEt Avg. totAl ANNUAl Most rEcENt MorNINgstAr QUotE 3 1 3 5 10 sINcE ExpENsE ExpENsE WEIgHtED AssEts pAyMENt DIvIDEND DIvIDEND 30-DAy FUND NAME (FUND INcEptIoN DAtE) cAtEgory syMbol rIsk lEvEl Mos.c yEAr yEArs yEArs yEArs INcEptIoN rAtIoa rAtIoa MAtUrIty(yrs) ($M) DAtE FrEQUENcy rEtUrN pAyMENt sEc yIElD LeADIng SChwAB AffILIAte funDSe laudus Mondrian Emerging Mrkts Fund – select (11/05/07)b,* Diversified Emerging Mkts lEMsx -10.56 3.56 4.69 0.49 — -0.46 1.66 1.52 — 20 12/6/12 Annually 2.44 0.21 — laudus Mondrian Intl. Equity Fund – select (06/17/08)b,* Foreign large value lIEFx 1.34 15.69 9.59 -1.89 — -2.65 1.40 1.12 — 1 12/6/12 Annually 3.18 0.24 — schwab International core Equity Fund (05/30/08) Foreign large blend sIcNx -1.17 20.32 12.70 0.51 — -1.00 1.17 0.87 — 112 12/6/12 Annually 2.53 0.21 — schwab premier Income Fund (10/31/07) Intermediate-term bond sWIIx -1.96 -0.36 3.05 5.05 — 5.13 0.62 0.45 4.60 378 6/28/13 Monthly 1.92 0.01 1.40 a smart approach schwab Dividend Equity Fund (09/02/03) large value sWDsx 3.16 20.75 18.02 7.12 — 8.10 0.89 0.89 — 1,656 6/28/13 Quarterly 1.88 0.08 1.74 to help you generate schwab tax-Free bond Fund (09/11/92) Muni National Interm sWNtx -2.46 0.04 4.29 5.53 4.03 5.28 0.59 0.49 6.10 700 6/28/13 Monthly 2.31 0.02 1.78 schwab Monthly Income Fund – Maximum payout (03/28/08) retirement Income sWlrx -1.64 0.84 3.93 3.93 — 3.53 0.65 0.46 — 68 6/17/13 Monthly 2.36 0.02 2.30 income from your schwab Monthly Income Fund – Enhanced payout (03/28/08) retirement Income sWkrx -1.14 3.72 6.34 4.71 — 4.25 0.75 0.57 — 94 6/17/13 Monthly 2.42 0.02 2.34 schwab Monthly Income Fund – Moderate payout (03/28/08) retirement Income sWJrx -0.67 6.55 8.18 5.01 — 4.50 1.11 0.67 — 39 6/17/13 Monthly 2.51 0.02 2.39 investments LeADIng 3RD PARtY funDS As you plan for retirement, you want DOMeStIC to build a portfolio to sustain you parnassus Equity Income - Inv (09/01/92)d large blend prblx 1.40 23.76 17.03 8.88 8.74 10.30 0.90 0.90 — 4,983 6/28/13 Quarterly 2.26 0.10 — tIAA-crEF social choice Eq retail (03/31/06) large blend tIcrx 2.61 24.20 17.39 7.28 — 5.27 0.49 0.49 — 272 12/7/12 Annually 1.66 0.21 — with regular income, but you don’t Jensen Quality growth J (08/03/92) large growth JENsx 2.10 19.79 15.18 8.01 6.42 7.96 0.91 0.91 — 2,490 6/25/13 Quarterly 1.03 0.08 — want to sacrifice the potential for JpMorgan Equity Income A (02/18/92)f large value oIEIx -1.45 15.15 17.73 8.04 7.63 8.15 1.09 1.05 — 1,281 6/28/13 Monthly 1.97 0.03 1.35 growth. One solution is to build a principal Equity Income A (05/31/39)f large value pQIAx -4.33 12.14 14.47 6.04 7.77 8.61 0.96 0.96 — 837 6/28/13 Quarterly 2.44 0.12 2.52 portfolio that incorporates both American century Mid cap value Inv (03/31/04) Mid-cap value AcMvx 3.20 25.04 17.33 11.56 — 9.80 1.01 1.01 — 2,743 6/11/13 Quarterly 1.47 0.07 1.17 royce total return svc (01/03/02) small blend rytFx 0.89 23.65 16.21 7.50 8.87 8.39 1.44 1.44 — 455 6/6/13 Quarterly 0.87 0.03 — fixed-income funds that generate InteRnAtIOnAL regular income and equity funds that Acadian Emerging Markets Instl (06/17/93) Diversified Emerging Mkts AEMgx -10.01 4.72 5.19 -2.28 14.91 8.54 1.31 1.31 — 1,199 12/28/12 Annually 1.81 0.32 — pay dividends as well as provide oakmark International I (09/30/92) Foreign large blend oAkIx 3.76 34.59 14.35 9.92 11.08 10.59 1.06 1.06 — 16,745 12/13/12 Annually 1.92 0.44 — growth potential. Federated Intl strategic val Dividend A (06/03/08)f Foreign large value IvFAx -9.66 3.06 9.36 -0.57 — -2.28 1.47 1.11 — 189 6/27/13 Monthly 3.70 0.01 4.57 perkins global value t (06/29/01) World stock JgvAx 2.87 18.51 14.15 7.07 8.30 6.60 1.12 1.12 — 44 12/20/12 Annually 1.96 0.28 — For a few ideas on how to build an SeCtOR income generating portfolio of more DWs rrEEF real Estate securities A (09/03/02)f real Estate rrrAx -6.93 1.05 15.39 5.66 10.17 10.67 0.99 0.99 — 511 6/21/13 Quarterly 1.58 0.08 — third Avenue real Estate value Investor (12/31/09) global real Estate tvrvx 1.67 21.24 15.69 —— 11.86 1.34 1.34 — 90 12/18/12 Annually 2.99 0.84 — than one fund from the Schwab tAxABLe BOnD Income Mutual Fund Select List, view tcW Emerging Markets Income N (03/01/04) Emerging Markets bond tgINx -5.49 6.56 9.63 11.94 — 9.87 1.11 1.11 8.40 1,555 6/28/13 Monthly 5.85 0.06 5.13 a sample portfolio online within the ridgeWorth seix High yield I (12/29/00) High yield bond sAMHx -1.49 9.50 9.99 8.52 6.72 7.57 0.57 0.57 7.70 1,549 6/28/13 Monthly 6.22 0.05 4.12 Income Select List pages, by going tIAA-crEF High-yield retail (03/31/06) High yield bond tIyrx -1.85 7.62 10.09 9.80 — 7.96 0.70 0.70 7.90 424 6/28/13 Monthly 5.57 0.05 5.04 American century Infl-Adj bond Inv (02/10/97) Inflation-protected bond AcItx -7.51 -5.46 4.06 4.07 4.78 5.74 0.48 0.48 9.20 3,003 6/28/13 Quarterly 1.84 0.04 2.18 to www.schwab.com/incomelist. American century government bond Inv (05/16/80) Intermediate government cptNx -2.43 -2.03 2.40 4.40 4.08 7.10 0.48 0.48 5.20 978 6/28/13 Monthly 2.04 0.02 1.03 Portfolios are provided for baird core plus bond Inv (09/29/00) Intermediate-term bond bcosx -2.87 1.04 5.14 6.81 5.63 6.43 0.55 0.55 6.80 1,114 6/25/13 Monthly 2.89 0.03 2.23 conservative, moderately conservative Doubleline total return bond N (04/06/10) Intermediate-term bond DltNx -1.65 3.59 8.43 —— 10.40 0.76 0.76 4.40 8,958 6/28/13 Monthly 5.11 0.04 — or moderate investors seeking income Metropolitan West total return bond M (03/31/97)b Intermediate-term bond MWtrx -2.34 4.51 6.19 8.43 6.77 7.23 0.62 0.62 6.40 10,668 6/28/13 Monthly 3.31 0.02 2.39 pIMco total return D (04/08/98) Intermediate-term bond pttDx -3.67 0.91 4.37 6.95 5.65 6.45 0.75 0.75 6.70 18,178 6/28/13 Monthly 3.57 0.02 1.55 from a portfolio consisting of taxable ridgeWorth total return bond I (12/30/97) Intermediate-term bond sAMFx -2.50 -0.60 3.79 6.31 5.00 5.58 0.39 0.39 7.30 1,164 6/28/13 Monthly 1.79 0.02 1.76 bond funds or municipal bond funds. pIMco Income D (03/30/07) Multisector bond poNDx -1.39 13.78 12.60 12.40 — 10.33 0.91 0.75 5.40 4,408 6/28/13 Monthly 5.93 0.05 2.97 Federated Adjustable rate secs Instl (12/03/85) short government FEUgx -0.48 0.02 0.71 1.91 2.58 4.81 0.64 0.64 — 803 6/28/13 Monthly 0.70 — 0.56 If you have questions about your Federated short-term Income Instl (07/01/86) short-term bond FstIx -0.54 1.38 2.22 3.54 3.24 5.10 0.84 0.53 1.80 636 6/28/13 Monthly 1.85 0.01 1.33 retirement, Schwab can help. Metropolitan West low Duration bond M (03/31/97)b short-term bond MWlDx -0.25 4.81 4.70 4.35 3.43 4.43 0.58 0.58 2.90 1,238 6/28/13 Monthly 2.63 0.01 1.55 Get answers to questions like: ridgeWorth Us gov sec Ultra-short bd I (04/11/02) Ultrashort bond sIgvx -0.23 0.53 1.24 2.31 2.83 2.81 0.39 0.39 3.50 2,178 6/28/13 Monthly 0.73 0.01 0.62 pIMco Foreign bond (Unhedged) D (04/30/04) World bond pFbDx -4.92 -4.10 4.88 5.25 — 5.55 0.90 0.90 9.60 650 6/28/13 Monthly 3.01 0.02 1.57 Can I afford to retire? tAx-fRee BOnD How are my expenses likely to change? American century Intermtrm tx-Fr bd Inv (03/02/87) Muni National Interm tWtIx -2.51 0.11 3.80 4.75 3.79 5.15 0.47 0.47 8.80 1,957 6/28/13 Monthly 2.51 0.02 1.27 When should I take Social Security? bMo Intermediate tax-Free y (02/01/94) Muni National Interm MItFx -2.76 0.44 4.34 5.54 4.15 4.62 0.70 0.55 5.60 957 6/28/13 Monthly 2.58 0.02 1.67 Northern tax-Exempt (03/31/94) Muni National long NotEx -3.91 -0.46 4.32 5.16 4.13 5.21 0.87 0.47 15.40 1,068 6/24/13 Monthly 2.94 0.03 2.78 at schwab.com/realliferetirement Federated shrt-Interm Dur Muni Instl (09/04/81) Muni National short FsHIx -1.06 0.57 2.39 2.94 2.51 4.46 0.80 0.47 — 483 6/28/13 Monthly 1.65 0.01 1.04 RetIReMent InCOMe Or talk to us about the retirement you pIMco real Income 2029 D (10/30/09) retirement Income porDx -7.98 -6.09 4.47 —— 5.18 0.79 0.79 9.00 8 6/28/13 Monthly 5.91 0.05 1.72 want by calling 888-445-4515. New to the select list this quarter * $50,000 initial minimum investment If an expense waiver was in place during the period, the net expense ratio was used to calculate fund performance. A net expense ratio lower than the gross expense ratio may reflect a cap or contractual waiver of fund expenses. please read the fund prospectus for details on limits or expiration dates for any such waivers. performance quoted is past performance and is no guarantee of future results. current performance may be lower or higher. visit schwab.com for month’s end performance information. Investment value will fluctuate, and shares, when redeemed, may be worth more or less than original cost. For asset class and performance benchmark definitions, please see footnotes on pages 37–43. FALL 2013 • ON INvesTINg please see page 42 for information on items a–f cited above. 45

OIM-FA13-Qrt3-45 research 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 66 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.

how eTFs are selected selection criteria To build the Schwab ETF Select List, Schwab analyzes all From among these eligible funds, one is selected for each eligible ETFs using the quantitative and qualitative selection ETF Select List category on the basis of its low cost of criteria described below. This includes both Schwab ETFs™ ownership, assuming a $5,000 purchase into the ETF is made and ETFs from third-party providers. Schwab accepts no online on schwab.com, held for one year, then sold.2 payments for inclusion of any ETF on this List, and all ETFs Estimated total cost of ownership as an annual percentage of are evaluated using the same criteria. invested assets including: Because the ETFs featured typically seek to track their index net operating expenses as closely as possible (not outperform, as actively-managed bid-ask spreads mutual funds seek to do), the List highlights just one ETF per category. Each ETF that makes the List has earned its spot trade commissions (buy and sell) based upon a combination of qualitative and quantitative Commissions can add significantly to the cost of ownership, variables such as cost of ownership, risk, fund structure and particularly smaller positions with shorter holding periods. fit within a given category rather than outperforming its peers. Schwab does not charge a commission for online trades of ETFs in Schwab ETF OneSource,™† giving them a cost eligibility requirements advantage in the selection process. Investing different To be eligible for the ETF Select List, an ETF must meet amounts, trading more or less frequently, trading through certain minimum requirements to ensure a basic standard brokers with commission structures different from Schwab’s, of liquidity, viability and structural stability among eligible or trading at Schwab through a trading channel like a live ETFs. Eligibility criteria include: representative or automated phone, or through a Schwab assets under management tracking error fee-based service that waives commissions, would affect bid-ask spread trading volume cost of ownership estimates and could favor an ETF other number of competitive market makers than the one selected by Schwab for the List. length of track record 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 Want to learn more about the any ETF provider, including Schwab, has more than one- ETFs listed here? Log on to third of the most favorably evaluated funds on the List, one or more of the second-most favorably evaluated ETFs will schwab.com/ETFSelectList be substituted as necessary to limit that ETF provider’s and click on a ticker symbol. representation. ETFs are evaluated and selected quarterly for the List using quarter-end data.

Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can obtain a prospectus by calling 800-435-4000. Please read the prospectus carefully before investing. 1 charles schwab Investment Advisory, Inc., a registered investment advisor, is an affiliate of charles schwab & co., Inc. 2 the $5,000 investment size is representative of historical schwab independent retail client trading activity. the one-year holding period is an estimate based on industry averages and schwab’s general view regarding the benefits of annual portfolio rebalancing. † conditions Apply: trades in EtFs available through schwab EtF onesource™ (including schwab EtFs™) are available without commissions when placed online in a schwab account. service charges apply for trade orders placed through a broker ($25) or by automated phone ($5). An exchange processing fee applies to sell transactions. certain types of schwab EtF onesource transactions are not eligible for the commission waiver, such as short sells and buys to cover (not including schwab EtFs). schwab reserves the right to change the EtFs we make available without commissions. All EtFs are subject to management fees and expenses. please see pricing guide for additional information. the select list excludes leveraged EtFs, inverse EtFs, EtNs, actively-managed EtFs, muni bond EtFs with underlying holdings subject to AMt, and unmanaged baskets of securities.

46 charLes schwaB • FALL 2013

OIM-FA13-Qrt3-46 exchaNge-TraDeD FUNDs FOR THE QUARTER ENDED JUNE 30, 2013

oNlINE EtF sElEct lIst QUotE gross coMMIs- cAtEgory syMbol FUND NAME INDEx ExpENsEs* sIoN DEscrIptIoN U.s. EQUIty EtFs

Dow Jones U.s. total stock Market † Index covers over 700 largest Us firms which comprise large core scHx schwab U.s. large-cap EtF large cap 0.04% $0 about 80% of the Us market (by capitalization) large growth scHg schwab U.s. large-cap growth EtF Dow Jones U.s. total stock Market 0.07% $0† EtF has diversified exposure to large growth names such large cap growth as Apple, Microsoft, Wal-Mart, pepsico large value scHv schwab U.s. large-cap value EtF Dow Jones U.s. total stock Market 0.07% $0† EtF has diversified exposure to large value names such large cap value as ExxonMobil, gE, IbM, and pfizer Mid core scHM schwab U.s. Mid-cap EtF Dow Jones U.s. Mid-cap total stock 0.07% $0† over 500 holdings providing Us equity exposure to the Market Index mid-cap portion of the broader U.s. stock market Mid growth MDyg spDr s&p 400 Mid cap growth EtF spDr s&p 400 Mid cap growth 0.25% $0† U.s. growth stocks with market caps between $850M and $3.8b selected based on sales growth, earnings growth, & momentum Mid-cap value style index. Main sectors are financials, Mid value voE vanguard Mid-cap value EtF crsp U.s. Mid cap value 0.10% $8.95 industrials, consumer discretionary and utilities small core scHA schwab U.s. small-cap EtF Dow Jones U.s. total stock Market 0.08% $0† Focuses on over 1700 small-cap companies; index small cap excludes the smallest micro-cap stocks small growth slyg spDr s&p 600 s&p 600 small cap growth 0.31% $0† Holds small-cap stocks with growth characteristics and small cap growth EtF market caps ranging from $250M to $1.2b Diversified small-cap value stock exposure; index is small value vbr vanguard small-cap value crsp Us small cap value Index 0.10% $8.95 about 20% mid-caps total stock Market scHb schwab U.s. broad Market EtF Dow Jones U.s. broad stock Market 0.04% $0† Holds over 1500 large to small-cap firms; covers virtually the entire Us 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

† canada included in this index which highlights large and Developed core scHF schwab International Equity EtF FtsE Developed ex U.s. Index 0.09% $0 mid-cap stocks from 20 developed markets Developed stock markets excl. Us and canada. top index Developed growth EFg ishares MscI EAFE growth Index MscI EAFE growth 0.40% $8.95 weights are U.k., Japan and switzerland Developed stock markets excl. Us and canada. Index Developed value EFv ishares MscI EAFE value Index MscI EAFE value 0.40% $8.95 heavy in Japan, U.k., and financial services Developed small scHc schwab International FtsE Developed small cap Ex U.s. 0.20% $0† canada included in this index featuring approximately small-cap Eq EtF liquid Index 1200 small-cap firms from over 20 developed markets Emerging Market stock scHE schwab Emerging Markets Equity EtF FtsE Emerging Index 0.15% $0† large and mid-cap stocks from over 20 emerging markets. Financials are over 25% of the holdings All World ex-Us stock cWI spDr MscI AcWI (ex-Us) MscI AcWI Ex UsA Index 0.34% $0† tracks a cap-weighted index of developed and emerging market countries excluding the Us vanguard total World stock Holds over 4000 stocks spanning the investable global global stock vt Index EtF FtsE global All cap Index 0.19% $8.95 stock markets, including emerging markets Features large and mid-cap stocks from approximately Europe stock vgk vanguard FtsE Europe EtF FtsE Developed Europe Index 0.12% $8.95 20 developed markets. largest sector is financials Features about 800 stocks, approximately 60% from pacific Asia stock vpl vanguard FtsE pacific EtF FtsE Developed Asia pacific Index 0.12% $8.95 Japan; also includes Australia, Hong kong and singapore pacific Asia Includes publicly traded stocks from Australia, ex-Japan stock Epp ishares MscI pacific ex-Japan MscI pacific ex-Japan Index 0.50% $8.95 Hong kong, and singapore Holds 225 stocks traded on the tokyo stock Exchange; lar- Japan stock Nky MAxIs Nikkei 225 Index EtF Nikkei 225 Index 0.53% $8.95 gest sectors are consumer discretionary, industrials and It EtF features over 200 stocks. largest index sectors are china stock gxc spDr s&p china s&p china broad Market Index 0.59% $8.95 financials, technology and energy. New to the select list this quarter

*“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.

FALL 2013 • ON INvesTINg 47

OIM-FA13-Qrt3-47 research

exchaNge-TraDeD FUNDs FOR THE QUARTER ENDED JUNE 30, 2013

oNlINE EtF sElEct lIst QUotE gross coMMIs- cAtEgory syMbol FUND NAME INDEx ExpENsEs* sIoN DEscrIptIoN boND EtFs short term barclays U.s. 1–5 year government/ Invests in U.s. government and investment grade broad Market bsv vanguard short-term bond EtF credit Float Adjusted Index 0.10% $8.95 corporate bonds with durations from one to five years vanguard short-term corp barclays U.s. 1–5 year corporate Holds over 1000 short-term, investment grade short term corporate vcsH bond Index EtF bond Index 0.12% $8.95 U.s. corporate bonds Market vectors short Municipal barclays capital AMt-Free short tracks a market value weighted index of AMt-free short term Muni sMb Index EtF continuous Municipal Index 0.20% $8.95 municipal bonds with nominal maturities of 1–6 years

schwab short-term barclays U.s. 1–3 year treasury † short term treasury scHo U.s. treasury EtF bond Index 0.08% $0 EtF features 33 treasuries which mature by June 2016 Intermediate scHz schwab U.s. Aggregate bond EtF barclays U.s. Aggregate bond Index 0.05% $0† Holds securities that are fixed rate, non-convertible with broad Market least $250 million of outstanding face value. vanguard Interm-term barclays U.s. 5–10 year corporate provides diversified exposure to the intermediate-term Intermediate corporate vcIt corp bond Index EtF bond Index 0.12% $8.95 investment-grade U.s. corporate bond market ishares s&p National AMt-Free standard and poor's National May help avoid AMt bite. Index has a heavy focus on Intermediate Muni MUb Muni bond AMt-Free Muni bond 0.25% $8.95 california munis Intermediate treasury scHr schwab Intermediate-term barclays U.s. 3–10 year treasury 0.10% $0† EtF features 50 treasuries maturing U.s. treasury EtF bond Index between 2016 and 2023 long term barclays U.s. long government/ provides diversified exposure to the long-term, broad Market blv vanguard long-term bond Index EtF credit Float Adjusted Index 0.10% $8.95 investment-grade segment of the U.s. bond market vanguard long-term corp bond Invests in high-quality (investment-grade) corporate bonds; long term corporate vclt Index EtF barclays U.s. 10+ year corp Index 0.12% $8.95 maintains a dollar-weighted average maturity of 10–25 years ishares barclays 20+ year barclays U.s. 20+ year treasury tracks an index of U.s. treasuries with at least 20 years long term treasury tlt treasury bond bond Index 0.15% $8.95 until maturity ® High yield pHb powershares Fundamental rAFI bonds U.s. High yield 1–10 † tracks an index of high-yield, U.s. bonds that are selected based High yield corp bond Index 0.50% $0 on the research Affiliates Fundamental Index® methodology tIps scHp schwab U.s. tIps EtF barclays Us treasury Inflation 0.07% $0† EtF highlights treasury securities which are designed to protected securities — series l adjust for and help protect against inflation Emerging Markets pcy powershares Emerging Mkts Db Emerging Market 0.50% $0† Holds U.s. dollar denominated government bonds issued sovereign Debt UsD liquid balanced by 22 emerging market countries International bWx spDr barclays International barclays global treasury Ex U.s. 0.50% $0† EtF features debt issued by foreign governments: treasury bond non-dollar denominated, investment grade preferred stock pgx powershares preferred bofA Merrill lynch core plus 0.50% $0† Dividends on preferreds may appeal to income seekers; Fixed rate preferred securities top 10 holdings are financial firms sEctor EtFs vanguard consumer MscI U.s. Investable Market Holds stocks that tend to be the most sensitive to economic consumer Discretionary vcr Discretionary EtF consumer Discretionary 25/50 0.14% $8.95 cycles (automotive, apparel, hotels, restaurants, etc.) MscI U.s. Investable Market Holds stocks that tend to be less sensitive to economic cycles consumer staples vDc vanguard consumer staples EtF consumer staples 25/50 0.14% $8.95 (food, beverages, tobacco, nondurable household goods, etc.) MscI U.s. Investable Market Multicapitalization equity in the energy sector; Exxon is Energy vDE vanguard Energy EtF Energy 25/50 Index 0.14% $8.95 over 20% of the portfolio Holds companies that focus on greener and generally renewa- clean Energy pbW powershares WilderHill clean Energy WilderHill clean Energy Index 0.76% $8.95 ble sources of energy; including tesla Motors and First solar Financial xlF Financial select spDr s&p 500 sector / Financials 0.18% $8.95 Diversified portfolio of banks, insurance companies and rEIts MscI U.s. Investable Market Includes companies that provide health care-related services Health care vHt vanguard Health care EtF Health care 25/50 0.14% $8.95 or manufacture health care equipment and supplies MscI U.s. Investable Market Holds companies that produce durable equipment for other Industrials vIs vanguard Industrials EtF Industrials 25/50 0.14% $8.95 firms.t op holdings include gE, United technologies, and 3M MscI U.s. Investable Market Includes companies in a wide range of commodity-related manu- Materials vAW vanguard Materials EtF Materials 25/50 Index 0.14% $8.95 facturing industries (e.g. chemicals, paper, metals, and minerals) MscI U.s. Investable Market sector consists of companies that produce computer technology vgt vanguard Information technology EtF Information technology 25/50 0.14% $8.95 software and hardware, including semiconductors MscI U.s. Investable Market Multicapitalization equity in the telecommunication telecommunications vox vanguard telecom services EtF telecommunication services 25/50 0.14% $8.95 services sector MscI U.s. Investable Market Holds electric, gas and water utility companies as well as Utilities vpU vanguard Utilities EtF Utilities 25/50 Index 0.14% $8.95 independent producers and distributors of power New to the select list this quarter

† conditions Apply: trades in EtFs available through schwab EtF onesource™ (including schwab EtFs™) are available without commissions when placed online in a schwab account. service charges apply for trade orders placed through a broker ($25) or by automated phone ($5). An exchange processing fee applies to sell transactions. certain types of schwab EtF onesource transactions are not eligible for the commission waiver, such as short sells and buys to cover (not including schwab EtFs). schwab reserves the right to change the EtFs we make available without commissions. All EtFs are subject to management fees and expenses. please see pricing guide for additional information. Many fixed-income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks, including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. the lower-rated securities in which some bond funds invest are subject to greater credit risk, default risk and liquidity risk. government bond fund shares are not guaranteed. their price and investment return will fluctuate with market conditions and interest rates. shares, when redeemed, may be worth more or less than their original cost. risks of rEIts are similar to those associated with direct ownership of real estate, such as changes in real-estate values and property taxes, interest rates, cash flow of underlying real-estate assets, supply and demand, and the management skill and creditworthiness of the issuer. since a sector fund is typically not diversified and focuses its investments on companies involved in a specific sector, the fund may involve a greater degree of risk than an investment in other mutual funds with greater diversification. charles schwab Investment Management, Inc., (“csIM”) the investment advisor for the schwab EtFs and an affiliate of schwab, receives fees from the schwab EtFs for investment advisory and fund administration services. the amount of fees csIM receives from the schwab EtFs is not considered in EtF select list selection, nor do the schwab EtFs or any third-party EtF, or any of their affiliates, pay schwab to be included in the EtF select list. schwab EtFs are distributed by sEI Investments Distribution co. (sIDco). sIDco is not affiliated with the charles schwab corporation or any of its affiliates. ©2013 charles schwab & co., Inc. (Member sIpc) All rights reserved. (0813-5442) 48 charLes schwaB • FALL 2013

OIM-FA13-Qrt3-48 exchaNge-TraDeD FUNDs FOR THE QUARTER ENDED JUNE 30, 2013

oNlINE EtF sElEct lIst QUotE gross coMMIs- cAtEgory syMbol FUND NAME INDEx ExpENsEs* sIoN DEscrIptIoN rEAl AssEts

summerHaven Dynamic † 14 futures contracts on precious metals, industrial metals, commodities broad UscI United states commodity Index commodity Index 1.08% $0 energy and agricultural products. Investors will receive k-1s. DbIQ Diversified Agriculture Index Uses futures contracts to access a cornucopia of coffee, sugar, Agriculture DbA powershares Db Agriculture Excess return 0.85% $8.95 livestock, grain, cocoa. Investors will get k-1s at tax time gold sgol EtFs physical swiss gold shares london pM Fix price of gold 0.39% $0† Each share backed by gold bullion held in a swiss vault; provides direct exposure to gold price movements broad precious Metals gltr EtFs physical pM basket shares london pM Fix price of gold, 0.60% $0† EtF is structured as a grantor trust; holds gold, silver, silver, platinum and palladium platinum and palladium DbIQ optimum yield Industrial tracks a proprietary index including aluminum, copper and Industrial Metals Dbb powershares Db base Metals Metals Index Excess return 0.75% $8.95 zinc using futures contracts. Investors will get k-1s at tax time oil Usl United states 12 Month oil West texas Intermediate light, 0.88% $0† Holds futures contracts expiring in 12 consecutive months sweet crude for light, sweet crude. Investors will get k-1s at tax time. broad Energy DbIQ optimum yield Energy Index Holds futures contracts on light sweet crude, heating oil, commodities DbE powershares Db Energy Excess return 0.75% $8.95 brent oil, gasoline and natural gas. Investors will get k-1s real Estate scHH schwab Us 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

† Holdings may include U.s. stocks, ADrs, rEIts, Mlps, closed- Multi-Asset Income cvy guggenheim Multi-Asset Income zacks Multi-Asset Income Index 0.86% $0 end funds and/or canadian royalty trusts; top sector is energy ALteRnAtIVe weIghteD etfs

EQUAl WEIgHtED EtFs

U.s. large standard and poor's 500 † compared to market cap weighted indexes, this EtF has lower Weighted Equal rsp guggenheim s&p 500 Equal Weight Equal Weight 0.40% $0 exposure to the largest companies; Index is rebalanced quarterly FUNDAMENtAl WEIgHtED EtFs U.s. large standard and poor's High Quality Holds stocks ranked highest by s&p for having long-term Weighted Fundamental spHQ powershares s&p 500 High Quality rankings Index 0.49% $8.95 growth and stability in earnings and dividends U.s. small powershares FtsE rAFI Us 1500 small-cap U.s. companies are selected based on the following Weighted Fundamental prFz small-Mid FtsE rAFI Us 1500 small-Mid 0.44% $8.95 fundamental measures: book value, cash flow, sales and dividends International powershares FtsE rAFI Dev Mkts Index is overweight non-U.s. companies with strong fundamen- Weighted Fundamental pxF ex-Us FtsE rAFI Developed Markets ex-U.s. 0.45% $8.95 tals as measured by book value, cash flow, sales and dividends loW volAtIlIty WEIgHtED EtFs ® U.s. large Weighted ® † Holds 100 stocks from the s&p 500 Index with the lowest low volatility splv powershares s&p 500 low volatility s&p 500 low volatility Index 0.25% $0 realized volatility over the past 12 months U.s. small Weighted powershares s&p Midcap low Holds about 80 stocks from the s&p Midcap 400® Index low volatility xMlv volatility portfolio s&p Midcap 400 low volatility Index 0.25% $8.95 with the lowest realized volatility over the past 12 months International Weighted Includes stocks from Europe, Australasia, the Middle and Far low volatility EFAv ishares MscI EAFE Min volatility MscI EAFE Minimum volatility 0.34% $8.95 East; stocks with the lowest volatility have the highest weights New to the 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.

new! ALteRnAtIVe weIghteD etfS We are pleased to introduce 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. here are descriptions of the Alternative weighted etf types that are in this quarter’s etf Select List: • 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.

FALL 2013 • ON INvesTINg 49

OIM-FA13-Qrt3-49 research: Argus reseArch co.

can small caps the argus mODel pOrtFOlIOs

9% 7% 6% 2% 7% 8% continue to - Factor 3: The tech sector dominates small-cap 5% 12% 5% 10% indexes, and companies have been investing in 14% 21% information technology. 4% 16% Outperform? 12% 9% Looking ahead, we believe large caps are

Despite positive returns in recent poised to reemerge as the leading performers, 7% years, small caps could be nearing much in the way they did during the lengthy bull 15% 10% market from 1994 to 2000. Why do we think so? 9% 7% the end of their bull run. 14% For one, global economies are starting to 21% BY John M. eAde 13% improve. The International Monetary Fund 17% 15% 12% estimates an improvement in global economic 11% growth in 2013, led by emerging countries such nvestors were smitten with small capitalization as India and Brazil, and supported by stabilizing BASIC MATERIALS stocks during the latest bull market, and conditions in Europe. Iit’s no wonder why. Returns for small caps On top of that, the US financial sector topped large-cap returns during the most recent finally appears to be improving. We see this International Paper Co - IP - Basic Materials one-, three- and five-year periods, according to in promising pricing trends among insurance Nucor Corp - NUE - Basic Materials Brinker International Inc - EAT - Consumer Discretionary Standard & Poor’s—a trend that extended into companies, stress test results for major banks Staples Inc - SPLS - Consumer Discretionary the first quarter of 2013, as well. and the pick-up in the housing sector. Time Warner Inc - TWX - Consumer Discretionary PepsiCo Inc - PEP - Consumer Staples But can small caps sustain this outperfor- Finally, and perhaps most important, the S&P Chevron Corp - CVX - Energy ® “We believe mance, or should investors consider 500 Index—which tracks 500 large-cap US Enterprise Prods Pntr L - EPD - Energy large caps large-cap stocks in the months ahead? stocks—remains undervalued to near-historic Phillips 66 - PSX - Energy Transocean Ltd - RIG - Energy are poised to To help answer that question, let’s take a lows despite its historic highs based on earnings. BlackStone Group LP - BX - Financial reemerge as look at the three factors that have fueled the As always, we stress diversification. For HCP Inc - HCP - Financial small-cap outperformance in recent years: investors who have been out of the market or KKR & Co LP - KKR - Financial the leading Lazard Ltd - LAZ - Financial - Factor 1: There aren’t as many global small only in large caps, we think it still makes sense State Auto Financial Corp - STFC - Financial performers.” caps as there are global large caps. So, to have 15–25% of their equity holdings invested Eli Lilly & Co - LLY - Healthcare Johnson & Johnson - JNJ - Healthcare despite underperformance in global in small-cap stocks. - Medtronic Inc - MDT - Healthcare markets—particularly in Europe—during Merck & Co Inc - MRK - Healthcare Pfizer Inc - PFE - Healthcare the past three years, small caps on the John M. Eade is President of Argus Research Co. Applied Materials Inc - AMAT - Technology whole were less affected than large caps. Automatic Data Processing Inc - ADP - Technology - Factor 2: Only a small percentage of Cisco Systems Inc - CSCO - Technology DO the research Intel Corp - INTC - Technology small-cap stocks exist in the US financial To see additional Argus Verizon Communications Inc - VZ - Telecommunications sector—a sector that, until recently, had research ratings, log in to Duke Energy Corp - DUK - Utility I PG&E Corp - PCG - Utility underperformed due to the credit crisis. schwab.com/O research. Spectra Energy Corp - SE - Utility

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Schwab and/or affiliates may publish or otherwise express other viewpoints or opinions that also may be different from certain of the viewpoints or opinions expressed in these materials. 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. Past performance is no guarantee of future results. The research is prepared by Argus, independent of Charles Schwab & Co., Inc., and its affiliates (collectively “Schwab”). None of the information constitutes a Small-cap securities are subject to greater volatility than those in other asset categories. 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, Indexes are unmanaged, do not incur management fees, costs or expenses, and cannot be invested in directly. 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% Diversification strategies do not assure a profit and do not protect against losses in declining markets. due to rounding. Data as of May 7, 2013. ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0413-3026) Past performance is no guarantee of future results. (0413-3026)

50 charles schwab • FALL 2013

OIM-FA13-Qrt3-50 fdSW_FA13_50-51_Argus.indd 50 8/6/13 1:41 PM THE ARGUS MODEL PORTFOLIOS Equity Income Growth & Income Mid-Cap Growth

9% 7%9% 7%9% 7% 6% 2% 6% 2% 6% 2% 7% 8%7% 8%7% 8% - Factor 3: e tech sector dominates small-cap 5% 5% 12%5% 12% 12% 5% 5% 5%10% 10% 10% indexes, and companies have been investing in 14% 14% 14% 21% 21% 21% information technology. 4% 4% 4%16% 16% 16% 9% 9% 9% Looking ahead, we believe large caps are12% 12% 12% poised to reemerge as the leading performers, 7% 7% 7% much in the way they did during the lengthy bull 14% 14% 14% 10% 10% 10% market from 1994 to 2000. Why do we think so? 9% 9% 9% 7% 7% 7% 14% 14% 14% For one, global economies are starting to 21% 21% 21% 13% 13% 13% improve. e International Monetary Fund 17% 17% 17% 15% 15% 12% 15%12% 12% estimates an improvement in global economic 11% 11% 11% growth in 2013, led by emerging countries such as India and Brazil, and supported by stabilizing BASIC MATERIALS CONSUMER CONSUMER ENERGY FINANCIAL HEALTHCARE INDUSTRIALS TECHNOLOGY TELE- UTILITY conditions in Europe. DISCRETIONARY STAPLES COMMUNICATIONS On top of that, the US nancial sector

nally appears to be improving. We see this International Paper Co - IP - Basic Materials Weyerhaeuser Co - WY - Basic Materials Ashland Inc - ASH - Basic Materials in promising pricing trends among insurance Nucor Corp - NUE - Basic Materials Cheesecake Factory Inc - CAKE - Consumer Discretionary Vulcan Materials Co (Hldg Co) - VMC - Basic Materials Brinker International Inc - EAT - Consumer Discretionary Coach Inc - COH - Consumer Discretionary Cheesecake Factory Inc - CAKE - Consumer Discretionary companies, stress test results for major banks Staples Inc - SPLS - Consumer Discretionary Walt Disney Co - DIS - Consumer Discretionary Dick’s Sporting Goods Inc - DKS - Consumer Discretionary and the pick-up in the housing sector. Time Warner Inc - TWX - Consumer Discretionary CVS Caremark Corp - CVS - Consumer Staples Dunkin’ Brands Group Inc - DNKN - Consumer Discretionary PepsiCo Inc - PEP - Consumer Staples Procter & Gamble Co - PG - Consumer Staples Goodyear Tire & Rubber Co - GT - Consumer Discretionary Finally, and perhaps most important, the S&P Chevron Corp - CVX - Energy Sysco Corp - SYY - Consumer Staples Pep Boys-Manny Moe & Jack - PBY - Consumer Discretionary ® 500 Index—which tracks 500 large-cap US Enterprise Prods Pntr L - EPD - Energy Halliburton Co - HAL - Energy Coca-Cola Enterprises Inc - CCE - Consumer Staples stocks—remains undervalued to near-historic Phillips 66 - PSX - Energy National Oilwell Varco Inc - NOV - Energy Green Mountain Coffee Roasters - GMCR - Consumer Staples Transocean Ltd - RIG - Energy Occidental Petroleum Corp - OXY - Energy Helmerich & Payne Inc - HP - Energy lows despite its historic highs based on earnings. BlackStone Group LP - BX - Financial American Express Co - AXP - Financial Noble Corp - NE - Energy As always, we stress diversi cation. For HCP Inc - HCP - Financial BlackStone Group LP - BX - Financial Brandywine Realty Trust - BDN - Financial KKR & Co LP - KKR - Financial Metlife Inc - MET - Financial Hartford Finl Servs Grp In - HIG - Financial investors who have been out of the market or Lazard Ltd - LAZ - Financial Suntrust Banks Inc - STI - Financial Kimco Realty Corp - KIM - Financial only in large caps, we think it still makes sense State Auto Financial Corp - STFC - Financial Amgen Inc - AMGN - Healthcare Lazard Ltd - LAZ - Financial to have 15–25% of their equity holdings invested Eli Lilly & Co - LLY - Healthcare Medtronic Inc - MDT - Healthcare Incyte Corp - INCY - Healthcare Johnson & Johnson - JNJ - Healthcare Pfi zer Inc - PFE - Healthcare United Therapeutics Corp - UTHR - Healthcare in small-cap stocks. - Medtronic Inc - MDT - Healthcare Deere & Co - DE - Industrials Vertex Pharmaceuticals Inc - VRTX - Healthcare Merck & Co Inc - MRK - Healthcare General Electric Co - GE - Industrials Zimmer Holdings Inc - ZMH - Healthcare Pfi zer Inc - PFE - Healthcare United Parcel Service Inc - UPS - Industrials Aecom Technology Corp - ACM - Industrials John M. Eade is President of Argus Research Co. Applied Materials Inc - AMAT - Technology United Technologies Corp - UTX - Industrials Parker-Hannifi n Corp - PH - Industrials Automatic Data Processing Inc - ADP - Technology Apple Inc - AAPL - Technology Stanley Black & Decker Inc - SWK - Industrials Cisco Systems Inc - CSCO - Technology International Business Machines - IBM - Technology Applied Materials Inc - AMAT - Technology Intel Corp - INTC - Technology Oracle Corp - ORCL - Technology eBay Inc - EBAY - Technology Verizon Communications Inc - VZ - Telecommunications Qualcomm Inc - QCOM - Technology Fiserv Inc - FISV - Technology Duke Energy Corp - DUK - Utility Verizon Communications Inc - VZ - Telecommunications IHS Inc - IHS - Technology PG&E Corp - PCG - Utility Consolidated Edison Inc - ED - Utility Juniper Networks Inc - JNPR - Technology Spectra Energy Corp - SE - Utility Teco Energy Inc - TE - Utility VeriFone Systems Inc - PAY - Technology Vishay Intertechnology Inc - VSH - Technology Xerox Corp - XRX - Technology 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 Aqua America Inc - WTR - Utility MDU Resources Group Inc - MDU - Utility 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. Past performance is no guarantee of future results. The research is prepared by Argus, independent of Charles Schwab & Co., Inc., and its affi liates (collectively “Schwab”). None of the information constitutes a Small-cap securities are subject to greater volatility than those in other asset categories. 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, Indexes are unmanaged, do not incur management fees, costs or expenses, and cannot be invested in directly. 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% Diversifi cation strategies do not assure a profi t and do not protect against losses in declining markets. due to rounding. Data as of May 7, 2013. ©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0413-3026) Past performance is no guarantee of future results. (0413-3026)

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actionable guidance in today’s Investors increasingly complex investing environment. They want high-quality products Like you and services at a fair price because they Understanding our know that lower expenses can translate into keeping more money invested clients’ needs and in their portfolios. So they set out to desires is at the understand fees and costs clearly—they forefront of our want to know how their broker and business. brokerage are paid, and how those costs could impact their financial goals. And many investors expect access to competitive pricing on products and services from across the industry, not just from the firm they work with. Finally, investors understand that People want to iven Schwab’s 40-year tenure success often comes from working invest—know they in the financial services industry with others. So when it comes to advice, “ G and the millions of clients they want to trust, and to be confident need to invest— we serve, I’m often asked what is on their trust is well-placed. Yet at the same but they also the minds of investors today. Every time, they aren’t comfortable giving over want a clear and individual is different, but I have heard control entirely to someone else, so they reasonable plan some common threads recently. are looking for service that feels like a to help them Anyone who has been investing collaboration of equals. for the last several years has experienced Sound at all like you? I expect it reach their goals one of history’s most devastating does. At Schwab, we strive every day without the fear financial crises and a market crash that to understand investors like you— of losing it all. struck fear in the hearts of even the committed, engaged, optimistic and most seasoned investors. People want to looking for results—in order to deliver the ” invest—know they need to invest—but products and services you’re looking for. they also want a clear and reasonable plan to help them reach their goals without the fear of losing it all. They want the insight that smart thinking can give them—sophisticated Charles R. Schwab market analysis that offers clear, Founder & Chairman

Investing involves risk, including loss of principal. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Each investor needs to review a securities transaction for his or her own particular situation.

52 charLes schwab • FA L L 2 013

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Now there’s an income growth strategy that strives to deliver. Again and again and again.

Introducing the ThomasPartners™ Dividend Growth Strategy

Rigorously focused on and seeking to achieve consistent income and income growth, the ThomasPartners Dividend Growth Strategy has three goals.

1 Monthly income. Provide monthly income whether the market goes up or down. 2 Annual income growth.2IIVHWLQÁDWLRQZLWKDGLYLGHQGSD\RXWLQWHQGHGWRJURZHYHU\\HDU 3 Capital appreciation. Deliver long–term, index-beating total returns.

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Past performance is not indicative of future results; the value of investments and the income derived from them can go down as well as up. Future returns and achievement of stated goals are not guaranteed and a loss of principal may occur. Please refer to ThomasPartners Form ADV, Part 2A, for more information. Diversi cation strategies do not ensure a pro t and do not protect against losses in declining markets. Investments in managed accounts should be considered in view of a larger, more diversi ed investment portfolio. There are risks associated with any investment approach and the ThomasPartners Dividend Growth Strategy has its own set of risks. First, there are the risks associated with investing in dividend-paying stocks, including but not limited to the risk that stocks in the strategy may reduce or stop paying dividends, affecting the strategy’s ability to generate income. Second, investor sentiment could cause dividend-paying equities to fall out of favor or price-earnings multiples to compress. Please discuss these and other potential risks with your Financial Consultant prior to investing. Portfolio management is provided by ThomasPartners, Inc. (“ThomasPartners”), a registered investment advisor and an af liate of Charles Schwab & Co., Inc. (“Schwab”). The ThomasPartners Dividend Growth Strategy is available through managed account programs sponsored by Schwab. There are two versions of the ThomasPartners Dividend Growth Strategy. ThomasPartners Dividend Growth Strategy (K-1 Generating) has direct exposure to master limited partnerships (MLPs) and generates IRS Schedule K-1 tax forms. The other version, ThomasPartners Dividend Growth Strategy (Non-K-1 Generating), uses exchange-traded funds (ETFs) to provide exposure to MLPs and therefore does not generate IRS Schedule K-1 tax forms. Please read Schwab’s applicable disclosure brochure for important information and disclosures. Schwab makes available other equity strategies in its managed account programs that focus on dividend-paying stocks, including strategies that are managed by rms that are unaf liated with Schwab. Because Schwab and ThomasPartners are af liates, Schwab and its af liates generate more combined revenue if you choose ThomasPartners than if you choose an unaf liated manager with a similar strategy. ©2013 ThomasPartners, Inc. All rights reserved. CS18943-19 (0713-4990) ADP75318-00 (07/13)

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