Table of Contents
As filed with the Securities and Exchange Commission on July
26, 2019
File Nos. 033-62470
811-07704
811-07704
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
| Post-Effective Amendment No. 196 | ☒ |
and
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
| Amendment No. 197 | ☒ |
SCHWAB CAPITAL TRUST
(Exact Name of Registrant as Specified in Charter)
211 Main Street
San Francisco, California 94105
(Address of Principal Executive Offices)
(800) 648-5300
(Registrant’s Telephone Number, including Area Code)
Jonathan de St. Paer
211 Main Street
211 Main Street
San Francisco, California 94105
(Name and Address of Agent for Service)
Copies of communications to:
|
Douglas
P. Dick, Esq.
Dechert LLP 1900 K Street, N.W. Washington, DC 20006 |
John
M. Loder, Esq.
Ropes & Gray LLP 800 Boylston Street Boston, MA 02199-3600 |
David J.
Lekich, Esq.
Charles Schwab Investment Management, Inc. 211 Main Street San Francisco, CA 94105 |
It is proposed that this filing will become effective (check
appropriate box):
□ Immediately upon filing
pursuant to paragraph (b)
☒ On July 29, 2019
pursuant to paragraph (b)
□ 60 days after filing
pursuant to paragraph (a)(1)
□ On (date) pursuant
to paragraph (a)(1)
□ 75 days after filing
pursuant to paragraph (a)(2)
□ On (date) pursuant
to paragraph (a)(2) of Rule 485
If appropriate, check
the following box:
□ This post-effective amendment
designates a new effective date for a previously filed post-effective amendment.
Table of Contents
Prospectus
| July
29, 2019
Schwab Funds
®
Schwab
®
Target Index Funds
| Schwab ® Target 2010 Index Fund | SWYAX |
| Schwab ® Target 2015 Index Fund | SWYBX |
| Schwab ® Target 2020 Index Fund | SWYLX |
| Schwab ® Target 2025 Index Fund | SWYDX |
| Schwab ® Target 2030 Index Fund | SWYEX |
| Schwab ® Target 2035 Index Fund | SWYFX |
| Schwab ® Target 2040 Index Fund | SWYGX |
| Schwab ® Target 2045 Index Fund | SWYHX |
| Schwab ® Target 2050 Index Fund | SWYMX |
| Schwab ® Target 2055 Index Fund | SWYJX |
| Schwab ® Target 2060 Index Fund | SWYNX |
New Notice Regarding Shareholder Report
Delivery Options
Beginning on January
1, 2021, paper copies of a fund’s shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports from a fund or from your financial intermediary (such as a bank or broker-dealer). Instead, the
reports will be made available on a fund’s website
www.schwabfunds.com/schwabfunds_prospectus
, and you will be notified by mail each time a report is posted and the mailing will provide a
website link to access the report. You will continue to receive other fund regulatory documents (such as prospectuses or supplements) in paper unless you have elected to receive all fund documents electronically.
If you would like to continue to receive a
fund’s future shareholder reports in paper free of charge after January 1, 2021, you can make that request:
| • | If you invest through Charles Schwab & Co, Inc. (broker-dealer), by calling 1-866-345-5954 and using the unique identifier attached to this mailing; |
| • | If you invest through another financial intermediary (such as a bank or broker-dealer) by contacting them directly; or |
| • | If owned directly through a fund by calling 1-800-407-0256. |
If you already receive shareholder reports
and other fund documents electronically, you will not be affected by this change and you need not take any action.
As with all mutual funds, the Securities and Exchange
Commission (SEC) has not approved these securities or passed on whether the information in this prospectus is adequate and accurate. Anyone who indicates otherwise is committing a federal crime.
Schwab Target Index Funds
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Schwab
®
Target 2010 Index Fund
| Ticker Symbol: | SWYAX |
Investment Objective
The fund seeks to provide capital appreciation and income
consistent with its current asset allocation.
Fund Fees
and Expenses
This table describes the fees and expenses
you may pay if you buy and hold shares of the fund. This table does not reflect any brokerage fees or commissions you may incur when buying or selling fund shares.
| 1 | The total annual fund operating expenses in the fee table may differ from the expense ratios in the fund’s “Financial Highlights” that include only the fund’s direct operating expenses and do not include acquired fund fees and expenses (AFFE), which reflect fees and expenses incurred indirectly by the fund through its investments in the underlying funds during its prior fiscal year. |
| 2 | The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (including AFFE, but excluding taxes and certain non-routine expenses) of the fund to 0.08% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees. |
Example
This example is intended to help you compare
the cost of investing in the fund with the cost of investing in other funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also
assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses (including AFFE) after any expense reduction. The example does not
reflect any brokerage fees or commissions you may incur when buying or selling fund shares. Your actual costs may be higher or lower.
| Expenses on a $10,000 Investment | |||
| 1 Year | 3 Years | 5 Years | 10 Years |
| $8 | $26 | $45 | $103 |
Portfolio Turnover
The fund pays transaction costs, such as
commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when fund shares are held in a taxable account. These
costs, which are not reflected in the annual fund operating expenses or in the example, affect the fund’s performance. During the most recent fiscal year, the fund’s portfolio turnover rate was 30% of the average value of its
portfolio.
Principal Investment Strategies
The fund seeks to achieve its investment objective by
investing primarily in affiliated Schwab exchange-traded funds (ETFs). The fund may also invest in affiliated Schwab Funds and Laudus Funds, and unaffiliated third party ETFs and mutual funds (all such ETFs and mutual funds referred to herein as the
“underlying funds”). The fund has a policy to invest, under normal circumstances, at least 80% of its assets (net assets, including, for this purpose, any borrowings for investment purposes) in underlying funds that are managed to seek
investment returns that track particular market indices. The fund will provide shareholders with at least 60 days’ prior written notice of any change in this investment policy. The fund invests in the underlying funds in accordance with its
target portfolio allocation. These underlying funds invest their assets directly in equity, fixed income, cash and cash equivalents (including money market funds) in accordance with their own investment objectives and policies. The fund is managed
based on the specific retirement date (target date) included in its name and assumes a retirement age of 65. The target date refers to the approximate year an investor in the fund would plan to retire and likely would stop making new investments in
the fund. The fund is designed for an investor who anticipates retiring at or about the target date and plans to withdraw the value of the investor’s account in the fund gradually after retirement. As described below, the adviser will continue
to modify the fund’s target asset allocation for 20 years beyond the target date.
The fund’s target asset allocation
will be adjusted annually based on the adviser’s asset allocation strategy; however, the adviser reserves the right to modify the fund’s target asset allocations from time to time should circumstances warrant a change. In general, the
fund’s allocation to equity securities will decrease and its allocation to fixed income securities will increase as the fund approaches its target date. The fund’s asset allocation as of February 1, 2019 (the most recent annual
adjustment of the fund’s target asset allocations) was approximately 35.9% equity securities, 56.8% fixed income securities, and 7.3% cash and cash equivalents (including money market funds). The fund will continue
Schwab Target 2010 Index Fund | Fund Summary
1
to reduce its allocation to equity securities for 20 years beyond the
fund’s stated target date. At such time, the fund’s asset allocation will remain fixed at approximately 25.0% equity securities, 65.6% fixed income securities, and 9.4% cash and cash equivalents (including money market funds).
In addition to the strategic annual adjustment of the
fund’s target asset allocation, the adviser may adjust the fund’s underlying fund allocations within a particular asset class based on the following considerations, including, but not limited to, market trends, its outlook for a given
market capitalization, and the underlying funds’ performance in various market conditions. Accordingly, the fund’s allocation to a particular underlying fund may increase or decrease throughout the year. Within the equity asset class,
the fund will have exposure to one or more “style classes”. For example, the style classes include domestic large-cap equity, domestic small-cap equity, and international equity. The adviser may adjust the fund’s allocation to a
particular style class based on the following considerations: market trends, its outlook for a given style class, and the style classes’ performance in various market conditions. Accordingly, the fund’s allocation to a particular style
class within the equity asset class may increase or decrease throughout the year.
The fund intends to invest in a combination of underlying
funds; however, the fund may invest directly in equity and fixed income securities and money market securities. For temporary defensive purposes during unusual economic or market conditions or for liquidity purposes, the fund may invest up to 100%
of its assets directly in cash, money market instruments, repurchase agreements and other short-term obligations. When the fund engages in such activities, it may not achieve its investment objective.
Principal Risks
The fund is subject to risks, any of which could cause an
investor to lose money. The fund’s principal risks include:
Asset Allocation Risk.
The
fund is subject to the risk that the selection of the underlying funds and the allocation of the fund’s assets among the various asset classes and market segments may cause the fund to underperform other funds with a similar investment
objective.
Conflicts of Interest Risk.
The investment adviser’s authority to select and substitute underlying funds from a variety of affiliated and unaffiliated mutual funds and ETFs may create a conflict of interest because the fees paid to it and
its affiliates by some underlying funds are higher than the fees paid by other underlying funds. The investment adviser also may have an incentive to select an affiliated underlying fund for other reasons, including to increase assets under
management or to support new investment strategies. In addition, other conflicts of interest may exist where the best interests of the affiliated underlying fund may not be aligned with those of the fund. However, the investment adviser is a
fiduciary to the fund and is legally obligated to act in the fund’s best interests when selecting underlying funds.
Market Risk.
Financial markets
rise and fall in response to a variety of factors, sometimes rapidly and unpredictably. As with any investment whose performance is tied to these markets, the value of an investment in the fund will fluctuate, which means that an investor could lose
money over short or long periods.
ETF Risk.
When the fund invests in an ETF, it will bear a proportionate share of the ETF’s expenses. Therefore, it may be more costly to own an ETF than to own underlying securities directly. In addition, while the risks of
owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF holds, lack of liquidity in the market for an ETF’s shares can result in its value being more volatile than the underlying portfolio of
securities. Although ETFs are listed on national securities exchanges, there can be no assurance that an active trading market for such ETF shares will develop or be maintained. If an active market is not maintained, the fund may experience
difficulty in buying or selling ETF shares. In addition, the market price of ETF shares may deviate, sometimes significantly, from net asset value, particularly during periods of market volatility. Certain ETFs that seek to track the performance of
their benchmark indices may not fully replicate their index and may hold securities not included in the index, which may not produce the intended results.
Direct Investment Risk.
The
fund may invest directly in cash, cash equivalents and equity and fixed-income securities, including money market securities, to maintain its allocations. The fund’s direct investment in these securities is subject to the same or similar risks
as an underlying fund’s investment in the same securities.
Underlying Fund Investment Risk.
Before investing in the fund, investors should assess the risks associated with the underlying funds in which the fund may invest, which include any combination of the risks described below.
| • | Investment Risk. The fund may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective. |
| • | Fixed Income Risk. Interest rates rise and fall over time, which will affect an underlying fund’s yield and share price. A change in a central bank’s monetary policy or economic conditions, among other things, may result in a change in interest rates, which could have sudden and unpredictable effects on the markets and significantly impact the value of debt securities in which the fund invests. A rise in interest rates could cause an underlying fund’s share price to fall. The credit quality of a portfolio investment could also cause an underlying fund’s share price to fall. An underlying fund could lose money if the issuer or guarantor of a portfolio investment or the counterparty to a derivatives contract fails to make timely principal or interest payments or otherwise honor its obligations. Fixed income securities may be paid off earlier or later than expected. Either situation could cause an underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the fund’s yield or share price. Below |
2
Schwab Target 2010 Index Fund | Fund Summary
| investment-grade bonds (junk bonds) involve greater credit risk, are more volatile, involve greater risk of price declines and may be more susceptible to economic downturns than investment-grade securities. | |
| • | Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time. |
| • | Market Capitalization Risk. Securities issued by companies of different market capitalizations tend to go in and out of favor based on market and economic conditions. During a period when securities of a particular market capitalization fall behind other types of investments, an underlying fund’s performance could be impacted. |
| • | Money Market Fund Risk . The fund may invest in underlying money market funds that either seek to maintain a stable $1 net asset value (“stable share price money market funds”) or that have a share price that fluctuates (“variable share price money market funds”). Although an underlying stable share price money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in such a money market fund. Because the share price of an underlying variable share price money market fund will fluctuate, when the fund sells the shares it owns they may be worth more or less than what the fund originally paid for them. In addition, neither type of money market fund is designed to offer capital appreciation. Certain underlying money market funds may impose a fee upon the sale of shares or may temporarily suspend the ability to sell shares if such fund’s liquidity falls below required minimums. |
| • | Foreign Investment Risk. An underlying fund’s investments in securities of foreign issuers involve certain risks that may be greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); the imposition of economic sanctions or other government restrictions; differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may negatively impact the value or liquidity of an underlying fund’s investments, and could impair the underlying fund’s ability to meet its investment objective or invest in accordance with its investment strategy. There is a risk that investments in securities denominated in, and/or receiving revenues in, foreign currencies will decline in value relative to the U.S. dollar. |
| • | Emerging Markets Risk. Emerging market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements and greater risk |
| associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in developed countries. As a result, there may be an increased risk of illiquidity and price volatility associated with an underlying fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar, and, at times, it may be difficult to value such investments. | |
| • | Derivatives Risk. An underlying fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. An underlying fund’s use of derivatives could reduce the underlying fund’s performance, increase volatility, and could cause the underlying fund to lose more than the initial amount invested. In addition, investments in derivatives may involve leverage, which means a small percentage of assets invested in derivatives can have a disproportionately large impact on an underlying fund. However, these risks are less severe when the underlying fund uses derivatives for hedging rather than to enhance the underlying fund’s returns or as a substitute for a position or security. |
| • | Leverage Risk. Certain underlying fund transactions, such as derivatives transactions, short sales, reverse repurchase agreements, and mortgage dollar rolls, may give rise to a form of leverage and may expose an underlying fund to greater risk. Leverage tends to magnify the effect of any decrease or increase in the value of an underlying fund’s portfolio securities, which means even a small amount of leverage can have a disproportionately large impact on the underlying fund. |
| • | Concentration Risk. To the extent that an underlying fund’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector or asset class, the underlying fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more vulnerable to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector or asset class. |
| • | Investment Style Risk. Certain underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Such underlying funds follow these stocks during upturns as well as downturns. Because of their indexing strategy, these underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index. |
| • | Liquidity Risk. An underlying fund may be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or an underlying fund may have to sell them at a loss. |
| • | Portfolio Turnover Risk. Certain of the underlying funds may buy and sell portfolio securities actively. If they do, their portfolio |
Schwab
Target 2010 Index Fund | Fund Summary
3
| turnover rate and transaction costs will rise, which may lower the underlying fund’s performance and may increase the likelihood of capital gains distributions. |
You may experience losses in the fund, including losses
before, at, or after the target date. There is no guarantee that the fund will be able to achieve its objective or provide adequate income at and through your retirement.
For more information on the risks of investing in the fund and
the underlying funds, please see the “Fund Details” section in the prospectus.
Performance
The bar chart below shows how the
fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to those of two broad based indices and a passive composite index based on
the fund’s target allocations. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ
from past performance. For current performance information, please see
www.schwabfunds.com/schwabfunds_prospectus
.
On July 24, 2017, the Investor Share class and Institutional
Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. Accordingly, the performance history of the fund, prior to July 24, 2017, is that of the fund’s former
Institutional Shares.
Annual Total Returns
(%) as of 12/31
Best Quarter:
2.73% Q1 2017
Worst Quarter: (4.16%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 9.47%
Worst Quarter: (4.16%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 9.47%
| Average Annual Total Returns as of 12/31/18 | ||
| 1 Year |
Since
Inception (8/25/16) |
|
| Before taxes | (2.27%) | 2.71% |
| After taxes on distributions | (2.94%) | 2.12% |
| After taxes on distributions and sale of shares | (1.23%) | 1.89% |
| Comparative Indices (reflect no deduction for expenses or taxes) | ||
| Dow Jones U.S. Total Stock Market Index | (5.30%) | 7.95% |
| Bloomberg Barclays US Aggregate Bond Index | 0.01% | 0.20% |
| Target 2010 Passive Composite Index 1 | (2.27%) | 2.82% |
| 1 | The Target 2010 Passive Composite Index is a custom blended index developed by Charles Schwab Investment Management, Inc. based on the Schwab Target 2010 Index Fund’s asset allocation glide schedule and will become more conservative as time elapses. Effective February 1, 2018, the composite is derived using the following portion allocations: 23.4% Dow Jones U.S. Large Cap Total Stock Market Index, 1.5% Dow Jones U.S. Small Cap Total Stock Market Index, 9.8% FTSE Developed ex-US Index (Net), 1.8% Dow Jones U.S. Select REIT Index, 8.6% Bloomberg Barclays US Treasury 1-3 Year Index, 41.4% Bloomberg Barclays US Aggregate Bond Index, 6.4% Bloomberg Barclays US Treasury Inflation Protected Securities (TIPS) Index (Series-L) and 7.2% Bloomberg Barclays US Treasury Bills 1-3 Month Index. The components that make up the composite index may vary over time. The composite index represents target allocations for 2018. Percentages listed may not total to 100% due to rounding. |
The after-tax figures reflect the highest individual
federal income tax rates in effect during the period and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your individual tax situation. In addition, after-tax returns are not relevant if you hold your fund
shares through a tax-deferred arrangement, such as a 401(k) plan, an individual retirement account (IRA) or other tax-advantaged account. In some cases, the return after taxes on distributions and sale of shares may exceed the fund’s other
returns due to an assumed benefit from any losses on a sale of shares at the end of the measurement period.
Investment Adviser
Charles Schwab Investment Management, Inc.
Portfolio Managers
Zifan Tang, Ph.D., CFA,
Senior Portfolio Manager, is responsible for the day-to-day co-management of the fund. She has managed the fund since August 2016.
Patrick Kwok, CFA,
Portfolio
Manager, is responsible for the day-to-day co-management of the fund. He has managed the fund since July 2018.
Purchase and Sale of Fund Shares
The fund is open for business each day that the New York
Stock Exchange (NYSE) is open. If the NYSE is closed due to weather or other extenuating circumstances on a day it would typically be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the fund
reserves the right to treat such day as a business day and accept purchase and redemption orders and calculate its share price as of the normally scheduled close of regular trading on the NYSE for that day.
4
Schwab Target 2010 Index Fund | Fund Summary
Investors may only invest in the fund
through an account at Charles Schwab & Co., Inc. (Schwab) or another financial intermediary. When you place orders to purchase, exchange or redeem fund shares through an account at Schwab or another financial intermediary, you must follow
Schwab’s or the other financial intermediary’s transaction procedures. Shareholders who previously purchased fund shares through the fund’s transfer agent and continue to hold such shares directly through the fund’s transfer
agent may make additional purchases and place exchange and redemption orders through the fund’s transfer agent by contacting the transfer agent by phone or in writing as noted below:
| • | by telephone at 1-800-407-0256; or |
| • | by mail to DST Asset Manager Solutions, Inc., Attn: Schwab Funds, P.O. Box 219647, Kansas City, MO 64121-9647. |
There is no minimum initial investment for the fund.
Tax Information
Dividends and capital gains distributions received from the
fund will generally be taxable as ordinary income or capital gains, unless you are investing through an IRA, 401(k) or other tax-advantaged account.
Payments to Financial Intermediaries
If you purchase shares of the fund through a broker-dealer
or other financial intermediary (such as a bank), the adviser and its related companies may pay the intermediary for the sale of fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or
other financial intermediary and your salesperson to recommend the fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Schwab Target 2010 Index Fund | Fund Summary
5
Schwab
®
Target 2015 Index Fund
| Ticker Symbol: | SWYBX |
Investment Objective
The fund seeks to provide capital appreciation and income
consistent with its current asset allocation.
Fund Fees
and Expenses
This table describes the fees and expenses
you may pay if you buy and hold shares of the fund. This table does not reflect any brokerage fees or commissions you may incur when buying or selling fund shares.
| 1 | The total annual fund operating expenses in the fee table may differ from the expense ratios in the fund’s “Financial Highlights” that include only the fund’s direct operating expenses and do not include acquired fund fees and expenses (AFFE), which reflect fees and expenses incurred indirectly by the fund through its investments in the underlying funds during its prior fiscal year. |
| 2 | The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (including AFFE, but excluding taxes and certain non-routine expenses) of the fund to 0.08% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees. |
Example
This example is intended to help you compare
the cost of investing in the fund with the cost of investing in other funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also
assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses (including AFFE) after any expense reduction. The example does not
reflect any brokerage fees or commissions you may incur when buying or selling fund shares. Your actual costs may be higher or lower.
| Expenses on a $10,000 Investment | |||
| 1 Year | 3 Years | 5 Years | 10 Years |
| $8 | $26 | $45 | $103 |
Portfolio Turnover
The fund pays transaction costs, such as
commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when fund shares are held in a taxable account. These
costs, which are not reflected in the annual fund operating expenses or in the example, affect the fund’s performance. During the most recent fiscal year, the fund’s portfolio turnover rate was 29% of the average value of its
portfolio.
Principal Investment Strategies
The fund seeks to achieve its investment objective by
investing primarily in affiliated Schwab exchange-traded funds (ETFs). The fund may also invest in affiliated Schwab Funds and Laudus Funds, and unaffiliated third party ETFs and mutual funds (all such ETFs and mutual funds referred to herein as the
“underlying funds”). The fund has a policy to invest, under normal circumstances, at least 80% of its assets (net assets, including, for this purpose, any borrowings for investment purposes) in underlying funds that are managed to seek
investment returns that track particular market indices. The fund will provide shareholders with at least 60 days’ prior written notice of any change in this investment policy. The fund invests in the underlying funds in accordance with its
target portfolio allocation. These underlying funds invest their assets directly in equity, fixed income, cash and cash equivalents (including money market funds) in accordance with their own investment objectives and policies. The fund is managed
based on the specific retirement date (target date) included in its name and assumes a retirement age of 65. The target date refers to the approximate year an investor in the fund would plan to retire and likely would stop making new investments in
the fund. The fund is designed for an investor who anticipates retiring at or about the target date and plans to withdraw the value of the investor’s account in the fund gradually after retirement. As described below, the adviser will continue
to modify the fund’s target asset allocation for 20 years beyond the target date.
The fund’s target asset allocation
will be adjusted annually based on the adviser’s asset allocation strategy; however, the adviser reserves the right to modify the fund’s target asset allocations from time to time should circumstances warrant a change. In general, the
fund’s allocation to equity securities will decrease and its allocation to fixed income securities will increase as the fund approaches its target date. The fund’s asset allocation as of February 1, 2019 (the most recent annual
adjustment of the fund’s target asset allocations) was approximately 38.5% equity securities, 54.7% fixed income securities, and 6.8% cash and cash equivalents (including money market funds). The fund will continue
6
Schwab Target 2015 Index Fund | Fund Summary
to reduce its allocation to equity securities for 20 years beyond the
fund’s stated target date. At such time, the fund’s asset allocation will remain fixed at approximately 25.0% equity securities, 65.6% fixed income securities, and 9.4% cash and cash equivalents (including money market funds).
In addition to the strategic annual adjustment of the
fund’s target asset allocation, the adviser may adjust the fund’s underlying fund allocations within a particular asset class based on the following considerations, including, but not limited to, market trends, its outlook for a given
market capitalization, and the underlying funds’ performance in various market conditions. Accordingly, the fund’s allocation to a particular underlying fund may increase or decrease throughout the year. Within the equity asset class,
the fund will have exposure to one or more “style classes”. For example, the style classes include domestic large-cap equity, domestic small-cap equity, and international equity. The adviser may adjust the fund’s allocation to a
particular style class based on the following considerations: market trends, its outlook for a given style class, and the style classes’ performance in various market conditions. Accordingly, the fund’s allocation to a particular style
class within the equity asset class may increase or decrease throughout the year.
The fund intends to invest in a combination of underlying
funds; however, the fund may invest directly in equity and fixed income securities and money market securities. For temporary defensive purposes during unusual economic or market conditions or for liquidity purposes, the fund may invest up to 100%
of its assets directly in cash, money market instruments, repurchase agreements and other short-term obligations. When the fund engages in such activities, it may not achieve its investment objective.
Principal Risks
The fund is subject to risks, any of which could cause an
investor to lose money. The fund’s principal risks include:
Asset Allocation Risk.
The
fund is subject to the risk that the selection of the underlying funds and the allocation of the fund’s assets among the various asset classes and market segments may cause the fund to underperform other funds with a similar investment
objective.
Conflicts of Interest Risk.
The investment adviser’s authority to select and substitute underlying funds from a variety of affiliated and unaffiliated mutual funds and ETFs may create a conflict of interest because the fees paid to it and
its affiliates by some underlying funds are higher than the fees paid by other underlying funds. The investment adviser also may have an incentive to select an affiliated underlying fund for other reasons, including to increase assets under
management or to support new investment strategies. In addition, other conflicts of interest may exist where the best interests of the affiliated underlying fund may not be aligned with those of the fund. However, the investment adviser is a
fiduciary to the fund and is legally obligated to act in the fund’s best interests when selecting underlying funds.
Market Risk.
Financial markets
rise and fall in response to a variety of factors, sometimes rapidly and unpredictably. As with any investment whose performance is tied to these markets, the value of an investment in the fund will fluctuate, which means that an investor could lose
money over short or long periods.
ETF Risk.
When the fund invests in an ETF, it will bear a proportionate share of the ETF’s expenses. Therefore, it may be more costly to own an ETF than to own underlying securities directly. In addition, while the risks of
owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF holds, lack of liquidity in the market for an ETF’s shares can result in its value being more volatile than the underlying portfolio of
securities. Although ETFs are listed on national securities exchanges, there can be no assurance that an active trading market for such ETF shares will develop or be maintained. If an active market is not maintained, the fund may experience
difficulty in buying or selling ETF shares. In addition, the market price of ETF shares may deviate, sometimes significantly, from net asset value, particularly during periods of market volatility. Certain ETFs that seek to track the performance of
their benchmark indices may not fully replicate their index and may hold securities not included in the index, which may not produce the intended results.
Direct Investment Risk.
The
fund may invest directly in cash, cash equivalents and equity and fixed-income securities, including money market securities, to maintain its allocations. The fund’s direct investment in these securities is subject to the same or similar risks
as an underlying fund’s investment in the same securities.
Underlying Fund Investment Risk.
Before investing in the fund, investors should assess the risks associated with the underlying funds in which the fund may invest, which include any combination of the risks described below.
| • | Investment Risk. The fund may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective. |
| • | Fixed Income Risk. Interest rates rise and fall over time, which will affect an underlying fund’s yield and share price. A change in a central bank’s monetary policy or economic conditions, among other things, may result in a change in interest rates, which could have sudden and unpredictable effects on the markets and significantly impact the value of debt securities in which the fund invests. A rise in interest rates could cause an underlying fund’s share price to fall. The credit quality of a portfolio investment could also cause an underlying fund’s share price to fall. An underlying fund could lose money if the issuer or guarantor of a portfolio investment or the counterparty to a derivatives contract fails to make timely principal or interest payments or otherwise honor its obligations. Fixed income securities may be paid off earlier or later than expected. Either situation could cause an underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the fund’s yield or share price. Below |
Schwab
Target 2015 Index Fund | Fund Summary
7
| investment-grade bonds (junk bonds) involve greater credit risk, are more volatile, involve greater risk of price declines and may be more susceptible to economic downturns than investment-grade securities. | |
| • | Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time. |
| • | Market Capitalization Risk. Securities issued by companies of different market capitalizations tend to go in and out of favor based on market and economic conditions. During a period when securities of a particular market capitalization fall behind other types of investments, an underlying fund’s performance could be impacted. |
| • | Money Market Fund Risk . The fund may invest in underlying money market funds that either seek to maintain a stable $1 net asset value (“stable share price money market funds”) or that have a share price that fluctuates (“variable share price money market funds”). Although an underlying stable share price money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in such a money market fund. Because the share price of an underlying variable share price money market fund will fluctuate, when the fund sells the shares it owns they may be worth more or less than what the fund originally paid for them. In addition, neither type of money market fund is designed to offer capital appreciation. Certain underlying money market funds may impose a fee upon the sale of shares or may temporarily suspend the ability to sell shares if such fund’s liquidity falls below required minimums. |
| • | Foreign Investment Risk. An underlying fund’s investments in securities of foreign issuers involve certain risks that may be greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); the imposition of economic sanctions or other government restrictions; differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may negatively impact the value or liquidity of an underlying fund’s investments, and could impair the underlying fund’s ability to meet its investment objective or invest in accordance with its investment strategy. There is a risk that investments in securities denominated in, and/or receiving revenues in, foreign currencies will decline in value relative to the U.S. dollar. |
| • | Emerging Markets Risk. Emerging market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements and greater risk |
| associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in developed countries. As a result, there may be an increased risk of illiquidity and price volatility associated with an underlying fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar, and, at times, it may be difficult to value such investments. | |
| • | Derivatives Risk. An underlying fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. An underlying fund’s use of derivatives could reduce the underlying fund’s performance, increase volatility, and could cause the underlying fund to lose more than the initial amount invested. In addition, investments in derivatives may involve leverage, which means a small percentage of assets invested in derivatives can have a disproportionately large impact on an underlying fund. However, these risks are less severe when the underlying fund uses derivatives for hedging rather than to enhance the underlying fund’s returns or as a substitute for a position or security. |
| • | Leverage Risk. Certain underlying fund transactions, such as derivatives transactions, short sales, reverse repurchase agreements, and mortgage dollar rolls, may give rise to a form of leverage and may expose an underlying fund to greater risk. Leverage tends to magnify the effect of any decrease or increase in the value of an underlying fund’s portfolio securities, which means even a small amount of leverage can have a disproportionately large impact on the underlying fund. |
| • | Concentration Risk. To the extent that an underlying fund’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector or asset class, the underlying fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more vulnerable to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector or asset class. |
| • | Investment Style Risk. Certain underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Such underlying funds follow these stocks during upturns as well as downturns. Because of their indexing strategy, these underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index. |
| • | Liquidity Risk. An underlying fund may be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or an underlying fund may have to sell them at a loss. |
| • | Portfolio Turnover Risk. Certain of the underlying funds may buy and sell portfolio securities actively. If they do, their portfolio |
8
Schwab Target 2015 Index Fund | Fund Summary
| turnover rate and transaction costs will rise, which may lower the underlying fund’s performance and may increase the likelihood of capital gains distributions. |
You may experience losses in the fund, including losses
before, at, or after the target date. There is no guarantee that the fund will be able to achieve its objective or provide adequate income at and through your retirement.
For more information on the risks of investing in the fund and
the underlying funds, please see the “Fund Details” section in the prospectus.
Performance
The bar chart below shows how the
fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to those of two broad based indices and a passive composite index based on
the fund’s target allocations. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ
from past performance. For current performance information, please see
www.schwabfunds.com/schwabfunds_prospectus
.
On July 24, 2017, the Investor Share class and Institutional
Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. Accordingly, the performance history of the fund, prior to July 24, 2017, is that of the fund’s former
Institutional Shares.
Annual Total Returns
(%) as of 12/31
Best Quarter:
2.83% Q1 2017
Worst Quarter: (4.65%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 9.66%
Worst Quarter: (4.65%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 9.66%
| Average Annual Total Returns as of 12/31/18 | ||
| 1 Year |
Since
Inception (8/25/16) |
|
| Before taxes | (2.61%) | 2.77% |
| After taxes on distributions | (3.17%) | 2.18% |
| After taxes on distributions and sale of shares | (1.42%) | 1.93% |
| Comparative Indices (reflect no deduction for expenses or taxes) | ||
| Dow Jones U.S. Total Stock Market Index | (5.30%) | 7.95% |
| Bloomberg Barclays US Aggregate Bond Index | 0.01% | 0.20% |
| Target 2015 Passive Composite Index 1 | (2.50%) | 2.92% |
| 1 | The Target 2015 Passive Composite Index is a custom blended index developed by Charles Schwab Investment Management, Inc. based on the Schwab Target 2015 Index Fund’s asset allocation glide schedule and will become more conservative as time elapses. Effective February 1, 2018, the composite is derived using the following portion allocations: 24.6% Dow Jones U.S. Large Cap Total Stock Market Index, 1.6% Dow Jones U.S. Small Cap Total Stock Market Index, 10.8% FTSE Developed ex-US Index (Net), 2.0% Dow Jones U.S. Select REIT Index, 8.1% Bloomberg Barclays US Treasury 1-3 Year Index, 40.1% Bloomberg Barclays US Aggregate Bond Index, 6.1% Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) and 6.7% Bloomberg Barclays US Treasury Bills 1-3 Month Index. The components that make up the composite index may vary over time. The composite index represents target allocations for 2018. Percentages listed may not total to 100% due to rounding. |
The after-tax figures reflect the highest individual
federal income tax rates in effect during the period and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your individual tax situation. In addition, after-tax returns are not relevant if you hold your fund
shares through a tax-deferred arrangement, such as a 401(k) plan, an individual retirement account (IRA) or other tax-advantaged account. In some cases, the return after taxes on distributions and sale of shares may exceed the fund’s other
returns due to an assumed benefit from any losses on a sale of shares at the end of the measurement period.
Investment Adviser
Charles Schwab Investment Management, Inc.
Portfolio Managers
Zifan Tang, Ph.D., CFA,
Senior Portfolio Manager, is responsible for the day-to-day co-management of the fund. She has managed the fund since August 2016.
Patrick Kwok, CFA,
Portfolio
Manager, is responsible for the day-to-day co-management of the fund. He has managed the fund since July 2018.
Purchase and Sale of Fund Shares
The fund is open for business each day that the New York
Stock Exchange (NYSE) is open. If the NYSE is closed due to weather or other extenuating circumstances on a day it would typically be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the fund
reserves the right to treat such day as a business day and accept purchase and redemption orders and calculate its share price as of the normally scheduled close of regular trading on the NYSE for that day.
Schwab
Target 2015 Index Fund | Fund Summary
9
Investors may only invest in the fund
through an account at Charles Schwab & Co., Inc. (Schwab) or another financial intermediary. When you place orders to purchase, exchange or redeem fund shares through an account at Schwab or another financial intermediary, you must follow
Schwab’s or the other financial intermediary’s transaction procedures. Shareholders who previously purchased fund shares through the fund’s transfer agent and continue to hold such shares directly through the fund’s transfer
agent may make additional purchases and place exchange and redemption orders through the fund’s transfer agent by contacting the transfer agent by phone or in writing as noted below:
| • | by telephone at 1-800-407-0256; or |
| • | by mail to DST Asset Manager Solutions, Inc., Attn: Schwab Funds, P.O. Box 219647, Kansas City, MO 64121-9647. |
There is no minimum initial investment for the fund.
Tax Information
Dividends and capital gains distributions received from the
fund will generally be taxable as ordinary income or capital gains, unless you are investing through an IRA, 401(k) or other tax-advantaged account.
Payments to Financial Intermediaries
If you purchase shares of the fund through a broker-dealer
or other financial intermediary (such as a bank), the adviser and its related companies may pay the intermediary for the sale of fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or
other financial intermediary and your salesperson to recommend the fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
10
Schwab Target 2015 Index Fund | Fund Summary
Schwab
®
Target 2020 Index Fund
| Ticker Symbol: | SWYLX |
Investment Objective
The fund seeks to provide capital appreciation and income
consistent with its current asset allocation.
Fund Fees
and Expenses
This table describes the fees and expenses
you may pay if you buy and hold shares of the fund. This table does not reflect any brokerage fees or commissions you may incur when buying or selling fund shares.
| 1 | The total annual fund operating expenses in the fee table may differ from the expense ratios in the fund’s “Financial Highlights” that include only the fund’s direct operating expenses and do not include acquired fund fees and expenses (AFFE), which reflect fees and expenses incurred indirectly by the fund through its investments in the underlying funds during its prior fiscal year. |
| 2 | The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (including AFFE, but excluding taxes and certain non-routine expenses) of the fund to 0.08% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees. |
Example
This example is intended to help you compare
the cost of investing in the fund with the cost of investing in other funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also
assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses (including AFFE) after any expense reduction. The example does not
reflect any brokerage fees or commissions you may incur when buying or selling fund shares. Your actual costs may be higher or lower.
| Expenses on a $10,000 Investment | |||
| 1 Year | 3 Years | 5 Years | 10 Years |
| $8 | $26 | $45 | $103 |
Portfolio Turnover
The fund pays transaction costs, such as
commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when fund shares are held in a taxable account. These
costs, which are not reflected in the annual fund operating expenses or in the example, affect the fund’s performance. During the most recent fiscal year, the fund’s portfolio turnover rate was 13% of the average value of its
portfolio.
Principal Investment Strategies
The fund seeks to achieve its investment objective by
investing primarily in affiliated Schwab exchange-traded funds (ETFs). The fund may also invest in affiliated Schwab Funds and Laudus Funds, and unaffiliated third party ETFs and mutual funds (all such ETFs and mutual funds referred to herein as the
“underlying funds”). The fund has a policy to invest, under normal circumstances, at least 80% of its assets (net assets, including, for this purpose, any borrowings for investment purposes) in underlying funds that are managed to seek
investment returns that track particular market indices. The fund will provide shareholders with at least 60 days’ prior written notice of any change in this investment policy. The fund invests in the underlying funds in accordance with its
target portfolio allocation. These underlying funds invest their assets directly in equity, fixed income, cash and cash equivalents (including money market funds) in accordance with their own investment objectives and policies. The fund is managed
based on the specific retirement date (target date) included in its name and assumes a retirement age of 65. The target date refers to the approximate year an investor in the fund would plan to retire and likely would stop making new investments in
the fund. The fund is designed for an investor who anticipates retiring at or about the target date and plans to withdraw the value of the investor’s account in the fund gradually after retirement. As described below, the adviser will continue
to modify the fund’s target asset allocation for 20 years beyond the target date.
The fund’s target asset allocation
will be adjusted annually based on the adviser’s asset allocation strategy; however, the adviser reserves the right to modify the fund’s target asset allocations from time to time should circumstances warrant a change. In general, the
fund’s allocation to equity securities will decrease and its allocation to fixed income securities will increase as the fund approaches its target date. The fund’s asset allocation as of February 1, 2019 (the most recent annual
adjustment of the fund’s target asset allocations) was approximately 43.3% equity securities, 50.6% fixed income securities, and 6.1% cash and cash equivalents (including money market funds). At the stated target
Schwab Target 2020 Index Fund | Fund Summary
11
date, the fund’s allocation will be approximately 40.0% equity
securities, 53.5% fixed income securities, and 6.5% cash and cash equivalents (including money market funds). The fund will continue to reduce its allocation to equity securities for 20 years beyond the fund’s stated target date. At such
time, the fund’s asset allocation will remain fixed at approximately 25.0% equity securities, 65.6% fixed income securities, and 9.4% cash and cash equivalents (including money market funds).
In addition to the strategic annual adjustment of the
fund’s target asset allocation, the adviser may adjust the fund’s underlying fund allocations within a particular asset class based on the following considerations, including, but not limited to, market trends, its outlook for a given
market capitalization, and the underlying funds’ performance in various market conditions. Accordingly, the fund’s allocation to a particular underlying fund may increase or decrease throughout the year. Within the equity asset class,
the fund will have exposure to one or more “style classes”. For example, the style classes include domestic large-cap equity, domestic small-cap equity, and international equity. The adviser may adjust the fund’s allocation to a
particular style class based on the following considerations: market trends, its outlook for a given style class, and the style classes’ performance in various market conditions. Accordingly, the fund’s allocation to a particular style
class within the equity asset class may increase or decrease throughout the year.
The fund intends to invest in a combination of underlying
funds; however, the fund may invest directly in equity and fixed income securities and money market securities. For temporary defensive purposes during unusual economic or market conditions or for liquidity purposes, the fund may invest up to 100%
of its assets directly in cash, money market instruments, repurchase agreements and other short-term obligations. When the fund engages in such activities, it may not achieve its investment objective.
Principal Risks
The fund is subject to risks, any of which could cause an
investor to lose money. The fund’s principal risks include:
Asset Allocation Risk.
The
fund is subject to the risk that the selection of the underlying funds and the allocation of the fund’s assets among the various asset classes and market segments may cause the fund to underperform other funds with a similar investment
objective.
Conflicts of Interest Risk.
The investment adviser’s authority to select and substitute underlying funds from a variety of affiliated and unaffiliated mutual funds and ETFs may create a conflict of interest because the fees paid to it and
its affiliates by some underlying funds are higher than the fees paid by other underlying funds. The investment adviser also may have an incentive to select an affiliated underlying fund for other reasons, including to increase assets under
management or to support new investment strategies. In addition, other conflicts of interest may exist where the best interests of the affiliated underlying fund may not be
aligned with those of the fund. However, the investment adviser is a
fiduciary to the fund and is legally obligated to act in the fund’s best interests when selecting underlying funds.
Market Risk.
Financial markets
rise and fall in response to a variety of factors, sometimes rapidly and unpredictably. As with any investment whose performance is tied to these markets, the value of an investment in the fund will fluctuate, which means that an investor could lose
money over short or long periods.
ETF Risk.
When the fund invests in an ETF, it will bear a proportionate share of the ETF’s expenses. Therefore, it may be more costly to own an ETF than to own underlying securities directly. In addition, while the risks of
owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF holds, lack of liquidity in the market for an ETF’s shares can result in its value being more volatile than the underlying portfolio of
securities. Although ETFs are listed on national securities exchanges, there can be no assurance that an active trading market for such ETF shares will develop or be maintained. If an active market is not maintained, the fund may experience
difficulty in buying or selling ETF shares. In addition, the market price of ETF shares may deviate, sometimes significantly, from net asset value, particularly during periods of market volatility. Certain ETFs that seek to track the performance of
their benchmark indices may not fully replicate their index and may hold securities not included in the index, which may not produce the intended results.
Direct Investment Risk.
The
fund may invest directly in cash, cash equivalents and equity and fixed-income securities, including money market securities, to maintain its allocations. The fund’s direct investment in these securities is subject to the same or similar risks
as an underlying fund’s investment in the same securities.
Underlying Fund Investment Risk.
Before investing in the fund, investors should assess the risks associated with the underlying funds in which the fund may invest, which include any combination of the risks described below.
| • | Investment Risk. The fund may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective. |
| • | Fixed Income Risk. Interest rates rise and fall over time, which will affect an underlying fund’s yield and share price. A change in a central bank’s monetary policy or economic conditions, among other things, may result in a change in interest rates, which could have sudden and unpredictable effects on the markets and significantly impact the value of debt securities in which the fund invests. A rise in interest rates could cause an underlying fund’s share price to fall. The credit quality of a portfolio investment could also cause an underlying fund’s share price to fall. An underlying fund could lose money if the issuer or guarantor of a portfolio investment or the counterparty to a derivatives contract fails to make timely principal or interest payments or otherwise honor its obligations. Fixed |
12
Schwab Target 2020 Index Fund | Fund Summary
| income securities may be paid off earlier or later than expected. Either situation could cause an underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the fund’s yield or share price. Below investment-grade bonds (junk bonds) involve greater credit risk, are more volatile, involve greater risk of price declines and may be more susceptible to economic downturns than investment-grade securities. | |
| • | Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time. |
| • | Market Capitalization Risk. Securities issued by companies of different market capitalizations tend to go in and out of favor based on market and economic conditions. During a period when securities of a particular market capitalization fall behind other types of investments, an underlying fund’s performance could be impacted. |
| • | Money Market Fund Risk . The fund may invest in underlying money market funds that either seek to maintain a stable $1 net asset value (“stable share price money market funds”) or that have a share price that fluctuates (“variable share price money market funds”). Although an underlying stable share price money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in such a money market fund. Because the share price of an underlying variable share price money market fund will fluctuate, when the fund sells the shares it owns they may be worth more or less than what the fund originally paid for them. In addition, neither type of money market fund is designed to offer capital appreciation. Certain underlying money market funds may impose a fee upon the sale of shares or may temporarily suspend the ability to sell shares if such fund’s liquidity falls below required minimums. |
| • | Foreign Investment Risk. An underlying fund’s investments in securities of foreign issuers involve certain risks that may be greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); the imposition of economic sanctions or other government restrictions; differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may negatively impact the value or liquidity of an underlying fund’s investments, and could impair the underlying fund’s ability to meet its investment objective or invest in accordance with its investment strategy. There is a risk that investments in securities denominated in, and/or receiving revenues in, foreign currencies will decline in value relative to the U.S. dollar. |
| • | Emerging Markets Risk. Emerging market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements and greater risk associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in developed countries. As a result, there may be an increased risk of illiquidity and price volatility associated with an underlying fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar, and, at times, it may be difficult to value such investments. |
| • | Derivatives Risk. An underlying fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. An underlying fund’s use of derivatives could reduce the underlying fund’s performance, increase volatility, and could cause the underlying fund to lose more than the initial amount invested. In addition, investments in derivatives may involve leverage, which means a small percentage of assets invested in derivatives can have a disproportionately large impact on an underlying fund. However, these risks are less severe when the underlying fund uses derivatives for hedging rather than to enhance the underlying fund’s returns or as a substitute for a position or security. |
| • | Leverage Risk. Certain underlying fund transactions, such as derivatives transactions, short sales, reverse repurchase agreements, and mortgage dollar rolls, may give rise to a form of leverage and may expose an underlying fund to greater risk. Leverage tends to magnify the effect of any decrease or increase in the value of an underlying fund’s portfolio securities, which means even a small amount of leverage can have a disproportionately large impact on the underlying fund. |
| • | Concentration Risk. To the extent that an underlying fund’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector or asset class, the underlying fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more vulnerable to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector or asset class. |
| • | Investment Style Risk. Certain underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Such underlying funds follow these stocks during upturns as well as downturns. Because of their indexing strategy, these underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index. |
Schwab
Target 2020 Index Fund | Fund Summary
13
| • | Liquidity Risk. An underlying fund may be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or an underlying fund may have to sell them at a loss. |
| • | Portfolio Turnover Risk. Certain of the underlying funds may buy and sell portfolio securities actively. If they do, their portfolio turnover rate and transaction costs will rise, which may lower the underlying fund’s performance and may increase the likelihood of capital gains distributions. |
You may experience losses in the fund, including losses
before, at, or after the target date. There is no guarantee that the fund will be able to achieve its objective or provide adequate income at and through your retirement.
For more information on the risks of investing in the fund and
the underlying funds, please see the “Fund Details” section in the prospectus.
Performance
The bar chart below shows how the
fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to those of two broad based indices and a passive composite index based on
the fund’s target allocations. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ
from past performance. For current performance information, please see
www.schwabfunds.com/schwabfunds_prospectus
.
On July 24, 2017, the Investor Share class and Institutional
Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. Accordingly, the performance history of the fund, prior to July 24, 2017, is that of the fund’s former
Institutional Shares.
Annual Total Returns
(%) as of 12/31
Best Quarter:
3.62% Q1 2017
Worst Quarter: (5.58%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 10.45%
Worst Quarter: (5.58%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 10.45%
| Average Annual Total Returns as of 12/31/18 | ||
| 1 Year |
Since
Inception (8/25/16) |
|
| Before taxes | (3.09%) | 3.62% |
| After taxes on distributions | (3.81%) | 3.02% |
| After taxes on distributions and sale of shares | (1.67%) | 2.60% |
| Comparative Indices (reflect no deduction for expenses or taxes) | ||
| Dow Jones U.S. Total Stock Market Index | (5.30%) | 7.95% |
| Bloomberg Barclays US Aggregate Bond Index | 0.01% | 0.20% |
| Target 2020 Passive Composite Index 1 | (3.05%) | 3.71% |
| 1 | The Target 2020 Passive Composite Index is a custom blended index developed by Charles Schwab Investment Management, Inc. based on the Schwab Target 2020 Index Fund’s asset allocation glide schedule and will become more conservative as time elapses. Effective February 1, 2018, the composite is derived using the following portion allocations: 28.1% Dow Jones U.S. Large Cap Total Stock Market Index, 2.0% Dow Jones U.S. Small Cap Total Stock Market Index, 12.7% FTSE Developed ex-US Index (Net), 1.2% FTSE Emerging Index (Net), 2.3% Dow Jones U.S. Select REIT Index, 6.1% Bloomberg Barclays US Treasury 1-3 Year Index, 37.7% Bloomberg Barclays US Aggregate Bond Index, 4.2% Bloomberg Barclays US Treasury Inflation Protected Securities (TIPS) Index (Series-L) and 5.7% Bloomberg Barclays US Treasury Bills 1-3 Month Index. The components that make up the composite index may vary over time. The composite index represents target allocations for 2018. Percentages listed may not total to 100% due to rounding. |
The after-tax figures
reflect the highest individual federal income tax rates in effect during the period and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your individual tax situation. In addition, after-tax returns are not
relevant if you hold your fund shares through a tax-deferred arrangement, such as a 401(k) plan, an individual retirement account (IRA) or other tax-advantaged account. In some cases, the return after taxes on distributions and sale of shares may
exceed the fund’s other returns due to an assumed benefit from any losses on a sale of shares at the end of the measurement period.
Investment Adviser
Charles Schwab Investment Management, Inc.
Portfolio Managers
Zifan Tang, Ph.D., CFA,
Senior Portfolio Manager, is responsible for the day-to-day co-management of the fund. She has managed the fund since August 2016.
Patrick Kwok, CFA,
Portfolio
Manager, is responsible for the day-to-day co-management of the fund. He has managed the fund since July 2018.
Purchase and Sale of Fund Shares
The fund is open for business each day that the New York
Stock Exchange (NYSE) is open. If the NYSE is closed due to weather or other extenuating circumstances on a day it would typically be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the fund
reserves the right to treat such day as a business day and accept purchase and redemption orders and calculate its share price as of the normally scheduled close of regular trading on the NYSE for that day.
14
Schwab Target 2020 Index Fund | Fund Summary
Investors may only invest in the fund
through an account at Charles Schwab & Co., Inc. (Schwab) or another financial intermediary. When you place orders to purchase, exchange or redeem fund shares through an account at Schwab or another financial intermediary, you must follow
Schwab’s or the other financial intermediary’s transaction procedures. Shareholders who previously purchased fund shares through the fund’s transfer agent and continue to hold such shares directly through the fund’s transfer
agent may make additional purchases and place exchange and redemption orders through the fund’s transfer agent by contacting the transfer agent by phone or in writing as noted below:
| • | by telephone at 1-800-407-0256; or |
| • | by mail to DST Asset Manager Solutions, Inc., Attn: Schwab Funds, P.O. Box 219647, Kansas City, MO 64121-9647. |
There is no minimum initial investment for the fund.
Tax Information
Dividends and capital gains distributions received from the
fund will generally be taxable as ordinary income or capital gains, unless you are investing through an IRA, 401(k) or other tax-advantaged account.
Payments to Financial Intermediaries
If you purchase shares of the fund through a broker-dealer
or other financial intermediary (such as a bank), the adviser and its related companies may pay the intermediary for the sale of fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or
other financial intermediary and your salesperson to recommend the fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Schwab Target 2020 Index Fund | Fund Summary
15
Schwab
®
Target 2025 Index Fund
| Ticker Symbol: | SWYDX |
Investment Objective
The fund seeks to provide capital appreciation and income
consistent with its current asset allocation.
Fund Fees
and Expenses
This table describes the fees and expenses
you may pay if you buy and hold shares of the fund. This table does not reflect any brokerage fees or commissions you may incur when buying or selling fund shares.
| 1 | The total annual fund operating expenses in the fee table may differ from the expense ratios in the fund’s “Financial Highlights” that include only the fund’s direct operating expenses and do not include acquired fund fees and expenses (AFFE), which reflect fees and expenses incurred indirectly by the fund through its investments in the underlying funds during its prior fiscal year. |
| 2 | The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (including AFFE, but excluding taxes and certain non-routine expenses) of the fund to 0.08% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees. |
Example
This example is intended to help you compare
the cost of investing in the fund with the cost of investing in other funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also
assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses (including AFFE) after any expense reduction. The example does not
reflect any brokerage fees or commissions you may incur when buying or selling fund shares. Your actual costs may be higher or lower.
| Expenses on a $10,000 Investment | |||
| 1 Year | 3 Years | 5 Years | 10 Years |
| $8 | $26 | $45 | $103 |
Portfolio Turnover
The fund pays transaction costs, such as
commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when fund shares are held in a taxable account. These
costs, which are not reflected in the annual fund operating expenses or in the example, affect the fund’s performance. During the most recent fiscal year, the fund’s portfolio turnover rate was 13% of the average value of its
portfolio.
Principal Investment Strategies
The fund seeks to achieve its investment objective by
investing primarily in affiliated Schwab exchange-traded funds (ETFs). The fund may also invest in affiliated Schwab Funds and Laudus Funds, and unaffiliated third party ETFs and mutual funds (all such ETFs and mutual funds referred to herein as the
“underlying funds”). The fund has a policy to invest, under normal circumstances, at least 80% of its assets (net assets, including, for this purpose, any borrowings for investment purposes) in underlying funds that are managed to seek
investment returns that track particular market indices. The fund will provide shareholders with at least 60 days’ prior written notice of any change in this investment policy. The fund invests in the underlying funds in accordance with its
target portfolio allocation. These underlying funds invest their assets directly in equity, fixed income, cash and cash equivalents (including money market funds) in accordance with their own investment objectives and policies. The fund is managed
based on the specific retirement date (target date) included in its name and assumes a retirement age of 65. The target date refers to the approximate year an investor in the fund would plan to retire and likely would stop making new investments in
the fund. The fund is designed for an investor who anticipates retiring at or about the target date and plans to withdraw the value of the investor’s account in the fund gradually after retirement. As described below, the adviser will continue
to modify the fund’s target asset allocation for 20 years beyond the target date.
The fund’s target asset allocation
will be adjusted annually based on the adviser’s asset allocation strategy; however, the adviser reserves the right to modify the fund’s target asset allocations from time to time should circumstances warrant a change. In general, the
fund’s allocation to equity securities will decrease and its allocation to fixed income securities will increase as the fund approaches its target date. The fund’s asset allocation as of February 1, 2019 (the most recent annual
adjustment of the fund’s target asset allocations) was approximately 56.8% equity securities, 38.7% fixed income securities, and 4.4% cash and cash equivalents (including money market funds). At the stated target
16
Schwab Target 2025 Index Fund | Fund Summary
date, the fund’s allocation will be approximately 40.0% equity
securities, 53.5% fixed income securities, and 6.5% cash and cash equivalents (including money market funds). The fund will continue to reduce its allocation to equity securities for 20 years beyond the fund’s stated target date. At such
time, the fund’s asset allocation will remain fixed at approximately 25.0% equity securities, 65.6% fixed income securities, and 9.4% cash and cash equivalents (including money market funds).
In addition to the strategic annual adjustment of the
fund’s target asset allocation, the adviser may adjust the fund’s underlying fund allocations within a particular asset class based on the following considerations, including, but not limited to, market trends, its outlook for a given
market capitalization, and the underlying funds’ performance in various market conditions. Accordingly, the fund’s allocation to a particular underlying fund may increase or decrease throughout the year. Within the equity asset class,
the fund will have exposure to one or more “style classes”. For example, the style classes include domestic large-cap equity, domestic small-cap equity, and international equity. The adviser may adjust the fund’s allocation to a
particular style class based on the following considerations: market trends, its outlook for a given style class, and the style classes’ performance in various market conditions. Accordingly, the fund’s allocation to a particular style
class within the equity asset class may increase or decrease throughout the year.
The fund intends to invest in a combination of underlying
funds; however, the fund may invest directly in equity and fixed income securities and money market securities. For temporary defensive purposes during unusual economic or market conditions or for liquidity purposes, the fund may invest up to 100%
of its assets directly in cash, money market instruments, repurchase agreements and other short-term obligations. When the fund engages in such activities, it may not achieve its investment objective.
Principal Risks
The fund is subject to risks, any of which could cause an
investor to lose money. The fund’s principal risks include:
Asset Allocation Risk.
The
fund is subject to the risk that the selection of the underlying funds and the allocation of the fund’s assets among the various asset classes and market segments may cause the fund to underperform other funds with a similar investment
objective.
Conflicts of Interest Risk.
The investment adviser’s authority to select and substitute underlying funds from a variety of affiliated and unaffiliated mutual funds and ETFs may create a conflict of interest because the fees paid to it and
its affiliates by some underlying funds are higher than the fees paid by other underlying funds. The investment adviser also may have an incentive to select an affiliated underlying fund for other reasons, including to increase assets under
management or to support new investment strategies. In addition, other conflicts of interest may exist where the best interests of the affiliated underlying fund may not be
aligned with those of the fund. However, the investment adviser is a
fiduciary to the fund and is legally obligated to act in the fund’s best interests when selecting underlying funds.
Market Risk.
Financial markets
rise and fall in response to a variety of factors, sometimes rapidly and unpredictably. As with any investment whose performance is tied to these markets, the value of an investment in the fund will fluctuate, which means that an investor could lose
money over short or long periods.
ETF Risk.
When the fund invests in an ETF, it will bear a proportionate share of the ETF’s expenses. Therefore, it may be more costly to own an ETF than to own underlying securities directly. In addition, while the risks of
owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF holds, lack of liquidity in the market for an ETF’s shares can result in its value being more volatile than the underlying portfolio of
securities. Although ETFs are listed on national securities exchanges, there can be no assurance that an active trading market for such ETF shares will develop or be maintained. If an active market is not maintained, the fund may experience
difficulty in buying or selling ETF shares. In addition, the market price of ETF shares may deviate, sometimes significantly, from net asset value, particularly during periods of market volatility. Certain ETFs that seek to track the performance of
their benchmark indices may not fully replicate their index and may hold securities not included in the index, which may not produce the intended results.
Direct Investment Risk.
The
fund may invest directly in cash, cash equivalents and equity and fixed-income securities, including money market securities, to maintain its allocations. The fund’s direct investment in these securities is subject to the same or similar risks
as an underlying fund’s investment in the same securities.
Underlying Fund Investment Risk.
Before investing in the fund, investors should assess the risks associated with the underlying funds in which the fund may invest, which include any combination of the risks described below.
| • | Investment Risk. The fund may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective. |
| • | Fixed Income Risk. Interest rates rise and fall over time, which will affect an underlying fund’s yield and share price. A change in a central bank’s monetary policy or economic conditions, among other things, may result in a change in interest rates, which could have sudden and unpredictable effects on the markets and significantly impact the value of debt securities in which the fund invests. A rise in interest rates could cause an underlying fund’s share price to fall. The credit quality of a portfolio investment could also cause an underlying fund’s share price to fall. An underlying fund could lose money if the issuer or guarantor of a portfolio investment or the counterparty to a derivatives contract fails to make timely principal or interest payments or otherwise honor its obligations. Fixed |
Schwab
Target 2025 Index Fund | Fund Summary
17
| income securities may be paid off earlier or later than expected. Either situation could cause an underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the fund’s yield or share price. Below investment-grade bonds (junk bonds) involve greater credit risk, are more volatile, involve greater risk of price declines and may be more susceptible to economic downturns than investment-grade securities. | |
| • | Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time. |
| • | Market Capitalization Risk. Securities issued by companies of different market capitalizations tend to go in and out of favor based on market and economic conditions. During a period when securities of a particular market capitalization fall behind other types of investments, an underlying fund’s performance could be impacted. |
| • | Money Market Fund Risk . The fund may invest in underlying money market funds that either seek to maintain a stable $1 net asset value (“stable share price money market funds”) or that have a share price that fluctuates (“variable share price money market funds”). Although an underlying stable share price money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in such a money market fund. Because the share price of an underlying variable share price money market fund will fluctuate, when the fund sells the shares it owns they may be worth more or less than what the fund originally paid for them. In addition, neither type of money market fund is designed to offer capital appreciation. Certain underlying money market funds may impose a fee upon the sale of shares or may temporarily suspend the ability to sell shares if such fund’s liquidity falls below required minimums. |
| • | Foreign Investment Risk. An underlying fund’s investments in securities of foreign issuers involve certain risks that may be greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); the imposition of economic sanctions or other government restrictions; differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may negatively impact the value or liquidity of an underlying fund’s investments, and could impair the underlying fund’s ability to meet its investment objective or invest in accordance with its investment strategy. There is a risk that investments in securities denominated in, and/or receiving revenues in, foreign currencies will decline in value relative to the U.S. dollar. |
| • | Emerging Markets Risk. Emerging market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements and greater risk associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in developed countries. As a result, there may be an increased risk of illiquidity and price volatility associated with an underlying fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar, and, at times, it may be difficult to value such investments. |
| • | Derivatives Risk. An underlying fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. An underlying fund’s use of derivatives could reduce the underlying fund’s performance, increase volatility, and could cause the underlying fund to lose more than the initial amount invested. In addition, investments in derivatives may involve leverage, which means a small percentage of assets invested in derivatives can have a disproportionately large impact on an underlying fund. However, these risks are less severe when the underlying fund uses derivatives for hedging rather than to enhance the underlying fund’s returns or as a substitute for a position or security. |
| • | Leverage Risk. Certain underlying fund transactions, such as derivatives transactions, short sales, reverse repurchase agreements, and mortgage dollar rolls, may give rise to a form of leverage and may expose an underlying fund to greater risk. Leverage tends to magnify the effect of any decrease or increase in the value of an underlying fund’s portfolio securities, which means even a small amount of leverage can have a disproportionately large impact on the underlying fund. |
| • | Concentration Risk. To the extent that an underlying fund’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector or asset class, the underlying fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more vulnerable to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector or asset class. |
| • | Investment Style Risk. Certain underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Such underlying funds follow these stocks during upturns as well as downturns. Because of their indexing strategy, these underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index. |
18
Schwab Target 2025 Index Fund | Fund Summary
| • | Liquidity Risk. An underlying fund may be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or an underlying fund may have to sell them at a loss. |
| • | Portfolio Turnover Risk. Certain of the underlying funds may buy and sell portfolio securities actively. If they do, their portfolio turnover rate and transaction costs will rise, which may lower the underlying fund’s performance and may increase the likelihood of capital gains distributions. |
You may experience losses in the fund, including losses
before, at, or after the target date. There is no guarantee that the fund will be able to achieve its objective or provide adequate income at and through your retirement.
For more information on the risks of investing in the fund and
the underlying funds, please see the “Fund Details” section in the prospectus.
Performance
The bar chart below shows how the
fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to those of two broad based indices and a passive composite index based on
the fund’s target allocations. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ
from past performance. For current performance information, please see
www.schwabfunds.com/schwabfunds_prospectus
.
On July 24, 2017, the Investor Share class and Institutional
Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. Accordingly, the performance history of the fund, prior to July 24, 2017, is that of the fund’s former
Institutional Shares.
Annual Total Returns
(%) as of 12/31
Best Quarter:
4.21% Q1 2017
Worst Quarter: (7.25%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 12.03%
Worst Quarter: (7.25%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 12.03%
| Average Annual Total Returns as of 12/31/18 | ||
| 1 Year |
Since
Inception (8/25/16) |
|
| Before taxes | (4.29%) | 4.24% |
| After taxes on distributions | (4.93%) | 3.66% |
| After taxes on distributions and sale of shares | (2.33%) | 3.12% |
| Comparative Indices (reflect no deduction for expenses or taxes) | ||
| Dow Jones U.S. Total Stock Market Index | (5.30%) | 7.95% |
| Bloomberg Barclays US Aggregate Bond Index | 0.01% | 0.20% |
| Target 2025 Passive Composite Index 1 | (4.21%) | 4.32% |
| 1 | The Target 2025 Passive Composite Index is a custom blended index developed by Charles Schwab Investment Management, Inc. based on the Schwab Target 2025 Index Fund’s asset allocation glide schedule and will become more conservative as time elapses. Effective February 1, 2018, the composite is derived using the following portion allocations: 34.8% Dow Jones U.S. Large Cap Total Stock Market Index, 2.9% Dow Jones U.S. Small Cap Total Stock Market Index, 16.1% FTSE Developed ex-US Index (Net), 2.4% FTSE Emerging Index (Net), 3.0% Dow Jones U.S. Select REIT Index, 3.3% Bloomberg Barclays US Treasury 1-3 Year Index, 32.1% Bloomberg Barclays US Aggregate Bond Index, 1.4% Bloomberg Barclays US Treasury Inflation Protected Securities (TIPS) Index (Series-L) and 4.2% Bloomberg Barclays US Treasury Bills 1-3 Month Index. The components that make up the composite index may vary over time. The composite index represents target allocations for 2018. Percentages listed may not total to 100% due to rounding. |
The after-tax figures
reflect the highest individual federal income tax rates in effect during the period and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your individual tax situation. In addition, after-tax returns are not
relevant if you hold your fund shares through a tax-deferred arrangement, such as a 401(k) plan, an individual retirement account (IRA) or other tax-advantaged account. In some cases, the return after taxes on distributions and sale of shares may
exceed the fund’s other returns due to an assumed benefit from any losses on a sale of shares at the end of the measurement period.
Investment Adviser
Charles Schwab Investment Management, Inc.
Portfolio Managers
Zifan Tang, Ph.D., CFA,
Senior Portfolio Manager, is responsible for the day-to-day co-management of the fund. She has managed the fund since August 2016.
Patrick Kwok, CFA,
Portfolio
Manager, is responsible for the day-to-day co-management of the fund. He has managed the fund since July 2018.
Purchase and Sale of Fund Shares
The fund is open for business each day that the New York
Stock Exchange (NYSE) is open. If the NYSE is closed due to weather or other extenuating circumstances on a day it would typically be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the fund
reserves the right to treat such day as a business day and accept purchase and redemption orders and calculate its share price as of the normally scheduled close of regular trading on the NYSE for that day.
Schwab
Target 2025 Index Fund | Fund Summary
19
Investors may only invest in the fund
through an account at Charles Schwab & Co., Inc. (Schwab) or another financial intermediary. When you place orders to purchase, exchange or redeem fund shares through an account at Schwab or another financial intermediary, you must follow
Schwab’s or the other financial intermediary’s transaction procedures. Shareholders who previously purchased fund shares through the fund’s transfer agent and continue to hold such shares directly through the fund’s transfer
agent may make additional purchases and place exchange and redemption orders through the fund’s transfer agent by contacting the transfer agent by phone or in writing as noted below:
| • | by telephone at 1-800-407-0256; or |
| • | by mail to DST Asset Manager Solutions, Inc., Attn: Schwab Funds, P.O. Box 219647, Kansas City, MO 64121-9647. |
There is no minimum initial investment for the fund.
Tax Information
Dividends and capital gains distributions received from the
fund will generally be taxable as ordinary income or capital gains, unless you are investing through an IRA, 401(k) or other tax-advantaged account.
Payments to Financial Intermediaries
If you purchase shares of the fund through a broker-dealer
or other financial intermediary (such as a bank), the adviser and its related companies may pay the intermediary for the sale of fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or
other financial intermediary and your salesperson to recommend the fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
20
Schwab Target 2025 Index Fund | Fund Summary
Schwab
®
Target 2030 Index Fund
| Ticker Symbol: | SWYEX |
Investment Objective
The fund seeks to provide capital appreciation and income
consistent with its current asset allocation.
Fund Fees
and Expenses
This table describes the fees and expenses
you may pay if you buy and hold shares of the fund. This table does not reflect any brokerage fees or commissions you may incur when buying or selling fund shares.
| 1 | The total annual fund operating expenses in the fee table may differ from the expense ratios in the fund’s “Financial Highlights” that include only the fund’s direct operating expenses and do not include acquired fund fees and expenses (AFFE), which reflect fees and expenses incurred indirectly by the fund through its investments in the underlying funds during its prior fiscal year. |
| 2 | The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (including AFFE, but excluding taxes and certain non-routine expenses) of the fund to 0.08% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees. |
Example
This example is intended to help you compare
the cost of investing in the fund with the cost of investing in other funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also
assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses (including AFFE) after any expense reduction. The example does not
reflect any brokerage fees or commissions you may incur when buying or selling fund shares. Your actual costs may be higher or lower.
| Expenses on a $10,000 Investment | |||
| 1 Year | 3 Years | 5 Years | 10 Years |
| $8 | $26 | $45 | $103 |
Portfolio Turnover
The fund pays transaction costs, such as commissions, when
it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when fund shares are held in a taxable account. These costs, which are
not reflected in the annual fund operating expenses or in the example, affect the fund’s performance. During the most recent fiscal year, the fund’s portfolio turnover rate was 8% of the average value of its portfolio.
Principal Investment Strategies
The fund seeks to achieve its investment objective by
investing primarily in affiliated Schwab exchange-traded funds (ETFs). The fund may also invest in affiliated Schwab Funds and Laudus Funds, and unaffiliated third party ETFs and mutual funds (all such ETFs and mutual funds referred to herein as the
“underlying funds”). The fund has a policy to invest, under normal circumstances, at least 80% of its assets (net assets, including, for this purpose, any borrowings for investment purposes) in underlying funds that are managed to seek
investment returns that track particular market indices. The fund will provide shareholders with at least 60 days’ prior written notice of any change in this investment policy. The fund invests in the underlying funds in accordance with its
target portfolio allocation. These underlying funds invest their assets directly in equity, fixed income, cash and cash equivalents (including money market funds) in accordance with their own investment objectives and policies. The fund is managed
based on the specific retirement date (target date) included in its name and assumes a retirement age of 65. The target date refers to the approximate year an investor in the fund would plan to retire and likely would stop making new investments in
the fund. The fund is designed for an investor who anticipates retiring at or about the target date and plans to withdraw the value of the investor’s account in the fund gradually after retirement. As described below, the adviser will continue
to modify the fund’s target asset allocation for 20 years beyond the target date.
The fund’s target asset allocation
will be adjusted annually based on the adviser’s asset allocation strategy; however, the adviser reserves the right to modify the fund’s target asset allocations from time to time should circumstances warrant a change. In general, the
fund’s allocation to equity securities will decrease and its allocation to fixed income securities will increase as the fund approaches its target date. The fund’s asset allocation as of February 1, 2019 (the most recent annual
adjustment of the fund’s target asset allocations) was approximately 66.7% equity securities, 29.9% fixed income securities, and 3.3% cash and cash equivalents (including money market funds). At the stated target
Schwab Target 2030 Index Fund | Fund Summary
21
date, the fund’s allocation will be approximately 40.0% equity
securities, 53.5% fixed income securities, and 6.5% cash and cash equivalents (including money market funds). The fund will continue to reduce its allocation to equity securities for 20 years beyond the fund’s stated target date. At such
time, the fund’s asset allocation will remain fixed at approximately 25.0% equity securities, 65.6% fixed income securities, and 9.4% cash and cash equivalents (including money market funds).
In addition to the strategic annual adjustment of the
fund’s target asset allocation, the adviser may adjust the fund’s underlying fund allocations within a particular asset class based on the following considerations, including, but not limited to, market trends, its outlook for a given
market capitalization, and the underlying funds’ performance in various market conditions. Accordingly, the fund’s allocation to a particular underlying fund may increase or decrease throughout the year. Within the equity asset class,
the fund will have exposure to one or more “style classes”. For example, the style classes include domestic large-cap equity, domestic small-cap equity, and international equity. The adviser may adjust the fund’s allocation to a
particular style class based on the following considerations: market trends, its outlook for a given style class, and the style classes’ performance in various market conditions. Accordingly, the fund’s allocation to a particular style
class within the equity asset class may increase or decrease throughout the year.
The fund intends to invest in a combination of underlying
funds; however, the fund may invest directly in equity and fixed income securities and money market securities. For temporary defensive purposes during unusual economic or market conditions or for liquidity purposes, the fund may invest up to 100%
of its assets directly in cash, money market instruments, repurchase agreements and other short-term obligations. When the fund engages in such activities, it may not achieve its investment objective.
Principal Risks
The fund is subject to risks, any of which could cause an
investor to lose money. The fund’s principal risks include:
Asset Allocation Risk.
The
fund is subject to the risk that the selection of the underlying funds and the allocation of the fund’s assets among the various asset classes and market segments may cause the fund to underperform other funds with a similar investment
objective.
Conflicts of Interest Risk.
The investment adviser’s authority to select and substitute underlying funds from a variety of affiliated and unaffiliated mutual funds and ETFs may create a conflict of interest because the fees paid to it and
its affiliates by some underlying funds are higher than the fees paid by other underlying funds. The investment adviser also may have an incentive to select an affiliated underlying fund for other reasons, including to increase assets under
management or to support new investment strategies. In addition, other conflicts of interest may exist where the best interests of the affiliated underlying fund may not be
aligned with those of the fund. However, the investment adviser is a
fiduciary to the fund and is legally obligated to act in the fund’s best interests when selecting underlying funds.
Market Risk.
Financial markets
rise and fall in response to a variety of factors, sometimes rapidly and unpredictably. As with any investment whose performance is tied to these markets, the value of an investment in the fund will fluctuate, which means that an investor could lose
money over short or long periods.
ETF Risk.
When the fund invests in an ETF, it will bear a proportionate share of the ETF’s expenses. Therefore, it may be more costly to own an ETF than to own underlying securities directly. In addition, while the risks of
owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF holds, lack of liquidity in the market for an ETF’s shares can result in its value being more volatile than the underlying portfolio of
securities. Although ETFs are listed on national securities exchanges, there can be no assurance that an active trading market for such ETF shares will develop or be maintained. If an active market is not maintained, the fund may experience
difficulty in buying or selling ETF shares. In addition, the market price of ETF shares may deviate, sometimes significantly, from net asset value, particularly during periods of market volatility. Certain ETFs that seek to track the performance of
their benchmark indices may not fully replicate their index and may hold securities not included in the index, which may not produce the intended results.
Direct Investment Risk.
The
fund may invest directly in cash, cash equivalents and equity and fixed-income securities, including money market securities, to maintain its allocations. The fund’s direct investment in these securities is subject to the same or similar risks
as an underlying fund’s investment in the same securities.
Underlying Fund Investment Risk.
Before investing in the fund, investors should assess the risks associated with the underlying funds in which the fund may invest, which include any combination of the risks described below.
| • | Investment Risk. The fund may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective. |
| • | Fixed Income Risk. Interest rates rise and fall over time, which will affect an underlying fund’s yield and share price. A change in a central bank’s monetary policy or economic conditions, among other things, may result in a change in interest rates, which could have sudden and unpredictable effects on the markets and significantly impact the value of debt securities in which the fund invests. A rise in interest rates could cause an underlying fund’s share price to fall. The credit quality of a portfolio investment could also cause an underlying fund’s share price to fall. An underlying fund could lose money if the issuer or guarantor of a portfolio investment or the counterparty to a derivatives contract fails to make timely principal or interest payments or otherwise honor its obligations. Fixed |
22
Schwab Target 2030 Index Fund | Fund Summary
| income securities may be paid off earlier or later than expected. Either situation could cause an underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the fund’s yield or share price. Below investment-grade bonds (junk bonds) involve greater credit risk, are more volatile, involve greater risk of price declines and may be more susceptible to economic downturns than investment-grade securities. | |
| • | Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time. |
| • | Market Capitalization Risk. Securities issued by companies of different market capitalizations tend to go in and out of favor based on market and economic conditions. During a period when securities of a particular market capitalization fall behind other types of investments, an underlying fund’s performance could be impacted. |
| • | Money Market Fund Risk . The fund may invest in underlying money market funds that either seek to maintain a stable $1 net asset value (“stable share price money market funds”) or that have a share price that fluctuates (“variable share price money market funds”). Although an underlying stable share price money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in such a money market fund. Because the share price of an underlying variable share price money market fund will fluctuate, when the fund sells the shares it owns they may be worth more or less than what the fund originally paid for them. In addition, neither type of money market fund is designed to offer capital appreciation. Certain underlying money market funds may impose a fee upon the sale of shares or may temporarily suspend the ability to sell shares if such fund’s liquidity falls below required minimums. |
| • | Foreign Investment Risk. An underlying fund’s investments in securities of foreign issuers involve certain risks that may be greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); the imposition of economic sanctions or other government restrictions; differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may negatively impact the value or liquidity of an underlying fund’s investments, and could impair the underlying fund’s ability to meet its investment objective or invest in accordance with its investment strategy. There is a risk that investments in securities denominated in, and/or receiving revenues in, foreign currencies will decline in value relative to the U.S. dollar. |
| • | Emerging Markets Risk. Emerging market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements and greater risk associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in developed countries. As a result, there may be an increased risk of illiquidity and price volatility associated with an underlying fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar, and, at times, it may be difficult to value such investments. |
| • | Derivatives Risk. An underlying fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. An underlying fund’s use of derivatives could reduce the underlying fund’s performance, increase volatility, and could cause the underlying fund to lose more than the initial amount invested. In addition, investments in derivatives may involve leverage, which means a small percentage of assets invested in derivatives can have a disproportionately large impact on an underlying fund. However, these risks are less severe when the underlying fund uses derivatives for hedging rather than to enhance the underlying fund’s returns or as a substitute for a position or security. |
| • | Leverage Risk. Certain underlying fund transactions, such as derivatives transactions, short sales, reverse repurchase agreements, and mortgage dollar rolls, may give rise to a form of leverage and may expose an underlying fund to greater risk. Leverage tends to magnify the effect of any decrease or increase in the value of an underlying fund’s portfolio securities, which means even a small amount of leverage can have a disproportionately large impact on the underlying fund. |
| • | Concentration Risk. To the extent that an underlying fund’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector or asset class, the underlying fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more vulnerable to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector or asset class. |
| • | Investment Style Risk. Certain underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Such underlying funds follow these stocks during upturns as well as downturns. Because of their indexing strategy, these underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index. |
Schwab
Target 2030 Index Fund | Fund Summary
23
| • | Liquidity Risk. An underlying fund may be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or an underlying fund may have to sell them at a loss. |
| • | Portfolio Turnover Risk. Certain of the underlying funds may buy and sell portfolio securities actively. If they do, their portfolio turnover rate and transaction costs will rise, which may lower the underlying fund’s performance and may increase the likelihood of capital gains distributions. |
You may experience losses in the fund, including losses
before, at, or after the target date. There is no guarantee that the fund will be able to achieve its objective or provide adequate income at and through your retirement.
For more information on the risks of investing in the fund and
the underlying funds, please see the “Fund Details” section in the prospectus.
Performance
The bar chart below shows how the
fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to those of two broad based indices and a passive composite index based on
the fund’s target allocations. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ
from past performance. For current performance information, please see
www.schwabfunds.com/schwabfunds_prospectus
.
On July 24, 2017, the Investor Share class and Institutional
Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. Accordingly, the performance history of the fund, prior to July 24, 2017, is that of the fund’s former
Institutional Shares.
Annual Total Returns
(%) as of 12/31
Best Quarter:
4.70% Q1 2017
Worst Quarter: (8.51%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 13.16%
Worst Quarter: (8.51%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 13.16%
| Average Annual Total Returns as of 12/31/18 | ||
| 1 Year |
Since
Inception (8/25/16) |
|
| Before taxes | (5.08%) | 4.67% |
| After taxes on distributions | (5.68%) | 4.08% |
| After taxes on distributions and sale of shares | (2.76%) | 3.47% |
| Comparative Indices (reflect no deduction for expenses or taxes) | ||
| Dow Jones U.S. Total Stock Market Index | (5.30%) | 7.95% |
| Bloomberg Barclays US Aggregate Bond Index | 0.01% | 0.20% |
| Target 2030 Passive Composite Index 1 | (5.11%) | 4.75% |
| 1 | The Target 2030 Passive Composite Index is a custom blended index developed by Charles Schwab Investment Management, Inc. based on the Schwab Target 2030 Index Fund’s asset allocation glide schedule and will become more conservative as time elapses. Effective February 1, 2018, the composite is derived using the following portion allocations: 39.3% Dow Jones U.S. Large Cap Total Stock Market Index, 3.6% Dow Jones U.S. Small Cap Total Stock Market Index, 18.7% FTSE Developed ex-US Index (Net), 3.4% FTSE Emerging Index (Net), 3.4% Dow Jones U.S. Select REIT Index, 1.9% Bloomberg Barclays US Treasury 1-3 Year Index, 26.5% Bloomberg Barclays US Aggregate Bond Index and 3.2% Bloomberg Barclays US Treasury Bills 1-3 Month Index. The components that make up the composite index may vary over time. The composite index represents target allocations for 2018. Percentages listed may not total to 100% due to rounding. |
The after-tax figures reflect the highest individual federal
income tax rates in effect during the period and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your individual tax situation. In addition, after-tax returns are not relevant if you hold your fund shares
through a tax-deferred arrangement, such as a 401(k) plan, an individual retirement account (IRA) or other tax-advantaged account. In some cases, the return after taxes on distributions and sale of shares may exceed the fund’s other returns
due to an assumed benefit from any losses on a sale of shares at the end of the measurement period.
Investment Adviser
Charles Schwab Investment Management, Inc.
Portfolio Managers
Zifan Tang, Ph.D., CFA,
Senior Portfolio Manager, is responsible for the day-to-day co-management of the fund. She has managed the fund since August 2016.
Patrick Kwok, CFA,
Portfolio
Manager, is responsible for the day-to-day co-management of the fund. He has managed the fund since July 2018.
Purchase and Sale of Fund Shares
The fund is open for business each day that the New York
Stock Exchange (NYSE) is open. If the NYSE is closed due to weather or other extenuating circumstances on a day it would typically be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the fund
reserves the right to treat such day as a business day and accept purchase and redemption orders and calculate its share price as of the normally scheduled close of regular trading on the NYSE for that day.
24
Schwab Target 2030 Index Fund | Fund Summary
Investors may only invest in the fund
through an account at Charles Schwab & Co., Inc. (Schwab) or another financial intermediary. When you place orders to purchase, exchange or redeem fund shares through an account at Schwab or another financial intermediary, you must follow
Schwab’s or the other financial intermediary’s transaction procedures. Shareholders who previously purchased fund shares through the fund’s transfer agent and continue to hold such shares directly through the fund’s transfer
agent may make additional purchases and place exchange and redemption orders through the fund’s transfer agent by contacting the transfer agent by phone or in writing as noted below:
| • | by telephone at 1-800-407-0256; or |
| • | by mail to DST Asset Manager Solutions, Inc., Attn: Schwab Funds, P.O. Box 219647, Kansas City, MO 64121-9647. |
There is no minimum initial investment for the fund.
Tax Information
Dividends and capital gains distributions received from the
fund will generally be taxable as ordinary income or capital gains, unless you are investing through an IRA, 401(k) or other tax-advantaged account.
Payments to Financial Intermediaries
If you purchase shares of the fund through a broker-dealer
or other financial intermediary (such as a bank), the adviser and its related companies may pay the intermediary for the sale of fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or
other financial intermediary and your salesperson to recommend the fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Schwab Target 2030 Index Fund | Fund Summary
25
Schwab
®
Target 2035 Index Fund
| Ticker Symbol: | SWYFX |
Investment Objective
The fund seeks to provide capital appreciation and income
consistent with its current asset allocation.
Fund Fees
and Expenses
This table describes the fees and expenses
you may pay if you buy and hold shares of the fund. This table does not reflect any brokerage fees or commissions you may incur when buying or selling fund shares.
| 1 | The total annual fund operating expenses in the fee table may differ from the expense ratios in the fund’s “Financial Highlights” that include only the fund’s direct operating expenses and do not include acquired fund fees and expenses (AFFE), which reflect fees and expenses incurred indirectly by the fund through its investments in the underlying funds during its prior fiscal year. |
| 2 | The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (including AFFE, but excluding taxes and certain non-routine expenses) of the fund to 0.08% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees. |
Example
This example is intended to help you compare
the cost of investing in the fund with the cost of investing in other funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also
assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses (including AFFE) after any expense reduction. The example does not
reflect any brokerage fees or commissions you may incur when buying or selling fund shares. Your actual costs may be higher or lower.
| Expenses on a $10,000 Investment | |||
| 1 Year | 3 Years | 5 Years | 10 Years |
| $8 | $26 | $45 | $103 |
Portfolio Turnover
The fund pays transaction costs, such as
commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when fund shares are held in a taxable account. These
costs, which are not reflected in the annual fund operating expenses or in the example, affect the fund’s performance. During the most recent fiscal year, the fund’s portfolio turnover rate was 6% of the average value of its
portfolio.
Principal Investment Strategies
The fund seeks to achieve its investment objective by
investing primarily in affiliated Schwab exchange-traded funds (ETFs). The fund may also invest in affiliated Schwab Funds and Laudus Funds, and unaffiliated third party ETFs and mutual funds (all such ETFs and mutual funds referred to herein as the
“underlying funds”). The fund has a policy to invest, under normal circumstances, at least 80% of its assets (net assets, including, for this purpose, any borrowings for investment purposes) in underlying funds that are managed to seek
investment returns that track particular market indices. The fund will provide shareholders with at least 60 days’ prior written notice of any change in this investment policy. The fund invests in the underlying funds in accordance with its
target portfolio allocation. These underlying funds invest their assets directly in equity, fixed income, cash and cash equivalents (including money market funds) in accordance with their own investment objectives and policies. The fund is managed
based on the specific retirement date (target date) included in its name and assumes a retirement age of 65. The target date refers to the approximate year an investor in the fund would plan to retire and likely would stop making new investments in
the fund. The fund is designed for an investor who anticipates retiring at or about the target date and plans to withdraw the value of the investor’s account in the fund gradually after retirement. As described below, the adviser will continue
to modify the fund’s target asset allocation for 20 years beyond the target date.
The fund’s target asset allocation
will be adjusted annually based on the adviser’s asset allocation strategy; however, the adviser reserves the right to modify the fund’s target asset allocations from time to time should circumstances warrant a change. In general, the
fund’s allocation to equity securities will decrease and its allocation to fixed income securities will increase as the fund approaches its target date. The fund’s asset allocation as of February 1, 2019 (the most recent annual
adjustment of the fund’s target asset allocations) was approximately 74.6% equity securities, 22.8% fixed income securities, and 2.5% cash and cash equivalents (including money market funds). At the stated target
26
Schwab Target 2035 Index Fund | Fund Summary
date, the fund’s allocation will be approximately 40.0% equity
securities, 53.5% fixed income securities, and 6.5% cash and cash equivalents (including money market funds). The fund will continue to reduce its allocation to equity securities for 20 years beyond the fund’s stated target date. At such
time, the fund’s asset allocation will remain fixed at approximately 25.0% equity securities, 65.6% fixed income securities, and 9.4% cash and cash equivalents (including money market funds).
In addition to the strategic annual adjustment of the
fund’s target asset allocation, the adviser may adjust the fund’s underlying fund allocations within a particular asset class based on the following considerations, including, but not limited to, market trends, its outlook for a given
market capitalization, and the underlying funds’ performance in various market conditions. Accordingly, the fund’s allocation to a particular underlying fund may increase or decrease throughout the year. Within the equity asset class,
the fund will have exposure to one or more “style classes”. For example, the style classes include domestic large-cap equity, domestic small-cap equity, and international equity. The adviser may adjust the fund’s allocation to a
particular style class based on the following considerations: market trends, its outlook for a given style class, and the style classes’ performance in various market conditions. Accordingly, the fund’s allocation to a particular style
class within the equity asset class may increase or decrease throughout the year.
The fund intends to invest in a combination of underlying
funds; however, the fund may invest directly in equity and fixed income securities and money market securities. For temporary defensive purposes during unusual economic or market conditions or for liquidity purposes, the fund may invest up to 100%
of its assets directly in cash, money market instruments, repurchase agreements and other short-term obligations. When the fund engages in such activities, it may not achieve its investment objective.
Principal Risks
The fund is subject to risks, any of which could cause an
investor to lose money. The fund’s principal risks include:
Asset Allocation Risk.
The
fund is subject to the risk that the selection of the underlying funds and the allocation of the fund’s assets among the various asset classes and market segments may cause the fund to underperform other funds with a similar investment
objective.
Conflicts of Interest Risk.
The investment adviser’s authority to select and substitute underlying funds from a variety of affiliated and unaffiliated mutual funds and ETFs may create a conflict of interest because the fees paid to it and
its affiliates by some underlying funds are higher than the fees paid by other underlying funds. The investment adviser also may have an incentive to select an affiliated underlying fund for other reasons, including to increase assets under
management or to support new investment strategies. In addition, other conflicts of interest may exist where the best interests of the affiliated underlying fund may not be
aligned with those of the fund. However, the investment adviser is a
fiduciary to the fund and is legally obligated to act in the fund’s best interests when selecting underlying funds.
Market Risk.
Financial markets
rise and fall in response to a variety of factors, sometimes rapidly and unpredictably. As with any investment whose performance is tied to these markets, the value of an investment in the fund will fluctuate, which means that an investor could lose
money over short or long periods.
ETF Risk.
When the fund invests in an ETF, it will bear a proportionate share of the ETF’s expenses. Therefore, it may be more costly to own an ETF than to own underlying securities directly. In addition, while the risks of
owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF holds, lack of liquidity in the market for an ETF’s shares can result in its value being more volatile than the underlying portfolio of
securities. Although ETFs are listed on national securities exchanges, there can be no assurance that an active trading market for such ETF shares will develop or be maintained. If an active market is not maintained, the fund may experience
difficulty in buying or selling ETF shares. In addition, the market price of ETF shares may deviate, sometimes significantly, from net asset value, particularly during periods of market volatility. Certain ETFs that seek to track the performance of
their benchmark indices may not fully replicate their index and may hold securities not included in the index, which may not produce the intended results.
Direct Investment Risk.
The
fund may invest directly in cash, cash equivalents and equity and fixed-income securities, including money market securities, to maintain its allocations. The fund’s direct investment in these securities is subject to the same or similar risks
as an underlying fund’s investment in the same securities.
Underlying Fund Investment Risk.
Before investing in the fund, investors should assess the risks associated with the underlying funds in which the fund may invest, which include any combination of the risks described below.
| • | Investment Risk. The fund may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective. |
| • | Fixed Income Risk. Interest rates rise and fall over time, which will affect an underlying fund’s yield and share price. A change in a central bank’s monetary policy or economic conditions, among other things, may result in a change in interest rates, which could have sudden and unpredictable effects on the markets and significantly impact the value of debt securities in which the fund invests. A rise in interest rates could cause an underlying fund’s share price to fall. The credit quality of a portfolio investment could also cause an underlying fund’s share price to fall. An underlying fund could lose money if the issuer or guarantor of a portfolio investment or the counterparty to a derivatives contract fails to make timely principal or interest payments or otherwise honor its obligations. Fixed |
Schwab
Target 2035 Index Fund | Fund Summary
27
| income securities may be paid off earlier or later than expected. Either situation could cause an underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the fund’s yield or share price. Below investment-grade bonds (junk bonds) involve greater credit risk, are more volatile, involve greater risk of price declines and may be more susceptible to economic downturns than investment-grade securities. | |
| • | Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time. |
| • | Market Capitalization Risk. Securities issued by companies of different market capitalizations tend to go in and out of favor based on market and economic conditions. During a period when securities of a particular market capitalization fall behind other types of investments, an underlying fund’s performance could be impacted. |
| • | Money Market Fund Risk . The fund may invest in underlying money market funds that either seek to maintain a stable $1 net asset value (“stable share price money market funds”) or that have a share price that fluctuates (“variable share price money market funds”). Although an underlying stable share price money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in such a money market fund. Because the share price of an underlying variable share price money market fund will fluctuate, when the fund sells the shares it owns they may be worth more or less than what the fund originally paid for them. In addition, neither type of money market fund is designed to offer capital appreciation. Certain underlying money market funds may impose a fee upon the sale of shares or may temporarily suspend the ability to sell shares if such fund’s liquidity falls below required minimums. |
| • | Foreign Investment Risk. An underlying fund’s investments in securities of foreign issuers involve certain risks that may be greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); the imposition of economic sanctions or other government restrictions; differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may negatively impact the value or liquidity of an underlying fund’s investments, and could impair the underlying fund’s ability to meet its investment objective or invest in accordance with its investment strategy. There is a risk that investments in securities denominated in, and/or receiving revenues in, foreign currencies will decline in value relative to the U.S. dollar. |
| • | Emerging Markets Risk. Emerging market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements and greater risk associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in developed countries. As a result, there may be an increased risk of illiquidity and price volatility associated with an underlying fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar, and, at times, it may be difficult to value such investments. |
| • | Derivatives Risk. An underlying fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. An underlying fund’s use of derivatives could reduce the underlying fund’s performance, increase volatility, and could cause the underlying fund to lose more than the initial amount invested. In addition, investments in derivatives may involve leverage, which means a small percentage of assets invested in derivatives can have a disproportionately large impact on an underlying fund. However, these risks are less severe when the underlying fund uses derivatives for hedging rather than to enhance the underlying fund’s returns or as a substitute for a position or security. |
| • | Leverage Risk. Certain underlying fund transactions, such as derivatives transactions, short sales, reverse repurchase agreements, and mortgage dollar rolls, may give rise to a form of leverage and may expose an underlying fund to greater risk. Leverage tends to magnify the effect of any decrease or increase in the value of an underlying fund’s portfolio securities, which means even a small amount of leverage can have a disproportionately large impact on the underlying fund. |
| • | Concentration Risk. To the extent that an underlying fund’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector or asset class, the underlying fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more vulnerable to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector or asset class. |
| • | Investment Style Risk. Certain underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Such underlying funds follow these stocks during upturns as well as downturns. Because of their indexing strategy, these underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index. |
28
Schwab Target 2035 Index Fund | Fund Summary
| • | Liquidity Risk. An underlying fund may be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or an underlying fund may have to sell them at a loss. |
| • | Portfolio Turnover Risk. Certain of the underlying funds may buy and sell portfolio securities actively. If they do, their portfolio turnover rate and transaction costs will rise, which may lower the underlying fund’s performance and may increase the likelihood of capital gains distributions. |
You may experience losses in the fund, including losses
before, at, or after the target date. There is no guarantee that the fund will be able to achieve its objective or provide adequate income at and through your retirement.
For more information on the risks of investing in the fund and
the underlying funds, please see the “Fund Details” section in the prospectus.
Performance
The bar chart below shows how the
fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to those of two broad based indices and a passive composite index based on
the fund’s target allocations. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ
from past performance. For current performance information, please see
www.schwabfunds.com/schwabfunds_prospectus
.
On July 24, 2017, the Investor Share class and Institutional
Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. Accordingly, the performance history of the fund, prior to July 24, 2017, is that of the fund’s former
Institutional Shares.
Annual Total Returns
(%) as of 12/31
Best Quarter:
5.19% Q1 2017
Worst Quarter: (9.69%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 14.10%
Worst Quarter: (9.69%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 14.10%
| Average Annual Total Returns as of 12/31/18 | ||
| 1 Year |
Since
Inception (8/25/16) |
|
| Before taxes | (6.05%) | 4.95% |
| After taxes on distributions | (6.58%) | 4.39% |
| After taxes on distributions and sale of shares | (3.32%) | 3.71% |
| Comparative Indices (reflect no deduction for expenses or taxes) | ||
| Dow Jones U.S. Total Stock Market Index | (5.30%) | 7.95% |
| Bloomberg Barclays US Aggregate Bond Index | 0.01% | 0.20% |
| Target 2035 Passive Composite Index 1 | (5.88%) | 5.07% |
| 1 | The Target 2035 Passive Composite Index is a custom blended index developed by Charles Schwab Investment Management, Inc. based on the Schwab Target 2035 Index Fund’s asset allocation glide schedule and will become more conservative as time elapses. Effective February 1, 2018, the composite is derived using the following portion allocations: 42.6% Dow Jones U.S. Large Cap Total Stock Market Index, 4.5% Dow Jones U.S. Small Cap Total Stock Market Index, 20.8% FTSE Developed ex-US Index (Net), 4.4% FTSE Emerging Index (Net), 3.8% Dow Jones U.S. Select REIT Index, 1.2% Bloomberg Barclays US Treasury 1-3 Year Index, 20.4% Bloomberg Barclays US Aggregate Bond Index and 2.4% Bloomberg Barclays US Treasury Bills 1-3 Month Index. The components that make up the composite index may vary over time. The composite index represents target allocations for 2018. Percentages listed may not total to 100% due to rounding. |
The after-tax figures reflect the highest individual federal
income tax rates in effect during the period and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your individual tax situation. In addition, after-tax returns are not relevant if you hold your fund shares
through a tax-deferred arrangement, such as a 401(k) plan, an individual retirement account (IRA) or other tax-advantaged account. In some cases, the return after taxes on distributions and sale of shares may exceed the fund’s other returns
due to an assumed benefit from any losses on a sale of shares at the end of the measurement period.
Investment Adviser
Charles Schwab Investment Management, Inc.
Portfolio Managers
Zifan Tang, Ph.D., CFA,
Senior Portfolio Manager, is responsible for the day-to-day co-management of the fund. She has managed the fund since August 2016.
Patrick Kwok, CFA,
Portfolio
Manager, is responsible for the day-to-day co-management of the fund. He has managed the fund since July 2018.
Purchase and Sale of Fund Shares
The fund is open for business each day that the New York
Stock Exchange (NYSE) is open. If the NYSE is closed due to weather or other extenuating circumstances on a day it would typically be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the fund
reserves the right to treat such day as a business day and accept purchase and redemption orders and calculate its share price as of the normally scheduled close of regular trading on the NYSE for that day.
Schwab
Target 2035 Index Fund | Fund Summary
29
Investors may only invest in the fund
through an account at Charles Schwab & Co., Inc. (Schwab) or another financial intermediary. When you place orders to purchase, exchange or redeem fund shares through an account at Schwab or another financial intermediary, you must follow
Schwab’s or the other financial intermediary’s transaction procedures. Shareholders who previously purchased fund shares through the fund’s transfer agent and continue to hold such shares directly through the fund’s transfer
agent may make additional purchases and place exchange and redemption orders through the fund’s transfer agent by contacting the transfer agent by phone or in writing as noted below:
| • | by telephone at 1-800-407-0256; or |
| • | by mail to DST Asset Manager Solutions, Inc., Attn: Schwab Funds, P.O. Box 219647, Kansas City, MO 64121-9647. |
There is no minimum initial investment for the fund.
Tax Information
Dividends and capital gains distributions received from the
fund will generally be taxable as ordinary income or capital gains, unless you are investing through an IRA, 401(k) or other tax-advantaged account.
Payments to Financial Intermediaries
If you purchase shares of the fund through a broker-dealer
or other financial intermediary (such as a bank), the adviser and its related companies may pay the intermediary for the sale of fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or
other financial intermediary and your salesperson to recommend the fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
30
Schwab Target 2035 Index Fund | Fund Summary
Schwab
®
Target 2040 Index Fund
| Ticker Symbol: | SWYGX |
Investment Objective
The fund seeks to provide capital appreciation and income
consistent with its current asset allocation.
Fund Fees
and Expenses
This table describes the fees and expenses
you may pay if you buy and hold shares of the fund. This table does not reflect any brokerage fees or commissions you may incur when buying or selling fund shares.
| 1 | The total annual fund operating expenses in the fee table may differ from the expense ratios in the fund’s “Financial Highlights” that include only the fund’s direct operating expenses and do not include acquired fund fees and expenses (AFFE), which reflect fees and expenses incurred indirectly by the fund through its investments in the underlying funds during its prior fiscal year. |
| 2 | The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (including AFFE, but excluding taxes and certain non-routine expenses) of the fund to 0.08% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees. |
Example
This example is intended to help you compare
the cost of investing in the fund with the cost of investing in other funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also
assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses (including AFFE) after any expense reduction. The example does not
reflect any brokerage fees or commissions you may incur when buying or selling fund shares. Your actual costs may be higher or lower.
| Expenses on a $10,000 Investment | |||
| 1 Year | 3 Years | 5 Years | 10 Years |
| $8 | $26 | $45 | $103 |
Portfolio Turnover
The fund pays transaction costs, such as
commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when fund shares are held in a taxable account. These
costs, which are not reflected in the annual fund operating expenses or in the example, affect the fund’s performance. During the most recent fiscal year, the fund’s portfolio turnover rate was 2% of the average value of its
portfolio.
Principal Investment Strategies
The fund seeks to achieve its investment objective by
investing primarily in affiliated Schwab exchange-traded funds (ETFs). The fund may also invest in affiliated Schwab Funds and Laudus Funds, and unaffiliated third party ETFs and mutual funds (all such ETFs and mutual funds referred to herein as the
“underlying funds”). The fund has a policy to invest, under normal circumstances, at least 80% of its assets (net assets, including, for this purpose, any borrowings for investment purposes) in underlying funds that are managed to seek
investment returns that track particular market indices. The fund will provide shareholders with at least 60 days’ prior written notice of any change in this investment policy. The fund invests in the underlying funds in accordance with its
target portfolio allocation. These underlying funds invest their assets directly in equity, fixed income, cash and cash equivalents (including money market funds) in accordance with their own investment objectives and policies. The fund is managed
based on the specific retirement date (target date) included in its name and assumes a retirement age of 65. The target date refers to the approximate year an investor in the fund would plan to retire and likely would stop making new investments in
the fund. The fund is designed for an investor who anticipates retiring at or about the target date and plans to withdraw the value of the investor’s account in the fund gradually after retirement. As described below, the adviser will continue
to modify the fund’s target asset allocation for 20 years beyond the target date.
The fund’s target asset allocation
will be adjusted annually based on the adviser’s asset allocation strategy; however, the adviser reserves the right to modify the fund’s target asset allocations from time to time should circumstances warrant a change. In general, the
fund’s allocation to equity securities will decrease and its allocation to fixed income securities will increase as the fund approaches its target date. The fund’s asset allocation as of February 1, 2019 (the most recent annual
adjustment of the fund’s target asset allocations) was approximately 81.6% equity securities, 16.6% fixed income securities, and 1.8% cash and cash equivalents (including money market funds). At the stated target
Schwab Target 2040 Index Fund | Fund Summary
31
date, the fund’s allocation will be approximately 40.0% equity
securities, 53.5% fixed income securities, and 6.5% cash and cash equivalents (including money market funds). The fund will continue to reduce its allocation to equity securities for 20 years beyond the fund’s stated target date. At such
time, the fund’s asset allocation will remain fixed at approximately 25.0% equity securities, 65.6% fixed income securities, and 9.4% cash and cash equivalents (including money market funds).
In addition to the strategic annual adjustment of the
fund’s target asset allocation, the adviser may adjust the fund’s underlying fund allocations within a particular asset class based on the following considerations, including, but not limited to, market trends, its outlook for a given
market capitalization, and the underlying funds’ performance in various market conditions. Accordingly, the fund’s allocation to a particular underlying fund may increase or decrease throughout the year. Within the equity asset class,
the fund will have exposure to one or more “style classes”. For example, the style classes include domestic large-cap equity, domestic small-cap equity, and international equity. The adviser may adjust the fund’s allocation to a
particular style class based on the following considerations: market trends, its outlook for a given style class, and the style classes’ performance in various market conditions. Accordingly, the fund’s allocation to a particular style
class within the equity asset class may increase or decrease throughout the year.
The fund intends to invest in a combination of underlying
funds; however, the fund may invest directly in equity and fixed income securities and money market securities. For temporary defensive purposes during unusual economic or market conditions or for liquidity purposes, the fund may invest up to 100%
of its assets directly in cash, money market instruments, repurchase agreements and other short-term obligations. When the fund engages in such activities, it may not achieve its investment objective.
Principal Risks
The fund is subject to risks, any of which could cause an
investor to lose money. The fund’s principal risks include:
Asset Allocation Risk.
The
fund is subject to the risk that the selection of the underlying funds and the allocation of the fund’s assets among the various asset classes and market segments may cause the fund to underperform other funds with a similar investment
objective.
Conflicts of Interest Risk.
The investment adviser’s authority to select and substitute underlying funds from a variety of affiliated and unaffiliated mutual funds and ETFs may create a conflict of interest because the fees paid to it and
its affiliates by some underlying funds are higher than the fees paid by other underlying funds. The investment adviser also may have an incentive to select an affiliated underlying fund for other reasons, including to increase assets under
management or to support new investment strategies. In addition, other conflicts of interest may exist where the best interests of the affiliated underlying fund may not be
aligned with those of the fund. However, the investment adviser is a
fiduciary to the fund and is legally obligated to act in the fund’s best interests when selecting underlying funds.
Market Risk.
Financial markets
rise and fall in response to a variety of factors, sometimes rapidly and unpredictably. As with any investment whose performance is tied to these markets, the value of an investment in the fund will fluctuate, which means that an investor could lose
money over short or long periods.
ETF Risk.
When the fund invests in an ETF, it will bear a proportionate share of the ETF’s expenses. Therefore, it may be more costly to own an ETF than to own underlying securities directly. In addition, while the risks of
owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF holds, lack of liquidity in the market for an ETF’s shares can result in its value being more volatile than the underlying portfolio of
securities. Although ETFs are listed on national securities exchanges, there can be no assurance that an active trading market for such ETF shares will develop or be maintained. If an active market is not maintained, the fund may experience
difficulty in buying or selling ETF shares. In addition, the market price of ETF shares may deviate, sometimes significantly, from net asset value, particularly during periods of market volatility. Certain ETFs that seek to track the performance of
their benchmark indices may not fully replicate their index and may hold securities not included in the index, which may not produce the intended results.
Direct Investment Risk.
The
fund may invest directly in cash, cash equivalents and equity and fixed-income securities, including money market securities, to maintain its allocations. The fund’s direct investment in these securities is subject to the same or similar risks
as an underlying fund’s investment in the same securities.
Underlying Fund Investment Risk.
Before investing in the fund, investors should assess the risks associated with the underlying funds in which the fund may invest, which include any combination of the risks described below.
| • | Investment Risk. The fund may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective. |
| • | Fixed Income Risk. Interest rates rise and fall over time, which will affect an underlying fund’s yield and share price. A change in a central bank’s monetary policy or economic conditions, among other things, may result in a change in interest rates, which could have sudden and unpredictable effects on the markets and significantly impact the value of debt securities in which the fund invests. A rise in interest rates could cause an underlying fund’s share price to fall. The credit quality of a portfolio investment could also cause an underlying fund’s share price to fall. An underlying fund could lose money if the issuer or guarantor of a portfolio investment or the counterparty to a derivatives contract fails to make timely principal or interest payments or otherwise honor its obligations. Fixed |
32
Schwab Target 2040 Index Fund | Fund Summary
| income securities may be paid off earlier or later than expected. Either situation could cause an underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the fund’s yield or share price. Below investment-grade bonds (junk bonds) involve greater credit risk, are more volatile, involve greater risk of price declines and may be more susceptible to economic downturns than investment-grade securities. | |
| • | Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time. |
| • | Market Capitalization Risk. Securities issued by companies of different market capitalizations tend to go in and out of favor based on market and economic conditions. During a period when securities of a particular market capitalization fall behind other types of investments, an underlying fund’s performance could be impacted. |
| • | Money Market Fund Risk . The fund may invest in underlying money market funds that either seek to maintain a stable $1 net asset value (“stable share price money market funds”) or that have a share price that fluctuates (“variable share price money market funds”). Although an underlying stable share price money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in such a money market fund. Because the share price of an underlying variable share price money market fund will fluctuate, when the fund sells the shares it owns they may be worth more or less than what the fund originally paid for them. In addition, neither type of money market fund is designed to offer capital appreciation. Certain underlying money market funds may impose a fee upon the sale of shares or may temporarily suspend the ability to sell shares if such fund’s liquidity falls below required minimums. |
| • | Foreign Investment Risk. An underlying fund’s investments in securities of foreign issuers involve certain risks that may be greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); the imposition of economic sanctions or other government restrictions; differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may negatively impact the value or liquidity of an underlying fund’s investments, and could impair the underlying fund’s ability to meet its investment objective or invest in accordance with its investment strategy. There is a risk that investments in securities denominated in, and/or receiving revenues in, foreign currencies will decline in value relative to the U.S. dollar. |
| • | Emerging Markets Risk. Emerging market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements and greater risk associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in developed countries. As a result, there may be an increased risk of illiquidity and price volatility associated with an underlying fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar, and, at times, it may be difficult to value such investments. |
| • | Derivatives Risk. An underlying fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. An underlying fund’s use of derivatives could reduce the underlying fund’s performance, increase volatility, and could cause the underlying fund to lose more than the initial amount invested. In addition, investments in derivatives may involve leverage, which means a small percentage of assets invested in derivatives can have a disproportionately large impact on an underlying fund. However, these risks are less severe when the underlying fund uses derivatives for hedging rather than to enhance the underlying fund’s returns or as a substitute for a position or security. |
| • | Leverage Risk. Certain underlying fund transactions, such as derivatives transactions, short sales, reverse repurchase agreements, and mortgage dollar rolls, may give rise to a form of leverage and may expose an underlying fund to greater risk. Leverage tends to magnify the effect of any decrease or increase in the value of an underlying fund’s portfolio securities, which means even a small amount of leverage can have a disproportionately large impact on the underlying fund. |
| • | Concentration Risk. To the extent that an underlying fund’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector or asset class, the underlying fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more vulnerable to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector or asset class. |
| • | Investment Style Risk. Certain underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Such underlying funds follow these stocks during upturns as well as downturns. Because of their indexing strategy, these underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index. |
Schwab
Target 2040 Index Fund | Fund Summary
33
| • | Liquidity Risk. An underlying fund may be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or an underlying fund may have to sell them at a loss. |
| • | Portfolio Turnover Risk. Certain of the underlying funds may buy and sell portfolio securities actively. If they do, their portfolio turnover rate and transaction costs will rise, which may lower the underlying fund’s performance and may increase the likelihood of capital gains distributions. |
You may experience losses in the fund, including losses
before, at, or after the target date. There is no guarantee that the fund will be able to achieve its objective or provide adequate income at and through your retirement.
For more information on the risks of investing in the fund and
the underlying funds, please see the “Fund Details” section in the prospectus.
Performance
The bar chart below shows how the
fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to those of two broad based indices and a passive composite index based on
the fund’s target allocations. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ
from past performance. For current performance information, please see
www.schwabfunds.com/schwabfunds_prospectus
.
On July 24, 2017, the Investor Share class and Institutional
Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. Accordingly, the performance history of the fund, prior to July 24, 2017, is that of the fund’s former
Institutional Shares.
Annual Total Returns
(%) as of 12/31
Best Quarter:
5.48% Q1 2017
Worst Quarter: (10.57%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 14.76%
Worst Quarter: (10.57%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 14.76%
| Average Annual Total Returns as of 12/31/18 | ||
| 1 Year |
Since
Inception (8/25/16) |
|
| Before taxes | (6.63%) | 5.31% |
| After taxes on distributions | (7.15%) | 4.74% |
| After taxes on distributions and sale of shares | (3.62%) | 4.00% |
| Comparative Indices (reflect no deduction for expenses or taxes) | ||
| Dow Jones U.S. Total Stock Market Index | (5.30%) | 7.95% |
| Bloomberg Barclays US Aggregate Bond Index | 0.01% | 0.20% |
| Target 2040 Passive Composite Index 1 | (6.61%) | 5.38% |
| 1 | The Target 2040 Passive Composite Index is a custom blended index developed by Charles Schwab Investment Management, Inc. based on the Schwab Target 2040 Index Fund’s asset allocation glide schedule and will become more conservative as time elapses. Effective February 1, 2018, the composite is derived using the following portion allocations: 45.5% Dow Jones U.S. Large Cap Total Stock Market Index, 5.3% Dow Jones U.S. Small Cap Total Stock Market Index, 22.7% FTSE Developed ex-US Index (Net), 5.5% FTSE Emerging Index (Net), 4.2% Dow Jones U.S. Select REIT Index, 0.8% Bloomberg Barclays US Treasury 1-3 Year Index, 14.5% Bloomberg Barclays US Aggregate Bond Index and 1.7% Bloomberg Barclays US Treasury Bills 1-3 Month Index. The components that make up the composite index may vary over time. The composite index represents target allocations for 2018. Percentages listed may not total to 100% due to rounding. |
The after-tax figures reflect the highest individual federal
income tax rates in effect during the period and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your individual tax situation. In addition, after-tax returns are not relevant if you hold your fund shares
through a tax-deferred arrangement, such as a 401(k) plan, an individual retirement account (IRA) or other tax-advantaged account. In some cases, the return after taxes on distributions and sale of shares may exceed the fund’s other returns
due to an assumed benefit from any losses on a sale of shares at the end of the measurement period.
Investment Adviser
Charles Schwab Investment Management, Inc.
Portfolio Managers
Zifan Tang, Ph.D., CFA,
Senior Portfolio Manager, is responsible for the day-to-day co-management of the fund. She has managed the fund since August 2016.
Patrick Kwok, CFA,
Portfolio
Manager, is responsible for the day-to-day co-management of the fund. He has managed the fund since July 2018.
Purchase and Sale of Fund Shares
The fund is open for business each day that the New York
Stock Exchange (NYSE) is open. If the NYSE is closed due to weather or other extenuating circumstances on a day it would typically be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the fund
reserves the right to treat such day as a business day and accept purchase and redemption orders and calculate its share price as of the normally scheduled close of regular trading on the NYSE for that day.
34
Schwab Target 2040 Index Fund | Fund Summary
Investors may only invest in the fund
through an account at Charles Schwab & Co., Inc. (Schwab) or another financial intermediary. When you place orders to purchase, exchange or redeem fund shares through an account at Schwab or another financial intermediary, you must follow
Schwab’s or the other financial intermediary’s transaction procedures. Shareholders who previously purchased fund shares through the fund’s transfer agent and continue to hold such shares directly through the fund’s transfer
agent may make additional purchases and place exchange and redemption orders through the fund’s transfer agent by contacting the transfer agent by phone or in writing as noted below:
| • | by telephone at 1-800-407-0256; or |
| • | by mail to DST Asset Manager Solutions, Inc., Attn: Schwab Funds, P.O. Box 219647, Kansas City, MO 64121-9647. |
There is no minimum initial investment for the fund.
Tax Information
Dividends and capital gains distributions received from the
fund will generally be taxable as ordinary income or capital gains, unless you are investing through an IRA, 401(k) or other tax-advantaged account.
Payments to Financial Intermediaries
If you purchase shares of the fund through a broker-dealer
or other financial intermediary (such as a bank), the adviser and its related companies may pay the intermediary for the sale of fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or
other financial intermediary and your salesperson to recommend the fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Schwab Target 2040 Index Fund | Fund Summary
35
Schwab
®
Target 2045 Index Fund
| Ticker Symbol: | SWYHX |
Investment Objective
The fund seeks to provide capital appreciation and income
consistent with its current asset allocation.
Fund Fees
and Expenses
This table describes the fees and expenses
you may pay if you buy and hold shares of the fund. This table does not reflect any brokerage fees or commissions you may incur when buying or selling fund shares.
| 1 | The total annual fund operating expenses in the fee table may differ from the expense ratios in the fund’s “Financial Highlights” that include only the fund’s direct operating expenses and do not include acquired fund fees and expenses (AFFE), which reflect fees and expenses incurred indirectly by the fund through its investments in the underlying funds during its prior fiscal year. |
| 2 | The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (including AFFE, but excluding taxes and certain non-routine expenses) of the fund to 0.08% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees. |
Example
This example is intended to help you compare
the cost of investing in the fund with the cost of investing in other funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also
assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses (including AFFE) after any expense reduction. The example does not
reflect any brokerage fees or commissions you may incur when buying or selling fund shares. Your actual costs may be higher or lower.
| Expenses on a $10,000 Investment | |||
| 1 Year | 3 Years | 5 Years | 10 Years |
| $8 | $26 | $45 | $103 |
Portfolio Turnover
The fund pays transaction costs, such as
commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when fund shares are held in a taxable account. These
costs, which are not reflected in the annual fund operating expenses or in the example, affect the fund’s performance. During the most recent fiscal year, the fund’s portfolio turnover rate was 7% of the average value of its
portfolio.
Principal Investment Strategies
The fund seeks to achieve its investment objective by
investing primarily in affiliated Schwab exchange-traded funds (ETFs). The fund may also invest in affiliated Schwab Funds and Laudus Funds, and unaffiliated third party ETFs and mutual funds (all such ETFs and mutual funds referred to herein as the
“underlying funds”). The fund has a policy to invest, under normal circumstances, at least 80% of its assets (net assets, including, for this purpose, any borrowings for investment purposes) in underlying funds that are managed to seek
investment returns that track particular market indices. The fund will provide shareholders with at least 60 days’ prior written notice of any change in this investment policy. The fund invests in the underlying funds in accordance with its
target portfolio allocation. These underlying funds invest their assets directly in equity, fixed income, cash and cash equivalents (including money market funds) in accordance with their own investment objectives and policies. The fund is managed
based on the specific retirement date (target date) included in its name and assumes a retirement age of 65. The target date refers to the approximate year an investor in the fund would plan to retire and likely would stop making new investments in
the fund. The fund is designed for an investor who anticipates retiring at or about the target date and plans to withdraw the value of the investor’s account in the fund gradually after retirement. As described below, the adviser will continue
to modify the fund’s target asset allocation for 20 years beyond the target date.
The fund’s target asset allocation
will be adjusted annually based on the adviser’s asset allocation strategy; however, the adviser reserves the right to modify the fund’s target asset allocations from time to time should circumstances warrant a change. In general, the
fund’s allocation to equity securities will decrease and its allocation to fixed income securities will increase as the fund approaches its target date. The fund’s asset allocation as of February 1, 2019 (the most recent annual
adjustment of the fund’s target asset allocations) was approximately 87.3% equity securities, 11.4% fixed income securities, and 1.3% cash and cash equivalents (including money market funds). At the stated target
36
Schwab Target 2045 Index Fund | Fund Summary
date, the fund’s allocation will be approximately 40.0% equity
securities, 53.5% fixed income securities, and 6.5% cash and cash equivalents (including money market funds). The fund will continue to reduce its allocation to equity securities for 20 years beyond the fund’s stated target date. At such
time, the fund’s asset allocation will remain fixed at approximately 25.0% equity securities, 65.6% fixed income securities, and 9.4% cash and cash equivalents (including money market funds).
In addition to the strategic annual adjustment of the
fund’s target asset allocation, the adviser may adjust the fund’s underlying fund allocations within a particular asset class based on the following considerations, including, but not limited to, market trends, its outlook for a given
market capitalization, and the underlying funds’ performance in various market conditions. Accordingly, the fund’s allocation to a particular underlying fund may increase or decrease throughout the year. Within the equity asset class,
the fund will have exposure to one or more “style classes”. For example, the style classes include domestic large-cap equity, domestic small-cap equity, and international equity. The adviser may adjust the fund’s allocation to a
particular style class based on the following considerations: market trends, its outlook for a given style class, and the style classes’ performance in various market conditions. Accordingly, the fund’s allocation to a particular style
class within the equity asset class may increase or decrease throughout the year.
The fund intends to invest in a combination of underlying
funds; however, the fund may invest directly in equity and fixed income securities and money market securities. For temporary defensive purposes during unusual economic or market conditions or for liquidity purposes, the fund may invest up to 100%
of its assets directly in cash, money market instruments, repurchase agreements and other short-term obligations. When the fund engages in such activities, it may not achieve its investment objective.
Principal Risks
The fund is subject to risks, any of which could cause an
investor to lose money. The fund’s principal risks include:
Asset Allocation Risk.
The
fund is subject to the risk that the selection of the underlying funds and the allocation of the fund’s assets among the various asset classes and market segments may cause the fund to underperform other funds with a similar investment
objective.
Conflicts of Interest Risk.
The investment adviser’s authority to select and substitute underlying funds from a variety of affiliated and unaffiliated mutual funds and ETFs may create a conflict of interest because the fees paid to it and
its affiliates by some underlying funds are higher than the fees paid by other underlying funds. The investment adviser also may have an incentive to select an affiliated underlying fund for other reasons, including to increase assets under
management or to support new investment strategies. In addition, other conflicts of interest may exist where the best interests of the affiliated underlying fund may not be
aligned with those of the fund. However, the investment adviser is a
fiduciary to the fund and is legally obligated to act in the fund’s best interests when selecting underlying funds.
Market Risk.
Financial markets
rise and fall in response to a variety of factors, sometimes rapidly and unpredictably. As with any investment whose performance is tied to these markets, the value of an investment in the fund will fluctuate, which means that an investor could lose
money over short or long periods.
ETF Risk.
When the fund invests in an ETF, it will bear a proportionate share of the ETF’s expenses. Therefore, it may be more costly to own an ETF than to own underlying securities directly. In addition, while the risks of
owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF holds, lack of liquidity in the market for an ETF’s shares can result in its value being more volatile than the underlying portfolio of
securities. Although ETFs are listed on national securities exchanges, there can be no assurance that an active trading market for such ETF shares will develop or be maintained. If an active market is not maintained, the fund may experience
difficulty in buying or selling ETF shares. In addition, the market price of ETF shares may deviate, sometimes significantly, from net asset value, particularly during periods of market volatility. Certain ETFs that seek to track the performance of
their benchmark indices may not fully replicate their index and may hold securities not included in the index, which may not produce the intended results.
Direct Investment Risk.
The
fund may invest directly in cash, cash equivalents and equity and fixed-income securities, including money market securities, to maintain its allocations. The fund’s direct investment in these securities is subject to the same or similar risks
as an underlying fund’s investment in the same securities.
Underlying Fund Investment Risk.
Before investing in the fund, investors should assess the risks associated with the underlying funds in which the fund may invest, which include any combination of the risks described below.
| • | Investment Risk. The fund may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective. |
| • | Fixed Income Risk. Interest rates rise and fall over time, which will affect an underlying fund’s yield and share price. A change in a central bank’s monetary policy or economic conditions, among other things, may result in a change in interest rates, which could have sudden and unpredictable effects on the markets and significantly impact the value of debt securities in which the fund invests. A rise in interest rates could cause an underlying fund’s share price to fall. The credit quality of a portfolio investment could also cause an underlying fund’s share price to fall. An underlying fund could lose money if the issuer or guarantor of a portfolio investment or the counterparty to a derivatives contract fails to make timely principal or interest payments or otherwise honor its obligations. Fixed |
Schwab
Target 2045 Index Fund | Fund Summary
37
| income securities may be paid off earlier or later than expected. Either situation could cause an underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the fund’s yield or share price. Below investment-grade bonds (junk bonds) involve greater credit risk, are more volatile, involve greater risk of price declines and may be more susceptible to economic downturns than investment-grade securities. | |
| • | Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time. |
| • | Market Capitalization Risk. Securities issued by companies of different market capitalizations tend to go in and out of favor based on market and economic conditions. During a period when securities of a particular market capitalization fall behind other types of investments, an underlying fund’s performance could be impacted. |
| • | Money Market Fund Risk . The fund may invest in underlying money market funds that either seek to maintain a stable $1 net asset value (“stable share price money market funds”) or that have a share price that fluctuates (“variable share price money market funds”). Although an underlying stable share price money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in such a money market fund. Because the share price of an underlying variable share price money market fund will fluctuate, when the fund sells the shares it owns they may be worth more or less than what the fund originally paid for them. In addition, neither type of money market fund is designed to offer capital appreciation. Certain underlying money market funds may impose a fee upon the sale of shares or may temporarily suspend the ability to sell shares if such fund’s liquidity falls below required minimums. |
| • | Foreign Investment Risk. An underlying fund’s investments in securities of foreign issuers involve certain risks that may be greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); the imposition of economic sanctions or other government restrictions; differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may negatively impact the value or liquidity of an underlying fund’s investments, and could impair the underlying fund’s ability to meet its investment objective or invest in accordance with its investment strategy. There is a risk that investments in securities denominated in, and/or receiving revenues in, foreign currencies will decline in value relative to the U.S. dollar. |
| • | Emerging Markets Risk. Emerging market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements and greater risk associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in developed countries. As a result, there may be an increased risk of illiquidity and price volatility associated with an underlying fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar, and, at times, it may be difficult to value such investments. |
| • | Derivatives Risk. An underlying fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. An underlying fund’s use of derivatives could reduce the underlying fund’s performance, increase volatility, and could cause the underlying fund to lose more than the initial amount invested. In addition, investments in derivatives may involve leverage, which means a small percentage of assets invested in derivatives can have a disproportionately large impact on an underlying fund. However, these risks are less severe when the underlying fund uses derivatives for hedging rather than to enhance the underlying fund’s returns or as a substitute for a position or security. |
| • | Leverage Risk. Certain underlying fund transactions, such as derivatives transactions, short sales, reverse repurchase agreements, and mortgage dollar rolls, may give rise to a form of leverage and may expose an underlying fund to greater risk. Leverage tends to magnify the effect of any decrease or increase in the value of an underlying fund’s portfolio securities, which means even a small amount of leverage can have a disproportionately large impact on the underlying fund. |
| • | Concentration Risk. To the extent that an underlying fund’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector or asset class, the underlying fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more vulnerable to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector or asset class. |
| • | Investment Style Risk. Certain underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Such underlying funds follow these stocks during upturns as well as downturns. Because of their indexing strategy, these underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index. |
38
Schwab Target 2045 Index Fund | Fund Summary
| • | Liquidity Risk. An underlying fund may be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or an underlying fund may have to sell them at a loss. |
| • | Portfolio Turnover Risk. Certain of the underlying funds may buy and sell portfolio securities actively. If they do, their portfolio turnover rate and transaction costs will rise, which may lower the underlying fund’s performance and may increase the likelihood of capital gains distributions. |
You may experience losses in the fund, including losses
before, at, or after the target date. There is no guarantee that the fund will be able to achieve its objective or provide adequate income at and through your retirement.
For more information on the risks of investing in the fund and
the underlying funds, please see the “Fund Details” section in the prospectus.
Performance
The bar chart below shows how the
fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to those of two broad based indices and a passive composite index based on
the fund’s target allocations. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ
from past performance. For current performance information, please see
www.schwabfunds.com/schwabfunds_prospectus
.
On July 24, 2017, the Investor Share class and Institutional
Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. Accordingly, the performance history of the fund, prior to July 24, 2017, is that of the fund’s former
Institutional Shares.
Annual Total Returns
(%) as of 12/31
Best Quarter:
5.77% Q1 2017
Worst Quarter: (11.37%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 15.46%
Worst Quarter: (11.37%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 15.46%
| Average Annual Total Returns as of 12/31/18 | ||
| 1 Year |
Since
Inception (8/25/16) |
|
| Before taxes | (7.28%) | 5.40% |
| After taxes on distributions | (7.79%) | 4.85% |
| After taxes on distributions and sale of shares | (3.99%) | 4.09% |
| Comparative Indices (reflect no deduction for expenses or taxes) | ||
| Dow Jones U.S. Total Stock Market Index | (5.30%) | 7.95% |
| Bloomberg Barclays US Aggregate Bond Index | 0.01% | 0.20% |
| Target 2045 Passive Composite Index 1 | (7.18%) | 5.52% |
| 1 | The Target 2045 Passive Composite Index is a custom blended index developed by Charles Schwab Investment Management, Inc. based on the Schwab Target 2045 Index Fund’s asset allocation glide schedule and will become more conservative as time elapses. Effective February 1, 2018, the composite is derived using the following portion allocations: 47.4% Dow Jones U.S. Large Cap Total Stock Market Index, 5.9% Dow Jones U.S. Small Cap Total Stock Market Index, 24.1% FTSE Developed ex-US Index (Net), 6.3% FTSE Emerging Index (Net), 4.4% Dow Jones U.S. Select REIT Index, 0.5% Bloomberg Barclays US Treasury 1-3 Year Index, 10.3% Bloomberg Barclays US Aggregate Bond Index and 1.2% Bloomberg Barclays US Treasury Bills 1-3 Month Index. The components that make up the composite index may vary over time. The composite index represents target allocations for 2018. Percentages listed may not total to 100% due to rounding. |
The after-tax figures reflect the highest individual federal
income tax rates in effect during the period and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your individual tax situation. In addition, after-tax returns are not relevant if you hold your fund shares
through a tax-deferred arrangement, such as a 401(k) plan, an individual retirement account (IRA) or other tax-advantaged account. In some cases, the return after taxes on distributions and sale of shares may exceed the fund’s other returns
due to an assumed benefit from any losses on a sale of shares at the end of the measurement period.
Investment Adviser
Charles Schwab Investment Management, Inc.
Portfolio Managers
Zifan Tang, Ph.D., CFA,
Senior Portfolio Manager, is responsible for the day-to-day co-management of the fund. She has managed the fund since August 2016.
Patrick Kwok, CFA,
Portfolio
Manager, is responsible for the day-to-day co-management of the fund. He has managed the fund since July 2018.
Purchase and Sale of Fund Shares
The fund is open for business each day that the New York
Stock Exchange (NYSE) is open. If the NYSE is closed due to weather or other extenuating circumstances on a day it would typically be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the fund
reserves the right to treat such day as a business day and accept purchase and redemption orders and calculate its share price as of the normally scheduled close of regular trading on the NYSE for that day.
Schwab
Target 2045 Index Fund | Fund Summary
39
Investors may only invest in the fund
through an account at Charles Schwab & Co., Inc. (Schwab) or another financial intermediary. When you place orders to purchase, exchange or redeem fund shares through an account at Schwab or another financial intermediary, you must follow
Schwab’s or the other financial intermediary’s transaction procedures. Shareholders who previously purchased fund shares through the fund’s transfer agent and continue to hold such shares directly through the fund’s transfer
agent may make additional purchases and place exchange and redemption orders through the fund’s transfer agent by contacting the transfer agent by phone or in writing as noted below:
| • | by telephone at 1-800-407-0256; or |
| • | by mail to DST Asset Manager Solutions, Inc., Attn: Schwab Funds, P.O. Box 219647, Kansas City, MO 64121-9647. |
There is no minimum initial investment for the fund.
Tax Information
Dividends and capital gains distributions received from the
fund will generally be taxable as ordinary income or capital gains, unless you are investing through an IRA, 401(k) or other tax-advantaged account.
Payments to Financial Intermediaries
If you purchase shares of the fund through a broker-dealer
or other financial intermediary (such as a bank), the adviser and its related companies may pay the intermediary for the sale of fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or
other financial intermediary and your salesperson to recommend the fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
40
Schwab Target 2045 Index Fund | Fund Summary
Schwab
®
Target 2050 Index Fund
| Ticker Symbol: | SWYMX |
Investment Objective
The fund seeks to provide capital appreciation and income
consistent with its current asset allocation.
Fund Fees
and Expenses
This table describes the fees and expenses
you may pay if you buy and hold shares of the fund. This table does not reflect any brokerage fees or commissions you may incur when buying or selling fund shares.
| 1 | The total annual fund operating expenses in the fee table may differ from the expense ratios in the fund’s “Financial Highlights” that include only the fund’s direct operating expenses and do not include acquired fund fees and expenses (AFFE), which reflect fees and expenses incurred indirectly by the fund through its investments in the underlying funds during its prior fiscal year. |
| 2 | The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (including AFFE, but excluding taxes and certain non-routine expenses) of the fund to 0.08% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees. |
Example
This example is intended to help you compare
the cost of investing in the fund with the cost of investing in other funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also
assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses (including AFFE) after any expense reduction. The example does not
reflect any brokerage fees or commissions you may incur when buying or selling fund shares. Your actual costs may be higher or lower.
| Expenses on a $10,000 Investment | |||
| 1 Year | 3 Years | 5 Years | 10 Years |
| $8 | $26 | $45 | $103 |
Portfolio Turnover
The fund pays transaction costs, such as
commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when fund shares are held in a taxable account. These
costs, which are not reflected in the annual fund operating expenses or in the example, affect the fund’s performance. During the most recent fiscal year, the fund’s portfolio turnover rate was 0% (less than 0.5%) of the average value of
its portfolio.
Principal Investment
Strategies
The fund seeks to achieve its investment objective by
investing primarily in affiliated Schwab exchange-traded funds (ETFs). The fund may also invest in affiliated Schwab Funds and Laudus Funds, and unaffiliated third party ETFs and mutual funds (all such ETFs and mutual funds referred to herein as the
“underlying funds”). The fund has a policy to invest, under normal circumstances, at least 80% of its assets (net assets, including, for this purpose, any borrowings for investment purposes) in underlying funds that are managed to seek
investment returns that track particular market indices. The fund will provide shareholders with at least 60 days’ prior written notice of any change in this investment policy. The fund invests in the underlying funds in accordance with its
target portfolio allocation. These underlying funds invest their assets directly in equity, fixed income, cash and cash equivalents (including money market funds) in accordance with their own investment objectives and policies. The fund is managed
based on the specific retirement date (target date) included in its name and assumes a retirement age of 65. The target date refers to the approximate year an investor in the fund would plan to retire and likely would stop making new investments in
the fund. The fund is designed for an investor who anticipates retiring at or about the target date and plans to withdraw the value of the investor’s account in the fund gradually after retirement. As described below, the adviser will continue
to modify the fund’s target asset allocation for 20 years beyond the target date.
The fund’s target asset allocation
will be adjusted annually based on the adviser’s asset allocation strategy; however, the adviser reserves the right to modify the fund’s target asset allocations from time to time should circumstances warrant a change. In general, the
fund’s allocation to equity securities will decrease and its allocation to fixed income securities will increase as the fund approaches its target date. The fund’s asset allocation as of February 1, 2019 (the most recent annual
adjustment of the fund’s target asset allocations) was approximately 90.5% equity securities, 8.6% fixed income securities, and 1.0% cash and cash
Schwab Target 2050 Index Fund | Fund Summary
41
equivalents (including money market funds). At the stated target date, the
fund’s allocation will be approximately 40.0% equity securities, 53.5% fixed income securities, and 6.5% cash and cash equivalents (including money market funds). The fund will continue to reduce its allocation to equity securities for
20 years beyond the fund’s stated target date. At such time, the fund’s asset allocation will remain fixed at approximately 25.0% equity securities, 65.6% fixed income securities, and 9.4% cash and cash equivalents (including money
market funds).
In addition to the strategic annual
adjustment of the fund’s target asset allocation, the adviser may adjust the fund’s underlying fund allocations within a particular asset class based on the following considerations, including, but not limited to, market trends, its
outlook for a given market capitalization, and the underlying funds’ performance in various market conditions. Accordingly, the fund’s allocation to a particular underlying fund may increase or decrease throughout the year. Within the
equity asset class, the fund will have exposure to one or more “style classes”. For example, the style classes include domestic large-cap equity, domestic small-cap equity, and international equity. The adviser may adjust the
fund’s allocation to a particular style class based on the following considerations: market trends, its outlook for a given style class, and the style classes’ performance in various market conditions. Accordingly, the fund’s
allocation to a particular style class within the equity asset class may increase or decrease throughout the year.
The fund intends to invest in a combination of underlying
funds; however, the fund may invest directly in equity and fixed income securities and money market securities. For temporary defensive purposes during unusual economic or market conditions or for liquidity purposes, the fund may invest up to 100%
of its assets directly in cash, money market instruments, repurchase agreements and other short-term obligations. When the fund engages in such activities, it may not achieve its investment objective.
Principal Risks
The fund is subject to risks, any of which could cause an
investor to lose money. The fund’s principal risks include:
Asset Allocation Risk.
The
fund is subject to the risk that the selection of the underlying funds and the allocation of the fund’s assets among the various asset classes and market segments may cause the fund to underperform other funds with a similar investment
objective.
Conflicts of Interest Risk.
The investment adviser’s authority to select and substitute underlying funds from a variety of affiliated and unaffiliated mutual funds and ETFs may create a conflict of interest because the fees paid to it and
its affiliates by some underlying funds are higher than the fees paid by other underlying funds. The investment adviser also may have an incentive to select an affiliated underlying fund for other reasons, including to increase assets under
management or to support new investment strategies. In addition, other conflicts of interest may exist where
the best interests of the affiliated underlying fund may not be aligned with
those of the fund. However, the investment adviser is a fiduciary to the fund and is legally obligated to act in the fund’s best interests when selecting underlying funds.
Market Risk.
Financial markets
rise and fall in response to a variety of factors, sometimes rapidly and unpredictably. As with any investment whose performance is tied to these markets, the value of an investment in the fund will fluctuate, which means that an investor could lose
money over short or long periods.
ETF Risk.
When the fund invests in an ETF, it will bear a proportionate share of the ETF’s expenses. Therefore, it may be more costly to own an ETF than to own underlying securities directly. In addition, while the risks of
owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF holds, lack of liquidity in the market for an ETF’s shares can result in its value being more volatile than the underlying portfolio of
securities. Although ETFs are listed on national securities exchanges, there can be no assurance that an active trading market for such ETF shares will develop or be maintained. If an active market is not maintained, the fund may experience
difficulty in buying or selling ETF shares. In addition, the market price of ETF shares may deviate, sometimes significantly, from net asset value, particularly during periods of market volatility. Certain ETFs that seek to track the performance of
their benchmark indices may not fully replicate their index and may hold securities not included in the index, which may not produce the intended results.
Direct Investment Risk.
The
fund may invest directly in cash, cash equivalents and equity and fixed-income securities, including money market securities, to maintain its allocations. The fund’s direct investment in these securities is subject to the same or similar risks
as an underlying fund’s investment in the same securities.
Underlying Fund Investment Risk.
Before investing in the fund, investors should assess the risks associated with the underlying funds in which the fund may invest, which include any combination of the risks described below.
| • | Investment Risk. The fund may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective. |
| • | Fixed Income Risk. Interest rates rise and fall over time, which will affect an underlying fund’s yield and share price. A change in a central bank’s monetary policy or economic conditions, among other things, may result in a change in interest rates, which could have sudden and unpredictable effects on the markets and significantly impact the value of debt securities in which the fund invests. A rise in interest rates could cause an underlying fund’s share price to fall. The credit quality of a portfolio investment could also cause an underlying fund’s share price to fall. An underlying fund could lose money if the issuer or guarantor of a portfolio investment or the counterparty to a derivatives contract fails to make timely principal or |
42
Schwab Target 2050 Index Fund | Fund Summary
| interest payments or otherwise honor its obligations. Fixed income securities may be paid off earlier or later than expected. Either situation could cause an underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the fund’s yield or share price. Below investment-grade bonds (junk bonds) involve greater credit risk, are more volatile, involve greater risk of price declines and may be more susceptible to economic downturns than investment-grade securities. | |
| • | Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time. |
| • | Market Capitalization Risk. Securities issued by companies of different market capitalizations tend to go in and out of favor based on market and economic conditions. During a period when securities of a particular market capitalization fall behind other types of investments, an underlying fund’s performance could be impacted. |
| • | Money Market Fund Risk . The fund may invest in underlying money market funds that either seek to maintain a stable $1 net asset value (“stable share price money market funds”) or that have a share price that fluctuates (“variable share price money market funds”). Although an underlying stable share price money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in such a money market fund. Because the share price of an underlying variable share price money market fund will fluctuate, when the fund sells the shares it owns they may be worth more or less than what the fund originally paid for them. In addition, neither type of money market fund is designed to offer capital appreciation. Certain underlying money market funds may impose a fee upon the sale of shares or may temporarily suspend the ability to sell shares if such fund’s liquidity falls below required minimums. |
| • | Foreign Investment Risk. An underlying fund’s investments in securities of foreign issuers involve certain risks that may be greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); the imposition of economic sanctions or other government restrictions; differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may negatively impact the value or liquidity of an underlying fund’s investments, and could impair the underlying fund’s ability to meet its investment objective or invest in accordance with its investment strategy. There is a risk that investments in securities denominated in, and/or receiving revenues in, foreign currencies will decline in value relative to the U.S. dollar. |
| • | Emerging Markets Risk. Emerging market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements and greater risk associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in developed countries. As a result, there may be an increased risk of illiquidity and price volatility associated with an underlying fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar, and, at times, it may be difficult to value such investments. |
| • | Derivatives Risk. An underlying fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. An underlying fund’s use of derivatives could reduce the underlying fund’s performance, increase volatility, and could cause the underlying fund to lose more than the initial amount invested. In addition, investments in derivatives may involve leverage, which means a small percentage of assets invested in derivatives can have a disproportionately large impact on an underlying fund. However, these risks are less severe when the underlying fund uses derivatives for hedging rather than to enhance the underlying fund’s returns or as a substitute for a position or security. |
| • | Leverage Risk. Certain underlying fund transactions, such as derivatives transactions, short sales, reverse repurchase agreements, and mortgage dollar rolls, may give rise to a form of leverage and may expose an underlying fund to greater risk. Leverage tends to magnify the effect of any decrease or increase in the value of an underlying fund’s portfolio securities, which means even a small amount of leverage can have a disproportionately large impact on the underlying fund. |
| • | Concentration Risk. To the extent that an underlying fund’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector or asset class, the underlying fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more vulnerable to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector or asset class. |
| • | Investment Style Risk. Certain underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Such underlying funds follow these stocks during upturns as well as downturns. Because of their indexing strategy, these underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index. |
Schwab
Target 2050 Index Fund | Fund Summary
43
| • | Liquidity Risk. An underlying fund may be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or an underlying fund may have to sell them at a loss. |
| • | Portfolio Turnover Risk. Certain of the underlying funds may buy and sell portfolio securities actively. If they do, their portfolio turnover rate and transaction costs will rise, which may lower the underlying fund’s performance and may increase the likelihood of capital gains distributions. |
You may experience losses in the fund, including losses
before, at, or after the target date. There is no guarantee that the fund will be able to achieve its objective or provide adequate income at and through your retirement.
For more information on the risks of investing in the fund and
the underlying funds, please see the “Fund Details” section in the prospectus.
Performance
The bar chart below shows how the
fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to those of two broad based indices and a passive composite index based on
the fund’s target allocations. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ
from past performance. For current performance information, please see
www.schwabfunds.com/schwabfunds_prospectus
.
On July 24, 2017, the Investor Share class and Institutional
Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. Accordingly, the performance history of the fund, prior to July 24, 2017, is that of the fund’s former
Institutional Shares.
Annual Total Returns
(%) as of 12/31
Best Quarter:
5.86% Q1 2017
Worst Quarter: (11.72%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 15.73%
Worst Quarter: (11.72%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 15.73%
| Average Annual Total Returns as of 12/31/18 | ||
| 1 Year |
Since
Inception (8/25/16) |
|
| Before taxes | (7.58%) | 5.49% |
| After taxes on distributions | (8.06%) | 4.93% |
| After taxes on distributions and sale of shares | (4.17%) | 4.16% |
| Comparative Indices (reflect no deduction for expenses or taxes) | ||
| Dow Jones U.S. Total Stock Market Index | (5.30%) | 7.95% |
| Bloomberg Barclays US Aggregate Bond Index | 0.01% | 0.20% |
| Target 2050 Passive Composite Index 1 | (7.50%) | 5.62% |
| 1 | The Target 2050 Passive Composite Index is a custom blended index developed by Charles Schwab Investment Management, Inc. based on the Schwab Target 2050 Index Fund’s asset allocation glide schedule and will become more conservative as time elapses. Effective February 1, 2018, the composite is derived using the following portion allocations: 48.4% Dow Jones U.S. Large Cap Total Stock Market Index, 6.3% Dow Jones U.S. Small Cap Total Stock Market Index, 24.9% FTSE Developed ex-US Index (Net), 6.8% FTSE Emerging Index (Net), 4.6% Dow Jones U.S. Select REIT Index, 0.3% Bloomberg Barclays US Treasury 1-3 Year Index, 7.8% Bloomberg Barclays US Aggregate Bond Index and 0.9% Bloomberg Barclays US Treasury Bills 1-3 Month Index. The components that make up the composite index may vary over time. The composite index represents target allocations for 2018. Percentages listed may not total to 100% due to rounding. |
The after-tax figures reflect the highest individual federal
income tax rates in effect during the period and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your individual tax situation. In addition, after-tax returns are not relevant if you hold your fund shares
through a tax-deferred arrangement, such as a 401(k) plan, an individual retirement account (IRA) or other tax-advantaged account. In some cases, the return after taxes on distributions and sale of shares may exceed the fund’s other returns
due to an assumed benefit from any losses on a sale of shares at the end of the measurement period.
Investment Adviser
Charles Schwab Investment Management, Inc.
Portfolio Managers
Zifan Tang, Ph.D., CFA,
Senior Portfolio Manager, is responsible for the day-to-day co-management of the fund. She has managed the fund since August 2016.
Patrick Kwok, CFA,
Portfolio
Manager, is responsible for the day-to-day co-management of the fund. He has managed the fund since July 2018.
Purchase and Sale of Fund Shares
The fund is open for business each day that the New York
Stock Exchange (NYSE) is open. If the NYSE is closed due to weather or other extenuating circumstances on a day it would typically be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the fund
reserves the right to treat such day as a business day and accept purchase and redemption orders and calculate its share price as of the normally scheduled close of regular trading on the NYSE for that day.
44
Schwab Target 2050 Index Fund | Fund Summary
Investors may only invest in the fund
through an account at Charles Schwab & Co., Inc. (Schwab) or another financial intermediary. When you place orders to purchase, exchange or redeem fund shares through an account at Schwab or another financial intermediary, you must follow
Schwab’s or the other financial intermediary’s transaction procedures. Shareholders who previously purchased fund shares through the fund’s transfer agent and continue to hold such shares directly through the fund’s transfer
agent may make additional purchases and place exchange and redemption orders through the fund’s transfer agent by contacting the transfer agent by phone or in writing as noted below:
| • | by telephone at 1-800-407-0256; or |
| • | by mail to DST Asset Manager Solutions, Inc., Attn: Schwab Funds, P.O. Box 219647, Kansas City, MO 64121-9647. |
There is no minimum initial investment for the fund.
Tax Information
Dividends and capital gains distributions received from the
fund will generally be taxable as ordinary income or capital gains, unless you are investing through an IRA, 401(k) or other tax-advantaged account.
Payments to Financial Intermediaries
If you purchase shares of the fund through a broker-dealer
or other financial intermediary (such as a bank), the adviser and its related companies may pay the intermediary for the sale of fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or
other financial intermediary and your salesperson to recommend the fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Schwab Target 2050 Index Fund | Fund Summary
45
Schwab
®
Target 2055 Index Fund
| Ticker Symbol: | SWYJX |
Investment Objective
The fund seeks to provide capital appreciation and income
consistent with its current asset allocation.
Fund Fees
and Expenses
This table describes the fees and expenses
you may pay if you buy and hold shares of the fund. This table does not reflect any brokerage fees or commissions you may incur when buying or selling fund shares.
| 1 | The total annual fund operating expenses in the fee table may differ from the expense ratios in the fund’s “Financial Highlights” that include only the fund’s direct operating expenses and do not include acquired fund fees and expenses (AFFE), which reflect fees and expenses incurred indirectly by the fund through its investments in the underlying funds during its prior fiscal year. |
| 2 | The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (including AFFE, but excluding taxes and certain non-routine expenses) of the fund to 0.08% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees. |
Example
This example is intended to help you compare
the cost of investing in the fund with the cost of investing in other funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also
assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses (including AFFE) after any expense reduction. The example does not
reflect any brokerage fees or commissions you may incur when buying or selling fund shares. Your actual costs may be higher or lower.
| Expenses on a $10,000 Investment | |||
| 1 Year | 3 Years | 5 Years | 10 Years |
| $8 | $26 | $45 | $103 |
Portfolio Turnover
The fund pays transaction costs, such as
commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when fund shares are held in a taxable account. These
costs, which are not reflected in the annual fund operating expenses or in the example, affect the fund’s performance. During the most recent fiscal year, the fund’s portfolio turnover rate was 6% of the average value of its
portfolio.
Principal Investment Strategies
The fund seeks to achieve its investment objective by
investing primarily in affiliated Schwab exchange-traded funds (ETFs). The fund may also invest in affiliated Schwab Funds and Laudus Funds, and unaffiliated third party ETFs and mutual funds (all such ETFs and mutual funds referred to herein as the
“underlying funds”). The fund has a policy to invest, under normal circumstances, at least 80% of its assets (net assets, including, for this purpose, any borrowings for investment purposes) in underlying funds that are managed to seek
investment returns that track particular market indices. The fund will provide shareholders with at least 60 days’ prior written notice of any change in this investment policy. The fund invests in the underlying funds in accordance with its
target portfolio allocation. These underlying funds invest their assets directly in equity, fixed income, cash and cash equivalents (including money market funds) in accordance with their own investment objectives and policies. The fund is managed
based on the specific retirement date (target date) included in its name and assumes a retirement age of 65. The target date refers to the approximate year an investor in the fund would plan to retire and likely would stop making new investments in
the fund. The fund is designed for an investor who anticipates retiring at or about the target date and plans to withdraw the value of the investor’s account in the fund gradually after retirement. As described below, the adviser will continue
to modify the fund’s target asset allocation for 20 years beyond the target date.
The fund’s target asset allocation
will be adjusted annually based on the adviser’s asset allocation strategy; however, the adviser reserves the right to modify the fund’s target asset allocations from time to time should circumstances warrant a change. In general, the
fund’s allocation to equity securities will decrease and its allocation to fixed income securities will increase as the fund approaches its target date. The fund’s asset allocation as of February 1, 2019 (the most recent annual
adjustment of the fund’s target asset allocations) was approximately 93.0% equity securities, 6.3% fixed income securities, and 0.7% cash and cash equivalents (including money market funds). At the stated target
46
Schwab Target 2055 Index Fund | Fund Summary
date, the fund’s allocation will be approximately 40.0% equity
securities, 53.5% fixed income securities, and 6.5% cash and cash equivalents (including money market funds). The fund will continue to reduce its allocation to equity securities for 20 years beyond the fund’s stated target date. At such
time, the fund’s asset allocation will remain fixed at approximately 25.0% equity securities, 65.6% fixed income securities, and 9.4% cash and cash equivalents (including money market funds).
In addition to the strategic annual adjustment of the
fund’s target asset allocation, the adviser may adjust the fund’s underlying fund allocations within a particular asset class based on the following considerations, including, but not limited to, market trends, its outlook for a given
market capitalization, and the underlying funds’ performance in various market conditions. Accordingly, the fund’s allocation to a particular underlying fund may increase or decrease throughout the year. Within the equity asset class,
the fund will have exposure to one or more “style classes”. For example, the style classes include domestic large-cap equity, domestic small-cap equity, and international equity. The adviser may adjust the fund’s allocation to a
particular style class based on the following considerations: market trends, its outlook for a given style class, and the style classes’ performance in various market conditions. Accordingly, the fund’s allocation to a particular style
class within the equity asset class may increase or decrease throughout the year.
The fund intends to invest in a combination of underlying
funds; however, the fund may invest directly in equity and fixed income securities and money market securities. For temporary defensive purposes during unusual economic or market conditions or for liquidity purposes, the fund may invest up to 100%
of its assets directly in cash, money market instruments, repurchase agreements and other short-term obligations. When the fund engages in such activities, it may not achieve its investment objective.
Principal Risks
The fund is subject to risks, any of which could cause an
investor to lose money. The fund’s principal risks include:
Asset Allocation Risk.
The
fund is subject to the risk that the selection of the underlying funds and the allocation of the fund’s assets among the various asset classes and market segments may cause the fund to underperform other funds with a similar investment
objective.
Conflicts of Interest Risk.
The investment adviser’s authority to select and substitute underlying funds from a variety of affiliated and unaffiliated mutual funds and ETFs may create a conflict of interest because the fees paid to it and
its affiliates by some underlying funds are higher than the fees paid by other underlying funds. The investment adviser also may have an incentive to select an affiliated underlying fund for other reasons, including to increase assets under
management or to support new investment strategies. In addition, other conflicts of interest may exist where the best interests of the affiliated underlying fund may not be
aligned with those of the fund. However, the investment adviser is a
fiduciary to the fund and is legally obligated to act in the fund’s best interests when selecting underlying funds.
Market Risk.
Financial markets
rise and fall in response to a variety of factors, sometimes rapidly and unpredictably. As with any investment whose performance is tied to these markets, the value of an investment in the fund will fluctuate, which means that an investor could lose
money over short or long periods.
ETF Risk.
When the fund invests in an ETF, it will bear a proportionate share of the ETF’s expenses. Therefore, it may be more costly to own an ETF than to own underlying securities directly. In addition, while the risks of
owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF holds, lack of liquidity in the market for an ETF’s shares can result in its value being more volatile than the underlying portfolio of
securities. Although ETFs are listed on national securities exchanges, there can be no assurance that an active trading market for such ETF shares will develop or be maintained. If an active market is not maintained, the fund may experience
difficulty in buying or selling ETF shares. In addition, the market price of ETF shares may deviate, sometimes significantly, from net asset value, particularly during periods of market volatility. Certain ETFs that seek to track the performance of
their benchmark indices may not fully replicate their index and may hold securities not included in the index, which may not produce the intended results.
Direct Investment Risk.
The
fund may invest directly in cash, cash equivalents and equity and fixed-income securities, including money market securities, to maintain its allocations. The fund’s direct investment in these securities is subject to the same or similar risks
as an underlying fund’s investment in the same securities.
Underlying Fund Investment Risk.
Before investing in the fund, investors should assess the risks associated with the underlying funds in which the fund may invest, which include any combination of the risks described below.
| • | Investment Risk. The fund may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective. |
| • | Fixed Income Risk. Interest rates rise and fall over time, which will affect an underlying fund’s yield and share price. A change in a central bank’s monetary policy or economic conditions, among other things, may result in a change in interest rates, which could have sudden and unpredictable effects on the markets and significantly impact the value of debt securities in which the fund invests. A rise in interest rates could cause an underlying fund’s share price to fall. The credit quality of a portfolio investment could also cause an underlying fund’s share price to fall. An underlying fund could lose money if the issuer or guarantor of a portfolio investment or the counterparty to a derivatives contract fails to make timely principal or interest payments or otherwise honor its obligations. Fixed |
Schwab
Target 2055 Index Fund | Fund Summary
47
| income securities may be paid off earlier or later than expected. Either situation could cause an underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the fund’s yield or share price. Below investment-grade bonds (junk bonds) involve greater credit risk, are more volatile, involve greater risk of price declines and may be more susceptible to economic downturns than investment-grade securities. | |
| • | Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time. |
| • | Market Capitalization Risk. Securities issued by companies of different market capitalizations tend to go in and out of favor based on market and economic conditions. During a period when securities of a particular market capitalization fall behind other types of investments, an underlying fund’s performance could be impacted. |
| • | Money Market Fund Risk . The fund may invest in underlying money market funds that either seek to maintain a stable $1 net asset value (“stable share price money market funds”) or that have a share price that fluctuates (“variable share price money market funds”). Although an underlying stable share price money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in such a money market fund. Because the share price of an underlying variable share price money market fund will fluctuate, when the fund sells the shares it owns they may be worth more or less than what the fund originally paid for them. In addition, neither type of money market fund is designed to offer capital appreciation. Certain underlying money market funds may impose a fee upon the sale of shares or may temporarily suspend the ability to sell shares if such fund’s liquidity falls below required minimums. |
| • | Foreign Investment Risk. An underlying fund’s investments in securities of foreign issuers involve certain risks that may be greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); the imposition of economic sanctions or other government restrictions; differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may negatively impact the value or liquidity of an underlying fund’s investments, and could impair the underlying fund’s ability to meet its investment objective or invest in accordance with its investment strategy. There is a risk that investments in securities denominated in, and/or receiving revenues in, foreign currencies will decline in value relative to the U.S. dollar. |
| • | Emerging Markets Risk. Emerging market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements and greater risk associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in developed countries. As a result, there may be an increased risk of illiquidity and price volatility associated with an underlying fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar, and, at times, it may be difficult to value such investments. |
| • | Derivatives Risk. An underlying fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. An underlying fund’s use of derivatives could reduce the underlying fund’s performance, increase volatility, and could cause the underlying fund to lose more than the initial amount invested. In addition, investments in derivatives may involve leverage, which means a small percentage of assets invested in derivatives can have a disproportionately large impact on an underlying fund. However, these risks are less severe when the underlying fund uses derivatives for hedging rather than to enhance the underlying fund’s returns or as a substitute for a position or security. |
| • | Leverage Risk. Certain underlying fund transactions, such as derivatives transactions, short sales, reverse repurchase agreements, and mortgage dollar rolls, may give rise to a form of leverage and may expose an underlying fund to greater risk. Leverage tends to magnify the effect of any decrease or increase in the value of an underlying fund’s portfolio securities, which means even a small amount of leverage can have a disproportionately large impact on the underlying fund. |
| • | Concentration Risk. To the extent that an underlying fund’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector or asset class, the underlying fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more vulnerable to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector or asset class. |
| • | Investment Style Risk. Certain underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Such underlying funds follow these stocks during upturns as well as downturns. Because of their indexing strategy, these underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index. |
48
Schwab Target 2055 Index Fund | Fund Summary
| • | Liquidity Risk. An underlying fund may be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or an underlying fund may have to sell them at a loss. |
| • | Portfolio Turnover Risk. Certain of the underlying funds may buy and sell portfolio securities actively. If they do, their portfolio turnover rate and transaction costs will rise, which may lower the underlying fund’s performance and may increase the likelihood of capital gains distributions. |
You may experience losses in the fund, including losses
before, at, or after the target date. There is no guarantee that the fund will be able to achieve its objective or provide adequate income at and through your retirement.
For more information on the risks of investing in the fund and
the underlying funds, please see the “Fund Details” section in the prospectus.
Performance
The bar chart below shows how the
fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to those of two broad based indices and a passive composite index based on
the fund’s target allocations. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ
from past performance. For current performance information, please see
www.schwabfunds.com/schwabfunds_prospectus
.
On July 24, 2017, the Investor Share class and Institutional
Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. Accordingly, the performance history of the fund, prior to July 24, 2017, is that of the fund’s former
Institutional Shares.
Annual Total Returns
(%) as of 12/31
Best Quarter:
5.96% Q1 2017
Worst Quarter: (12.11%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 15.97%
Worst Quarter: (12.11%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 15.97%
| Average Annual Total Returns as of 12/31/18 | ||
| 1 Year |
Since
Inception (8/25/16) |
|
| Before taxes | (7.86%) | 5.60% |
| After taxes on distributions | (8.32%) | 5.05% |
| After taxes on distributions and sale of shares | (4.32%) | 4.26% |
| Comparative Indices (reflect no deduction for expenses or taxes) | ||
| Dow Jones U.S. Total Stock Market Index | (5.30%) | 7.95% |
| Bloomberg Barclays US Aggregate Bond Index | 0.01% | 0.20% |
| Target 2055 Passive Composite Index 1 | (7.77%) | 5.72% |
| 1 | The Target 2055 Passive Composite Index is a custom blended index developed by Charles Schwab Investment Management, Inc. based on the Schwab Target 2055 Index Fund’s asset allocation glide schedule and will become more conservative as time elapses. Effective February 1, 2018, the composite is derived using the following portion allocations: 49.3% Dow Jones U.S. Large Cap Total Stock Market Index, 6.6% Dow Jones U.S. Small Cap Total Stock Market Index, 25.7% FTSE Developed ex-US Index (Net), 7.3% FTSE Emerging Index (Net), 4.7% Dow Jones U.S. Select REIT Index, 0.2% Bloomberg Barclays US Treasury 1-3 Year Index, 5.6% Bloomberg Barclays US Aggregate Bond Index and 0.7% Bloomberg Barclays US Treasury Bills 1-3 Month Index. The components that make up the composite index may vary over time. The composite index represents target allocations for 2018. Percentages listed may not total to 100% due to rounding. |
The after-tax figures reflect the highest individual federal
income tax rates in effect during the period and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your individual tax situation. In addition, after-tax returns are not relevant if you hold your fund shares
through a tax-deferred arrangement, such as a 401(k) plan, an individual retirement account (IRA) or other tax-advantaged account. In some cases, the return after taxes on distributions and sale of shares may exceed the fund’s other returns
due to an assumed benefit from any losses on a sale of shares at the end of the measurement period.
Investment Adviser
Charles Schwab Investment Management, Inc.
Portfolio Managers
Zifan Tang, Ph.D., CFA,
Senior Portfolio Manager, is responsible for the day-to-day co-management of the fund. She has managed the fund since August 2016.
Patrick Kwok, CFA,
Portfolio
Manager, is responsible for the day-to-day co-management of the fund. He has managed the fund since July 2018.
Purchase and Sale of Fund Shares
The fund is open for business each day that the New York
Stock Exchange (NYSE) is open. If the NYSE is closed due to weather or other extenuating circumstances on a day it would typically be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the fund
reserves the right to treat such day as a business day and accept purchase and redemption orders and calculate its share price as of the normally scheduled close of regular trading on the NYSE for that day.
Schwab
Target 2055 Index Fund | Fund Summary
49
Investors may only invest in the fund
through an account at Charles Schwab & Co., Inc. (Schwab) or another financial intermediary. When you place orders to purchase, exchange or redeem fund shares through an account at Schwab or another financial intermediary, you must follow
Schwab’s or the other financial intermediary’s transaction procedures. Shareholders who previously purchased fund shares through the fund’s transfer agent and continue to hold such shares directly through the fund’s transfer
agent may make additional purchases and place exchange and redemption orders through the fund’s transfer agent by contacting the transfer agent by phone or in writing as noted below:
| • | by telephone at 1-800-407-0256; or |
| • | by mail to DST Asset Manager Solutions, Inc., Attn: Schwab Funds, P.O. Box 219647, Kansas City, MO 64121-9647. |
There is no minimum initial investment for the fund.
Tax Information
Dividends and capital gains distributions received from the
fund will generally be taxable as ordinary income or capital gains, unless you are investing through an IRA, 401(k) or other tax-advantaged account.
Payments to Financial Intermediaries
If you purchase shares of the fund through a broker-dealer
or other financial intermediary (such as a bank), the adviser and its related companies may pay the intermediary for the sale of fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or
other financial intermediary and your salesperson to recommend the fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
50
Schwab Target 2055 Index Fund | Fund Summary
Schwab
®
Target 2060 Index Fund
| Ticker Symbol: | SWYNX |
Investment Objective
The fund seeks to provide capital appreciation and income
consistent with its current asset allocation.
Fund Fees
and Expenses
This table describes the fees and expenses
you may pay if you buy and hold shares of the fund. This table does not reflect any brokerage fees or commissions you may incur when buying or selling fund shares.
| 1 | The total annual fund operating expenses in the fee table may differ from the expense ratios in the fund’s “Financial Highlights” that include only the fund’s direct operating expenses and do not include acquired fund fees and expenses (AFFE), which reflect fees and expenses incurred indirectly by the fund through its investments in the underlying funds during its prior fiscal year. |
| 2 | The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (including AFFE, but excluding taxes and certain non-routine expenses) of the fund to 0.08% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees. |
Example
This example is intended to help you compare
the cost of investing in the fund with the cost of investing in other funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also
assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses (including AFFE) after any expense reduction. The example does not
reflect any brokerage fees or commissions you may incur when buying or selling fund shares. Your actual costs may be higher or lower.
| Expenses on a $10,000 Investment | |||
| 1 Year | 3 Years | 5 Years | 10 Years |
| $8 | $26 | $45 | $103 |
Portfolio Turnover
The fund pays transaction costs, such as
commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when fund shares are held in a taxable account. These
costs, which are not reflected in the annual fund operating expenses or in the example, affect the fund’s performance. During the most recent fiscal year, the fund’s portfolio turnover rate was 2% of the average value of its
portfolio.
Principal Investment Strategies
The fund seeks to achieve its investment objective by
investing primarily in affiliated Schwab exchange-traded funds (ETFs). The fund may also invest in affiliated Schwab Funds and Laudus Funds, and unaffiliated third party ETFs and mutual funds (all such ETFs and mutual funds referred to herein as the
“underlying funds”). The fund has a policy to invest, under normal circumstances, at least 80% of its assets (net assets, including, for this purpose, any borrowings for investment purposes) in underlying funds that are managed to seek
investment returns that track particular market indices. The fund will provide shareholders with at least 60 days’ prior written notice of any change in this investment policy. The fund invests in the underlying funds in accordance with its
target portfolio allocation. These underlying funds invest their assets directly in equity, fixed income, cash and cash equivalents (including money market funds) in accordance with their own investment objectives and policies. The fund is managed
based on the specific retirement date (target date) included in its name and assumes a retirement age of 65. The target date refers to the approximate year an investor in the fund would plan to retire and likely would stop making new investments in
the fund. The fund is designed for an investor who anticipates retiring at or about the target date and plans to withdraw the value of the investor’s account in the fund gradually after retirement. As described below, the adviser will continue
to modify the fund’s target asset allocation for 20 years beyond the target date.
The fund’s target asset allocation
will be adjusted annually based on the adviser’s asset allocation strategy; however, the adviser reserves the right to modify the fund’s target asset allocations from time to time should circumstances warrant a change. In general, the
fund’s allocation to equity securities will decrease and its allocation to fixed income securities will increase as the fund approaches its target date. The fund’s asset allocation as of February 1, 2019 (the most recent annual
adjustment of the fund’s target asset allocations) was approximately 95.0% equity securities, 4.5% fixed income securities, and 0.5% cash and cash equivalents (including money market funds). At the stated target
Schwab Target 2060 Index Fund | Fund Summary
51
date, the fund’s allocation will be approximately 40.0% equity
securities, 53.5% fixed income securities, and 6.5% cash and cash equivalents (including money market funds). The fund will continue to reduce its allocation to equity securities for 20 years beyond the fund’s stated target date. At such
time, the fund’s asset allocation will remain fixed at approximately 25.0% equity securities, 65.6% fixed income securities, and 9.4% cash and cash equivalents (including money market funds).
In addition to the strategic annual adjustment of the
fund’s target asset allocation, the adviser may adjust the fund’s underlying fund allocations within a particular asset class based on the following considerations, including, but not limited to, market trends, its outlook for a given
market capitalization, and the underlying funds’ performance in various market conditions. Accordingly, the fund’s allocation to a particular underlying fund may increase or decrease throughout the year. Within the equity asset class,
the fund will have exposure to one or more “style classes”. For example, the style classes include domestic large-cap equity, domestic small-cap equity, and international equity. The adviser may adjust the fund’s allocation to a
particular style class based on the following considerations: market trends, its outlook for a given style class, and the style classes’ performance in various market conditions. Accordingly, the fund’s allocation to a particular style
class within the equity asset class may increase or decrease throughout the year.
The fund intends to invest in a combination of underlying
funds; however, the fund may invest directly in equity and fixed income securities and money market securities. For temporary defensive purposes during unusual economic or market conditions or for liquidity purposes, the fund may invest up to 100%
of its assets directly in cash, money market instruments, repurchase agreements and other short-term obligations. When the fund engages in such activities, it may not achieve its investment objective.
Principal Risks
The fund is subject to risks, any of which could cause an
investor to lose money. The fund’s principal risks include:
Asset Allocation Risk.
The
fund is subject to the risk that the selection of the underlying funds and the allocation of the fund’s assets among the various asset classes and market segments may cause the fund to underperform other funds with a similar investment
objective.
Conflicts of Interest Risk.
The investment adviser’s authority to select and substitute underlying funds from a variety of affiliated and unaffiliated mutual funds and ETFs may create a conflict of interest because the fees paid to it and
its affiliates by some underlying funds are higher than the fees paid by other underlying funds. The investment adviser also may have an incentive to select an affiliated underlying fund for other reasons, including to increase assets under
management or to support new investment strategies. In addition, other conflicts of interest may exist where the best interests of the affiliated underlying fund may not be
aligned with those of the fund. However, the investment adviser is a
fiduciary to the fund and is legally obligated to act in the fund’s best interests when selecting underlying funds.
Market Risk.
Financial markets
rise and fall in response to a variety of factors, sometimes rapidly and unpredictably. As with any investment whose performance is tied to these markets, the value of an investment in the fund will fluctuate, which means that an investor could lose
money over short or long periods.
ETF Risk.
When the fund invests in an ETF, it will bear a proportionate share of the ETF’s expenses. Therefore, it may be more costly to own an ETF than to own underlying securities directly. In addition, while the risks of
owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF holds, lack of liquidity in the market for an ETF’s shares can result in its value being more volatile than the underlying portfolio of
securities. Although ETFs are listed on national securities exchanges, there can be no assurance that an active trading market for such ETF shares will develop or be maintained. If an active market is not maintained, the fund may experience
difficulty in buying or selling ETF shares. In addition, the market price of ETF shares may deviate, sometimes significantly, from net asset value, particularly during periods of market volatility. Certain ETFs that seek to track the performance of
their benchmark indices may not fully replicate their index and may hold securities not included in the index, which may not produce the intended results.
Direct Investment Risk.
The
fund may invest directly in cash, cash equivalents and equity and fixed-income securities, including money market securities, to maintain its allocations. The fund’s direct investment in these securities is subject to the same or similar risks
as an underlying fund’s investment in the same securities.
Underlying Fund Investment Risk.
Before investing in the fund, investors should assess the risks associated with the underlying funds in which the fund may invest, which include any combination of the risks described below.
| • | Investment Risk. The fund may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective. |
| • | Fixed Income Risk. Interest rates rise and fall over time, which will affect an underlying fund’s yield and share price. A change in a central bank’s monetary policy or economic conditions, among other things, may result in a change in interest rates, which could have sudden and unpredictable effects on the markets and significantly impact the value of debt securities in which the fund invests. A rise in interest rates could cause an underlying fund’s share price to fall. The credit quality of a portfolio investment could also cause an underlying fund’s share price to fall. An underlying fund could lose money if the issuer or guarantor of a portfolio investment or the counterparty to a derivatives contract fails to make timely principal or interest payments or otherwise honor its obligations. Fixed |
52
Schwab Target 2060 Index Fund | Fund Summary
| income securities may be paid off earlier or later than expected. Either situation could cause an underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the fund’s yield or share price. Below investment-grade bonds (junk bonds) involve greater credit risk, are more volatile, involve greater risk of price declines and may be more susceptible to economic downturns than investment-grade securities. | |
| • | Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time. |
| • | Market Capitalization Risk. Securities issued by companies of different market capitalizations tend to go in and out of favor based on market and economic conditions. During a period when securities of a particular market capitalization fall behind other types of investments, an underlying fund’s performance could be impacted. |
| • | Money Market Fund Risk . The fund may invest in underlying money market funds that either seek to maintain a stable $1 net asset value (“stable share price money market funds”) or that have a share price that fluctuates (“variable share price money market funds”). Although an underlying stable share price money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in such a money market fund. Because the share price of an underlying variable share price money market fund will fluctuate, when the fund sells the shares it owns they may be worth more or less than what the fund originally paid for them. In addition, neither type of money market fund is designed to offer capital appreciation. Certain underlying money market funds may impose a fee upon the sale of shares or may temporarily suspend the ability to sell shares if such fund’s liquidity falls below required minimums. |
| • | Foreign Investment Risk. An underlying fund’s investments in securities of foreign issuers involve certain risks that may be greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); the imposition of economic sanctions or other government restrictions; differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may negatively impact the value or liquidity of an underlying fund’s investments, and could impair the underlying fund’s ability to meet its investment objective or invest in accordance with its investment strategy. There is a risk that investments in securities denominated in, and/or receiving revenues in, foreign currencies will decline in value relative to the U.S. dollar. |
| • | Emerging Markets Risk. Emerging market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements and greater risk associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in developed countries. As a result, there may be an increased risk of illiquidity and price volatility associated with an underlying fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar, and, at times, it may be difficult to value such investments. |
| • | Derivatives Risk. An underlying fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. An underlying fund’s use of derivatives could reduce the underlying fund’s performance, increase volatility, and could cause the underlying fund to lose more than the initial amount invested. In addition, investments in derivatives may involve leverage, which means a small percentage of assets invested in derivatives can have a disproportionately large impact on an underlying fund. However, these risks are less severe when the underlying fund uses derivatives for hedging rather than to enhance the underlying fund’s returns or as a substitute for a position or security. |
| • | Leverage Risk. Certain underlying fund transactions, such as derivatives transactions, short sales, reverse repurchase agreements, and mortgage dollar rolls, may give rise to a form of leverage and may expose an underlying fund to greater risk. Leverage tends to magnify the effect of any decrease or increase in the value of an underlying fund’s portfolio securities, which means even a small amount of leverage can have a disproportionately large impact on the underlying fund. |
| • | Concentration Risk. To the extent that an underlying fund’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector or asset class, the underlying fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more vulnerable to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector or asset class. |
| • | Investment Style Risk. Certain underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Such underlying funds follow these stocks during upturns as well as downturns. Because of their indexing strategy, these underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index. |
Schwab
Target 2060 Index Fund | Fund Summary
53
| • | Liquidity Risk. An underlying fund may be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or an underlying fund may have to sell them at a loss. |
| • | Portfolio Turnover Risk. Certain of the underlying funds may buy and sell portfolio securities actively. If they do, their portfolio turnover rate and transaction costs will rise, which may lower the underlying fund’s performance and may increase the likelihood of capital gains distributions. |
You may experience losses in the fund, including losses
before, at, or after the target date. There is no guarantee that the fund will be able to achieve its objective or provide adequate income at and through your retirement.
For more information on the risks of investing in the fund and
the underlying funds, please see the “Fund Details” section in the prospectus.
Performance
The bar chart below shows how the
fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to those of two broad based indices and a passive composite index based on
the fund’s target allocations. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ
from past performance. For current performance information, please see
www.schwabfunds.com/schwabfunds_prospectus
.
On July 24, 2017, the Investor Share class and Institutional
Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. Accordingly, the performance history of the fund, prior to July 24, 2017, is that of the fund’s former
Institutional Shares.
Annual Total Returns
(%) as of 12/31
Best Quarter:
6.06% Q1 2017
Worst Quarter: (12.18%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 16.16%
Worst Quarter: (12.18%) Q4 2018
Year-to-date performance (before taxes) as of 6/30/19: 16.16%
| Average Annual Total Returns as of 12/31/18 | ||
| 1 Year |
Since
Inception (8/25/16) |
|
| Before taxes | (8.02%) | 5.58% |
| After taxes on distributions | (8.48%) | 5.04% |
| After taxes on distributions and sale of shares | (4.42%) | 4.25% |
| Comparative Indices (reflect no deduction for expenses or taxes) | ||
| Dow Jones U.S. Total Stock Market Index | (5.30%) | 7.95% |
| Bloomberg Barclays US Aggregate Bond Index | 0.01% | 0.20% |
| Target 2060 Passive Composite Index 1 | (7.96%) | 5.71% |
| 1 | The Target 2060 Passive Composite Index is a custom blended index developed by Charles Schwab Investment Management, Inc. based on the Schwab Target 2060 Index Fund’s asset allocation glide schedule and will become more conservative as time elapses. Effective February 1, 2018, the composite is derived using the following portion allocations: 49.8% Dow Jones U.S. Large Cap Total Stock Market Index, 6.8% Dow Jones U.S. Small Cap Total Stock Market Index, 26.1% FTSE Developed ex-US Index (Net), 7.5% FTSE Emerging Index (Net), 4.8% Dow Jones U.S. Select REIT Index, 0.2% Bloomberg Barclays US Treasury 1-3 Year Index, 4.3% Bloomberg Barclays US Aggregate Bond Index and 0.5% Bloomberg Barclays US Treasury Bills 1-3 Month Index. The components that make up the composite index may vary over time. The composite index represents target allocations for 2018. Percentages listed may not total to 100% due to rounding. |
The after-tax figures reflect the highest individual federal
income tax rates in effect during the period and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your individual tax situation. In addition, after-tax returns are not relevant if you hold your fund shares
through a tax-deferred arrangement, such as a 401(k) plan, an individual retirement account (IRA) or other tax-advantaged account. In some cases, the return after taxes on distributions and sale of shares may exceed the fund’s other returns
due to an assumed benefit from any losses on a sale of shares at the end of the measurement period.
Investment Adviser
Charles Schwab Investment Management, Inc.
Portfolio Managers
Zifan Tang, Ph.D., CFA,
Senior Portfolio Manager, is responsible for the day-to-day co-management of the fund. She has managed the fund since August 2016.
Patrick Kwok, CFA,
Portfolio
Manager, is responsible for the day-to-day co-management of the fund. He has managed the fund since July 2018.
Purchase and Sale of Fund Shares
The fund is open for business each day that the New York
Stock Exchange (NYSE) is open. If the NYSE is closed due to weather or other extenuating circumstances on a day it would typically be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the fund
reserves the right to treat such day as a business day and accept purchase and redemption orders and calculate its share price as of the normally scheduled close of regular trading on the NYSE for that day.
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Schwab Target 2060 Index Fund | Fund Summary
Investors may only invest in the fund
through an account at Charles Schwab & Co., Inc. (Schwab) or another financial intermediary. When you place orders to purchase, exchange or redeem fund shares through an account at Schwab or another financial intermediary, you must follow
Schwab’s or the other financial intermediary’s transaction procedures. Shareholders who previously purchased fund shares through the fund’s transfer agent and continue to hold such shares directly through the fund’s transfer
agent may make additional purchases and place exchange and redemption orders through the fund’s transfer agent by contacting the transfer agent by phone or in writing as noted below:
| • | by telephone at 1-800-407-0256; or |
| • | by mail to DST Asset Manager Solutions, Inc., Attn: Schwab Funds, P.O. Box 219647, Kansas City, MO 64121-9647. |
There is no minimum initial investment for the fund.
Tax Information
Dividends and capital gains distributions received from the
fund will generally be taxable as ordinary income or capital gains, unless you are investing through an IRA, 401(k) or other tax-advantaged account.
Payments to Financial Intermediaries
If you purchase shares of the fund through a broker-dealer
or other financial intermediary (such as a bank), the adviser and its related companies may pay the intermediary for the sale of fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or
other financial intermediary and your salesperson to recommend the fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Schwab Target 2060 Index Fund | Fund Summary
55
About the Funds
The Schwab Target Index Funds (the funds) are designed to
provide investors with investment management, asset allocation and ongoing reallocation over time. Because the funds invest in ETFs and other mutual funds (the underlying funds), each fund is considered a “fund of funds.” A fund of funds
generally bears its own direct expenses in addition to bearing a proportionate share of expenses charged to the underlying funds in which it invests.
Each fund is designed for an investor who anticipates retiring
at or about the specific retirement date (target date) included in its name and plans to withdraw the value of the investor’s account in the fund gradually after retirement. These funds gradually decrease their equity holdings and increase
fixed income holdings as the target date approaches and beyond, becoming more conservative over time. This rebalancing over time is often referred to as the glide path of the fund. The glide path is a pre-set investment schedule that reallocates
risk based on an investor’s target date. Please see the fund’s glide path in the “Fund Details” section.
Each fund is managed based on the target date included in its
name and assumes a retirement age of 65. The target date refers to the approximate year an investor in a fund would plan to retire and likely would stop making new investments in the fund. The target date included in a fund’s name does not
necessarily represent the specific year you expect to need your assets. It is intended only as a general guide.
The funds are designed for long-term investors. Their
performance will fluctuate over time and, as with all investments, future performance may differ from past performance.
Investor Profile
The funds are designed to offer investors a professionally
managed investment plan that simplifies the investment management of an investor’s assets prior to, and continuing after, the investor’s retirement. The main component of the investment program is the funds’ ongoing reallocation of
the investor’s assets among various asset classes, including equities, fixed income securities and cash and cash equivalents (including money market funds). In particular, the funds are designed for investors who are saving for
retirement.
Who may want to invest in the funds?
The funds may be a suitable investment for investors:
| • | seeking an investment whose asset allocation mix becomes more conservative over time |
| • | seeking funds that combine the potential for capital appreciation and income |
| • | seeking the convenience of funds that allocate their assets among both equity and fixed income investments |
Who may not want to invest in the funds?
The funds may not be suitable for investors:
| • | seeking to invest for a short period of time |
| • | uncomfortable with fluctuations in the value of their investment |
| • | seeking to use the funds for educational savings accounts |
The funds are designed to be an integral part of an
investor’s overall retirement investment strategy. However, they are not designed to provide investors with a complete solution to their retirement needs. Investors must consider many factors when choosing an investment strategy for their
retirement. For example, factors such as an appropriate retirement date, your expected retirement needs and your sources of income all should be considered when you choose your overall retirement strategy.
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Schwab Target Index Funds | About the Funds
Fund Details
There can be no assurance that the funds will achieve their
objectives. Except as explicitly described otherwise, the investment objectives, investment strategies and policies of each fund may be changed without shareholder approval.
The principal investment strategies and the main risks
associated with investing in each fund are summarized in the fund summaries at the front of this prospectus. This section takes a more detailed look at some of the types of securities, the associated risks, and the various investment strategies that
may be used in the day-to-day portfolio management of the funds, as described below.
Investment Objectives, Strategies and Risks
Schwab Target Index Funds
Investment Objective
Each of the funds seeks to provide capital appreciation and
income consistent with its current asset allocation. Each fund’s investment objective is not fundamental and therefore may be changed by the fund’s Board of Trustees without shareholder approval.
Principal Investment Strategies of the Funds
Each of the funds seeks to achieve its investment objective by
investing primarily in affiliated Schwab ETFs. Each fund may also invest in affiliated Schwab and Laudus mutual funds and unaffiliated third party ETFs and mutual funds (all such ETFs and mutual funds referred to herein as, the “underlying
funds”). Each fund invests in the underlying funds in accordance with its target portfolio allocation. These underlying funds invest their assets directly in equity, fixed income, money market and other securities in accordance with their own
investment objectives and policies. For each of the funds, the target asset allocation will be adjusted annually based on the adviser’s asset allocation strategy, in accordance with a predetermined “glide path” illustrated below
under the “Asset Allocation and Investment Strategies” section. However, the adviser reserves the right to modify a fund’s target asset allocations from time to time should, in the adviser’s discretion, circumstances warrant
a change. In general, each fund’s allocation to equity securities will decrease and its allocation to fixed income securities will increase as the fund approaches its target retirement date. At the stated target date, each fund’s
allocation will be approximately 40.0% equity securities, 53.5% fixed income securities, and 6.5% cash and cash equivalents (including money market funds). Each fund will continue to reduce its allocation to equity securities for 20 years beyond the
fund’s stated target date at which time each fund’s asset allocation will remain fixed at approximately 25.0% equity securities, 65.6% fixed income securities, and 9.4% cash and cash equivalents (including money market funds).
In addition to the strategic annual adjustment of each
fund’s target asset allocation, the adviser may adjust each fund’s underlying fund allocations within a particular asset class based on the following considerations: market trends, its outlook for a given market capitalization, and the
underlying funds’ performance in various market conditions. Accordingly, a fund’s allocation to a particular underlying fund may increase or decrease throughout the year. Within the equity asset class, each fund will have exposure to one
or more “style classes”. The style classes include domestic large-cap equity, domestic small-cap equity, and international equity. The adviser may adjust a fund’s allocation to a particular style class based on the following
considerations: market trends, its outlook for a given style class, and the style classes’ performance in various market conditions. Accordingly, a fund’s allocation to a particular style class within the equity asset class may increase
or decrease throughout the year.
Each fund intends to
invest in a combination of underlying funds; however, each fund may invest directly in equity and fixed income securities and cash and cash equivalents (including money market securities).
For temporary defensive purposes during unusual economic or
market conditions or for liquidity purposes, each fund may invest up to 100% of its assets directly in cash, money market instruments, repurchase agreements and other short-term obligations. When a fund engages in such activities, it may not achieve
its investment objective.
Asset Allocation and Investment
Strategies
Each fund invests in a combination of
underlying funds. Each fund’s target allocation is intended to allocate investments among various asset classes such as equity, fixed income, and cash and cash equivalents (including money market securities). As set forth below, each fund has
its own distinct target portfolio allocation and is designed to accommodate different investment goals and risk tolerances.
The following chart shows each fund’s
target asset allocation among the various asset classes as of February 1, 2019. The allocations may not add to 100% due to rounding.
Schwab Target Index Funds | Fund
Details
57
Target Asset Allocation*
| Asset Class |
Schwab
Target
2010 Index Fund |
Schwab
Target
2015 Index Fund |
Schwab
Target
2020 Index Fund |
Schwab
Target
2025 Index Fund |
Schwab
Target
2030 Index Fund |
Schwab
Target
2035 Index Fund |
| Equity ETFs | 35.9% | 38.5% | 43.3% | 56.8% | 66.7% | 74.6% |
| Fixed Income ETFs | 56.8% | 54.7% | 50.6% | 38.7% | 29.9% | 22.8% |
| Cash and Cash Equivalents (Including Money Market Funds) | 7.3% | 6.8% | 6.1% | 4.4% | 3.3% | 2.5% |
Target Asset
Allocation*
| Asset Class |
Schwab
Target
2040 Index Fund |
Schwab
Target
2045 Index Fund |
Schwab
Target
2050 Index Fund |
Schwab
Target
2055 Index Fund |
Schwab
Target
2060 Index Fund |
| Equity ETFs | 81.6% | 87.3% | 90.5% | 93.0% | 95.0% |
| Fixed Income ETFs | 16.6% | 11.4% | 8.6% | 6.3% | 4.5% |
| Cash and Cash Equivalents (Including Money Market Funds) | 1.8% | 1.3% | 1.0% | 0.7% | 0.5% |
| * | Market appreciation or depreciation may cause a fund’s actual asset allocation to vary temporarily from the fund’s target asset allocation. |
As shown above, the portfolios of the funds with an earlier
target retirement date are more heavily allocated to fixed income securities and money market funds; therefore these funds represent a more conservative approach. Funds with later target retirement dates take a more aggressive approach by allocating
a greater amount of their assets to equity securities.
The target asset allocations of the funds have been developed
with two general rules of investing in mind:
| • | Higher investment returns are generally accompanied by a higher risk of losing money. Put another way, the greater an investment’s potential return, the greater its potential loss. For example, equity securities generally provide long-term returns that are superior to fixed income securities, although their returns have tended to be more volatile in the short-term. |
| • | Because their investments have more time to recover from losses, investors with longer time horizons generally have a higher risk tolerance. |
For these reasons, the target asset allocations of the funds
are expected to vary over time as your investment horizon changes.
Over time, the target allocation to asset classes will change
according to a predetermined “glide path,” as illustrated in the following graph. As the glide path shows, each fund’s asset mix becomes more conservative as time elapses — both prior to and after the target retirement date.
This reflects the need for reduced investment risk as retirement approaches and the need for greater certainty of income after retiring. The funds’ actual asset allocations may differ from the allocations shown in the illustration. Once a fund
reaches its most conservative planned allocation, approximately 20 years after its target date, its allocation to equity securities will remain fixed at approximately 25.0% in equity securities, 65.6% in fixed income securities and 9.4% in cash and
cash equivalents (including money market securities). The adviser reserves the right to modify the glide path from time to time should circumstances warrant.
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Schwab
Target Index Funds | Fund Details
Target Glide Path
Differences in the
performance of underlying funds and the size and frequency of purchase and redemption orders may affect the fund’s actual allocations.
More Information About Principal Investment Risks
The funds are intended for investors seeking an investment
option whose asset mix becomes more conservative over time, and who are willing to accept the risks associated with the funds’ asset allocation strategies. In general, a fund with a later target date is expected to be more volatile than a fund
with an earlier target date.
Each fund is subject to
risks, any of which could cause an investor to lose money. Principal risks of the funds include:
Conflicts of Interest Risk.
The investment adviser’s authority to select and substitute underlying funds from a variety of affiliated and unaffiliated mutual funds and ETFs may create a conflict of interest because the fees paid to it and its affiliates by some
underlying funds are higher than the fees paid by other underlying funds. The investment adviser also may have an incentive to select an affiliated underlying fund for other reasons, including to increase assets under management or to support new
investment strategies. In addition, other conflicts of interest may exist. For example, the investment adviser’s decisions to cause a fund to purchase or redeem shares of an affiliated underlying fund could be influenced by its belief that an
affiliated underlying fund may benefit from additional assets or that it is in the best interests of the affiliated underlying fund to limit purchases of shares of the underlying fund. In such cases, the best interests of the affiliated underlying
fund may not be aligned with those of the fund. However, the investment adviser is a fiduciary to each fund and is legally obligated to act in each fund’s best interests when selecting underlying funds.
Operational Risk.
The fund is
exposed to operational risk arising from a number of factors, including, but not limited to, human error, processing and communication errors, errors of the fund’s service providers, counterparties or other third parties, failed or inadequate
processes and technology or system failures. The fund seeks to reduce these operational risks through controls and procedures believed to be reasonably designed to address these risks. However, these controls and procedures cannot address every
possible risk and may not fully mitigate the risks that they are intended to address.
Underlying Fund Investment Risk.
The value of an investment in a fund is based primarily on the prices of the underlying funds that the fund purchases. In turn, the price of each underlying fund is based on the value of its securities. The fund is
subject to the performance, expenses and risks of the underlying funds in which it invests. Before investing in a fund, investors should assess the risks associated with the underlying funds in which the fund may invest and the types of investments
made by those underlying funds. These risks include any combination of the risks described below, although the fund’s exposure to a particular risk will depend on the fund’s overall asset allocation and underlying fund
allocation.
| • | Investment Risk. An investment in the underlying funds is not a bank deposit. The funds’ investments in the underlying funds are not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The fund may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective. |
Schwab Target Index
Funds | Fund Details
59
| • | Market Segment Risk. The underlying funds invest their assets in accordance with their own distinct investment objectives. As a result, the performance of an underlying fund will correlate directly with the performance of the particular segment of the stock or bond market that the fund invests in (e.g., large-cap securities, small-cap securities, foreign securities, fixed income securities or dividend-paying common stocks). This may cause the underlying fund to underperform funds that do not similarly restrict their investments to a particular market segment. |
| • | Equity Risk. The prices of equity securities in which the underlying funds invest rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time. Due to their fixed income features, preferred stocks provide higher income potential than issuers’ common stocks, but typically are more sensitive to interest rate changes than the underlying common stock. The rights of common stockholders are generally subordinate to the rights associated with an issuer’s preferred stocks and the rights of preferred stockholders are generally subordinate to the rights associated with an issuer’s debt securities on the distribution of an issuer’s assets in the event of a liquidation. |
| • | Market Capitalization Risk. Securities issued by companies of different market capitalizations tend to go in and out of favor based on market and economic conditions. In addition, there may be less trading volume in securities issued by mid- and small-cap companies than those issued by larger companies and, as a result, trading volatility may have a greater impact on the value of securities of mid- and small-cap companies. Securities issued by large-cap companies, on the other hand, may not be able to attain the high growth rates of some mid- and small-cap companies. During a period when securities of a particular market capitalization fall behind other types of investments, an underlying fund’s performance could be impacted. |
| • | Large-Cap Company Risk. Large-cap companies are generally more mature than smaller companies. They also may have fewer new market opportunities for their products or services, may focus resources on maintaining their market share, and may be unable to respond quickly to new competitive challenges. As a result, the securities issued by these companies may not be able to reach the same levels of growth as the securities issued by small- or mid-cap companies. |
| • | Mid-Cap Company Risk. Mid-cap companies may be more vulnerable to adverse business or economic events than larger, more established companies and their securities may be riskier than those issued by large-cap companies. The value of securities issued by mid-cap companies may be based in substantial part on future expectations rather than current achievements and their prices may move sharply, especially during market upturns and downturns. |
| • | Small-Cap Company Risk. Small-cap companies may be more vulnerable to adverse business or economic events than larger, more established companies and their securities may be riskier than those issued by larger companies. The value of securities issued by small-cap companies may be based in substantial part on future expectations rather than current achievements and their prices may move sharply, especially during market upturns and downturns. In addition, small-cap companies may have limited financial resources, management experience, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies. Further, small-cap companies may have less publicly available information and such information may be inaccurate or incomplete. |
| • | Convertible Securities Risk. Certain of the underlying funds may invest in convertible securities, which are bonds, debentures, notes, preferred stock or other securities that may be converted into or exercised for a prescribed amount of common stock at a specified time and price. Convertible securities provide an opportunity for equity participation, with the potential for a higher dividend or interest yield and lower price volatility compared to common stock. The value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline, and the credit standing of the issuer. The price of a convertible security will also normally vary in some proportion to changes in the price of the underlying common stock because of the conversion or exercise feature. |
| • | Growth Investing Risk. Certain of the underlying funds pursue a “growth style” of investing. Growth investing focuses on a company’s prospects for growth of revenue and earnings. If a company’s earnings or revenues fall short of expectations, its stock price may fall dramatically. Growth stocks also can perform differently from the market as a whole and other types of stocks and can be more volatile than other types of stocks. Since growth companies usually invest a high portion of earnings in their business, they may lack the dividends of value stocks that can cushion stock prices in a falling market. Growth stocks may also be more expensive relative to their earnings or assets compared to value or other stocks. |
| • | Value Investing Risk. Certain of the underlying funds may pursue a “value style” of investing. Value investing focuses on companies whose stocks appear undervalued in light of factors such as the company’s earnings, book value, revenues or cash flow. If an underlying |
60
Schwab
Target Index Funds | Fund Details
| fund’s investment adviser’s (or sub-adviser’s) assessment of a company’s value or prospects for exceeding earnings expectations or market conditions is wrong, the underlying fund could suffer losses or produce poor performance relative to other funds. In addition, “value stocks” can continue to be undervalued by the market for long periods of time. |
| • | Interest Rate Risk. An underlying fund’s investments in fixed income securities are subject to the risk that interest rates may rise and fall over time. As with any investment whose yield reflects current interest rates, an underlying fund’s yield will change over time. During periods when interest rates are low, an underlying fund’s yield (and total return) also may be low. Changes in interest rates also may affect an underlying fund’s share price: a rise in interest rates could cause the fund’s share price to fall. This risk is greater when the underlying fund holds bonds with longer maturities. An underlying fund may also lose money if interest rates rise sharply. The longer an underlying fund’s portfolio duration, the more sensitive to interest rate movements its share price is likely to be. A change in a central bank’s monetary policy or economic conditions, among other things, may result in a change in interest rates, which could have sudden and unpredictable effects on the markets and significantly impact the value of debt securities in which an underlying fund invests. Rising interest rates may decrease liquidity in the fixed income securities markets, making it more difficult for an underlying fund to sell its fixed income securities holdings at a time when the investment adviser might wish to sell such securities. In addition, decreased market liquidity also may make it more difficult to value some or all of an underlying fund’s fixed income securities holdings. If the underlying fund invests in inflation-protected securities, such securities may react differently to interest rate changes than other types of debt securities and, tend to react to changes in “real” interest rates. |
| • | Credit Risk. Certain of the underlying funds are subject to the risk that a decline in the credit quality of a portfolio investment could cause the fund’s share price to fall. The underlying fund could lose money if the issuer or guarantor of a portfolio investment or the counterparty to a derivatives contract fails to make timely principal or interest payments or otherwise honor its obligations. Below investment-grade bonds (junk bonds) involve greater risks of default or downgrade and are more volatile than investment-grade bonds. Below investment-grade bonds also involve greater risk of price declines than investment-grade securities due to actual or perceived changes in an issuer’s creditworthiness. In addition, issuers of below investment-grade bonds may be more susceptible than other issuers to economic downturns. Such bonds are subject to the risk that the issuer may not be able to pay interest or dividends and ultimately to repay principal upon maturity. Discontinuation of these payments could substantially adversely affect the market value of the bonds. |
| • | Prepayment and Extension Risk. An underlying fund’s investments in fixed income securities are subject to the risk that the securities may be paid off earlier or later than expected. Either situation could cause the underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the fund’s yield or share price. In addition, rising interest rates tend to extend the duration of certain fixed income securities, making them more sensitive to changes in interest rates. As a result, in a period of rising interest rates, an underlying fund that holds these securities may exhibit additional volatility. This is known as extension risk. When interest rates decline, borrowers may pay off their fixed income securities sooner than expected. This can reduce the returns of an underlying fund because the fund will have to reinvest that money at the lower prevailing interest rates. This is known as prepayment risk. |
| • | U.S. Government Securities Risk. Some of the U.S. government securities that the underlying funds invest in are not backed by the full faith and credit of the U.S. government, which means they are neither issued nor guaranteed by the U.S. Treasury. Issuers such as the Federal Home Loan Banks maintain limited access to credit lines from the U.S. Treasury. Others, such as obligations issued by the Federal Farm Credit Banks Funding Corporation, are supported solely by the credit of the issuer. There can be no assurance that the U.S. government will provide financial support to securities of its agencies and instrumentalities if it is not obligated to do so under law. Also, any government guarantees on securities the underlying funds own do not extend to shares of the underlying funds themselves. On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and Freddie Mac, placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality. Under this agreement, the U.S. Treasury has pledged to provide up to $100 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This is intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. No assurance can be given that the U.S. Treasury initiatives will be successful. |
| • | Inflation-Protected Securities Risk. Certain of the underlying funds may invest in inflation-protected securities. The value of inflation-protected securities generally will fluctuate in response to changes in “real” interest rates. Real interest rates represent nominal (or stated) interest rates reduced by the expected impact of inflation. The value of an inflation-protected security generally decreases when real interest rates rise and generally increase when real interest rates fall. In addition, the principal value of an inflation-protected security is periodically adjusted up or down along with the rate of inflation. If the measure of inflation falls, the principal value of the inflation-protected security will be adjusted downwards, and consequently, the interest payable on the security |
Schwab Target Index Funds | Fund
Details
61
| will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed by the United States Treasury in the case of Treasury Inflation-Protected Securities. For securities that do not provide a similar guarantee, the adjusted principal value of the security to be repaid at maturity is subject to credit risk. | |
| • | Mortgage-Backed and Mortgage Pass-Through Securities Risk. Certain of the mortgage-backed securities in which an underlying fund may invest are not backed by the full faith and credit of the U.S. government and there can be no assurance that the U.S. government would provide financial support where it was not obligated to do so. Mortgage-backed securities tend to increase in value less than other debt securities when interest rates decline, but are subject to similar risk of decline in market value during periods of rising interest rates. Transactions in mortgage pass-through securities often occur through TBA transactions. Default by or bankruptcy of a counterparty to a TBA transaction could expose the underlying fund to possible losses. |
| • | Mortgage Dollar Rolls Risk. Mortgage dollar rolls are transactions in which an underlying fund sells mortgage-backed securities to a dealer and simultaneously agrees to repurchase similar securities in the future at a predetermined price. An underlying fund’s mortgage dollar rolls could lose money if the price of the mortgage-backed securities sold falls below the agreed upon repurchase price, or if the counterparty is unable to honor the agreement. |
| • | Money Market Fund Risk. In addition to the risks discussed under “Investment Risk” above, an investment by the fund in an underlying money market fund has additional risks. The fund may invest in underlying money market funds that either seek to maintain a stable $1 net asset value (“stable share price money market funds”) or that have a share price that fluctuates (“variable share price money market funds”). Although an underlying stable share price money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in such a money market fund. Because the share price of an underlying variable share price money market fund will fluctuate, when the fund sells the shares it owns they may be worth more or less than what the fund originally paid for them. In addition, neither type of money market fund is designed to offer capital appreciation. In exchange for their emphasis on stability and liquidity, money market investments may offer lower long-term performance than stock or bond investments. Certain underlying money market funds may impose a fee upon the sale of shares or may temporarily suspend the ability to sell shares if such fund’s liquidity falls below required minimums. |
| • | Foreign Investment Risk. An underlying fund’s investments in securities of foreign issuers involve certain risks that may be greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. In certain countries, legal remedies available to investors may be more limited than those available with respect to investments in the U.S. These risks may negatively impact the value or liquidity of an underlying fund’s investments and could impair the underlying fund’s ability to meet its investment objective or invest in accordance with its investment strategy. In addition, an underlying fund’s investments in foreign securities may be subject to economic sanctions or other government restrictions, including trade tariffs, embargoes or limitations on trade which could have a significant impact on a country’s markets overall as well as global economies or markets. There also is the risk that the cost of buying, selling, and holding foreign securities, including brokerage, tax, and custody costs, may be higher than those involved in domestic transactions. The securities of some foreign companies may be less liquid and, at times, more volatile than securities of comparable U.S. companies. An underlying fund may also experience more rapid or extreme changes in value as compared to an underlying fund that invests solely in securities of U.S. companies because the securities markets of many foreign countries are relatively small, with a limited number of companies representing a small number of industries. To the extent an underlying fund’s investments in a single country or a limited number of countries represent a large percentage of the underlying fund’s assets, the underlying fund’s performance may be adversely affected by the economic, political, regulatory and social conditions in those countries, and the underlying fund’s price may be more volatile than the price of an underlying fund that is geographically diversified. |
| • | Emerging Markets Risk. The risks of foreign investments apply to, and may be heightened in connection with, investments in emerging market countries or securities of issuers that conduct their business in emerging markets. Emerging market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements and greater risk associated with the custody of securities. It is sometimes difficult to obtain and enforce court judgments in such countries. There is often a greater potential for nationalization, expropriation, confiscatory taxation, government regulation, social instability or diplomatic developments (including war) in emerging market countries, which could adversely affect the economies of, or investments in securities of issuers located in, such countries. In addition, emerging markets are substantially smaller than developed markets, and the financial stability of issuers (including governments) in emerging market countries may be more precarious than in developed countries. As a result, there will tend to be an increased risk of illiquidity and price volatility associated with an underlying fund’s investments in emerging market countries which may be magnified by currency fluctuations relative to the U.S. dollar, and, at times, it may be difficult to value such investments. |
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| • | Currency Risk. An underlying fund’s investments in securities denominated in, and/or receiving revenues in, foreign currencies, will subject the underlying fund to the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in an underlying fund would be adversely affected. Currency exchange rates may fluctuate in response to factors extrinsic to that country’s economy, which makes the forecasting of currency market movements extremely difficult. Currency rates in foreign countries may fluctuate significantly over short periods of time for a number of reasons, including changes in interest rates; intervention (or failure to intervene) by U.S. or foreign governments, central banks or supranational entities such as the International Monetary Fund; or by the imposition of currency controls or other political developments in the United States or abroad. These can result in losses to an underlying fund if it is unable to deliver or receive currency or monies in settlement of obligations and could also cause hedges it has entered into to be rendered useless, resulting in full currency exposure as well as incurring transaction costs. Forward contracts on foreign currencies are not traded on exchanges; rather, a bank or dealer will act as agent or as principal in order to make or take future delivery of a specified lot of a particular currency for the underlying fund’s account. An underlying fund is subject to the risk of a counterparty’s failure, inability or refusal to perform with respect to such contracts. |
| • | Real Estate Investment Risk. Certain of the underlying funds have a policy of concentrating their investments in real estate companies and companies related to the real estate industry. Such an underlying fund is subject to risks associated with the direct ownership of real estate securities and a fund’s investment in such an underlying fund will be closely linked to the performance of the real estate markets. An investment by a fund in an underlying fund that invests, but does not concentrate, in real estate companies and companies related to the real estate industry will subject the fund to the risks associated with the direct ownership of real estate securities to a lesser extent. These risks include, among others, declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds; overbuilding; extended vacancies of properties; defaults by borrowers or tenants, particularly during an economic downturn; increasing competition; increases in property taxes and operating expenses; changes in zoning laws; losses due to costs resulting from the clean-up of environmental problems; liability to third parties for damages resulting from environmental problems; casualty or condemnation losses; limitations on rents; changes in market and sub-market values and the appeal of properties to tenants; and changes in interest rates. |
| • | Real Estate Investment Trusts (REITs) Risk. Certain of the underlying funds invest in REITs. In addition to the risks associated with investing in securities of real estate companies and real estate related companies, REITs are subject to certain additional risks. Equity REITs may be affected by changes in the value of the underlying properties owned by the trusts, and mortgage REITs may be affected by the quality of any credit extended. Further, REITs are dependent upon specialized management skills and may have their investments in relatively few properties, or in a small geographic area or a single property type. REITs are also subject to heavy cash flow dependency, defaults by borrowers and self-liquidation. In addition, REITs could possibly fail to qualify for tax free pass-through of income under the Internal Revenue Code, or to maintain their exemptions from registration under the Investment Company Act of 1940. The failure of a company to qualify as a REIT under federal tax law may have adverse consequences to an underlying fund that invests in that REIT. The above factors may also adversely affect a borrower’s or a lessee’s ability to meet its obligations to the REIT. In the event of a default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments. In addition, REITs have their own expenses, and an underlying fund that invests in REITs will bear a proportionate share of those expenses. |
| • | Short Sales Risk. Certain underlying funds may engage in short sales, which are transactions in which the underlying fund sells a security it does not own. To complete a short sale, the underlying fund must borrow the security to deliver to the buyer. The underlying fund is then obligated to replace the borrowed security by purchasing the security at the market price at the time of replacement. This price may be more or less than the price at which the security was sold by the underlying fund and the underlying fund will incur a loss if the price of the security sold short increases between the time of the short sale and the time the underlying fund replaces the borrowed security. |
| • | Derivatives Risk. An underlying fund may use derivatives to enhance returns or hedge against market declines. Examples of derivatives are options, futures, options on futures and swaps. An option is the right to buy or sell an instrument at a specific price before a specific date. A future is an agreement to buy or sell a financial instrument at a specific price on a specific day. A swap is an agreement whereby two parties agree to exchange payment streams calculated in relation to a rate, index, instrument or certain securities and a predetermined amount. A credit default swap is an agreement in which the seller agrees to make a payment to the buyer in the event of a specified credit event in exchange for a fixed payment or series of fixed payments. |
| An underlying fund’s use of derivative instruments involves risks different from or possibly greater than the risks associated with investing directly in securities and other traditional investments. Certain of these risks, such as credit risk, leverage risk, liquidity risk, market risk and management risk, are discussed elsewhere in this section. An underlying fund’s use of derivatives is also subject to lack of availability risk, valuation risk, correlation risk and tax risk. Lack of availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Valuation risk is the risk that a |
Schwab Target Index
Funds | Fund Details
63
| particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause an underlying fund to realize higher amounts of short-term capital gains. An underlying fund’s use of derivatives could reduce the underlying fund’s performance, increase its volatility, and could cause the fund to lose more than the initial amount invested. The use of derivatives that are subject to regulation by the Commodity Futures Trading Commission (CFTC) by an underlying fund could cause a fund to become a commodity pool, which would require the fund to comply with certain CFTC rules. | |
| • | Leverage Risk. Certain underlying fund transactions, such as derivatives transactions, short sales, reverse repurchase agreements, and mortgage dollar rolls, may give rise to a form of leverage and may expose the underlying fund to greater risk. In a reverse repurchase agreement, the underlying fund would sell a security and enter into an agreement to repurchase the security at a specified future date and price. Leverage tends to magnify the effect of any decrease or increase in the value of the underlying fund’s portfolio securities. The use of leverage may cause the underlying fund to liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its obligations. |
| • | Non-Diversification Risk. Certain of the underlying funds are non-diversified and, as such, may invest a greater percentage of their assets in the securities in a single issuer than an underlying fund that is diversified. A non-diversified underlying fund is more susceptible to risks associated with a single economic, political or regulatory occurrence than a diversified underlying fund. |
| • | Securities Lending Risk. An underlying fund may lend its portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. When an underlying fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the underlying fund will also receive a fee or interest on the collateral. Securities lending involves the risk of loss of rights in, or delay in recovery of, the loaned securities if the borrower fails to return the security loaned or becomes insolvent. An underlying fund will also bear the risk of any decline in value of securities acquired with cash collateral. An underlying fund may pay lending fees to a party arranging the loan. |
| • | Tracking Error Risk. Certain underlying funds seek to track the performance of their benchmark indices, although they may not be successful in doing so. The divergence between the performance of an underlying fund and its benchmark index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant. For example, an underlying fund may not invest in certain securities in its benchmark index, or match the securities’ weighting to the benchmark, due to regulatory, operational, custodial or liquidity constraints, which may result in tracking error. An underlying fund may attempt to offset the effects of not being invested in certain index securities by making substitute investments, but these efforts may not be successful. In addition, cash flows into and out of an underlying fund, operating expenses and trading costs all affect the ability of the fund to match the performance of its benchmark index, because the benchmark index does not have to manage cash flows and does not incur any costs. |
| • | Sampling Index Tracking Risk. Certain underlying funds that seek to track the performance of their benchmark indices may not fully replicate their index and may hold securities not included in the index. As a result, such underlying funds are subject to the risk that their investment adviser’s investment management strategy, the implementation of which is subject to a number of constraints, may not produce the intended results. Because such an underlying fund utilizes a sampling approach it may not track the return of the index as well as it would if the underlying fund purchased all of the securities in the index. |
| • | Investment Style Risk. An underlying fund’s investment style may impact the performance of the fund. For example, an underlying fund may invest in accordance with an indexing investment style, causing the underlying fund to follow the performance of an index during upturns as well as downturns. In addition, an underlying fund may have an investment style that favors certain types of investments over others. As a result, such an underlying fund may underperform funds that do not limit their investments to the particular type of investment. |
| • | Shares of Certain Underlying Funds May Trade at Prices Other Than NAV. Certain underlying fund shares may be bought and sold by the fund in the secondary market at market prices. Although it is expected that the market price of the shares of an underlying fund will approximate that underlying fund’s net asset value (NAV), there may be times when the market price and the NAV vary significantly. The fund may pay more than NAV when it buys shares of the fund in the secondary market, and the fund may receive less than NAV when it sells those shares in the secondary market. The market price of underlying fund shares may deviate, sometimes significantly, from NAV during periods of market volatility. |
| • | Liquidity Risk. Liquidity risk exists when particular investments are difficult to purchase, sell or value, especially during stressed market conditions. The market for certain investments may become illiquid due to specific adverse changes in the conditions of a particular issuer or under adverse market or economic conditions independent of the issuer. In addition, limited dealer inventories of certain securities could potentially lead to decreased liquidity. In such cases, an underlying fund, due to limitations on investments in illiquid securities and the difficulty in readily purchasing and selling such securities at favorable times or prices, may decline in value, experience lower returns and/or be unable to achieve its desired level of exposure to a certain issuer or sector. Further, transactions in illiquid securities may entail transaction costs that are higher than those for transactions in liquid securities. Liquidity risk also includes |
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Target Index Funds | Fund Details
| the risk that market conditions or large shareholder redemptions may impact the ability of an underlying fund to meet redemption requests within the required time period. In order to meet such redemption requests, the underlying fund may be forced to sell securities at inopportune times or prices. | |
| • | High-Yield Risk. Underlying funds that invest in high-yield securities and unrated securities of similar credit quality (sometimes called junk bonds) may be subject to greater levels of credit and liquidity risk than underlying funds that do not invest in such securities. These securities are considered predominately speculative with respect to the issuer’s continuing ability to make principal and interest payments. An economic downturn or period of rising interest rates could adversely affect the market for these securities and reduce an underlying fund’s ability to sell these securities (liquidity risk). If the issuer of a security is in default with respect to interest or principal payments, an underlying fund may lose its entire investment. Because of the risks involved in investing in high-yield securities, an investment in an underlying fund that invests in such securities should be considered speculative. |
| • | Repurchase Agreements Risk . When an underlying fund enters into a repurchase agreement, the underlying fund is exposed to the risk that the other party (i.e., the counterparty) will not fulfill its contractual obligation. In a repurchase agreement, there exists the risk that, when an underlying fund buys a security from a counterparty that agrees to repurchase the security at an agreed upon price (usually higher) and time, the counterparty will not repurchase the security. These risks are magnified to the extent that a repurchase agreement is secured by collateral other than cash and government securities, such as debt securities, equity securities and high-yield securities that are rated below investment grade (Alternative Collateral). High-yield securities that are used as Alternative Collateral are subject to greater levels of credit and liquidity risk, and are considered primarily speculative with respect to the issuer’s continuing ability to make principal and interest payments. Alternative Collateral may be subject to greater price volatility and may be more volatile or less liquid than other types of collateral, increasing the risk that an underlying fund will be unable to recover fully in the event of a counterparty’s default. |
Schwab Target Index Funds | Fund
Details
65
Risk Spectrum
Each fund has a different level of risk and the amount of risk
is relative to the time horizon included in its name. Funds with earlier target retirement dates will tend to be less risky and have lower expected returns than the funds with later target retirement dates. The following risk spectrum is designed to
provide investors with a general overview of the relative risk characteristics of each fund.
Portfolio Holdings
The funds may make various types of portfolio securities
information available to shareholders. The funds post a detailed list of the securities held by each fund at
www.schwabfunds.com/schwabfunds_prospectus
(under “Portfolio Holdings”) as of month end.
This list is generally posted approximately 15-20 days after the end of the month remaining posted for at least six months. The funds also post in the fund summary section of the funds’ website and on fund fact sheets certain summary portfolio
attributes, including top ten holdings, approximately 5-25 days after the end of the calendar quarter. The funds may exclude any portion of these portfolio holdings from publication when deemed in the best interest of a fund. Further information
regarding the funds’ policy and procedures on the disclosure of portfolio holdings is available in the Statement of Additional Information (SAI).
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Target Index Funds | Fund Details
Financial Highlights
This section provides further details about each fund’s
financial history for the past five years or, if shorter, for its period of operations. Certain information reflects financial results for a single fund share. “Total return” shows the percentage that an investor in a fund would
have earned or lost during a given period, assuming all distributions were reinvested. Each fund’s independent registered public accounting firm, PricewaterhouseCoopers LLP (PwC), audited these figures. PwC’s full report is included in
each fund’s annual report (see back cover).
Schwab
Target 2010 Index Fund
|
4/1/18–
3/31/19 |
4/1/17–
3/31/18 1 |
8/25/16
2
–
3/31/17 |
||||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $ 10.59 | $ 10.15 | $10.00 | |||
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) 3 | 0.27 | 0.22 | 0.12 | |||
| Net realized and unrealized gains (losses) | 0.23 | 0.34 | 0.10 | |||
| Total from investment operations | 0.50 | 0.56 | 0.22 | |||
| Less distributions: | ||||||
| Distributions from net investment income | (0.20) | (0.12) | (0.07) | |||
| Distributions from net realized gains | (0.01) | (0.00) 4 | – | |||
| Total distributions | (0.21) | (0.12) | (0.07) | |||
| Net asset value at end of period | $ 10.88 | $ 10.59 | $10.15 | |||
| Total return | 4.81% | 5.57% | 2.26% 5 | |||
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses 6 | 0.03% | 0.03% | 0.02% 7 | |||
| Gross operating expenses 6 | 0.08% | 0.08% | 0.08% 7 | |||
| Net investment income (loss) | 2.53% | 2.11% | 1.99% 7 | |||
| Portfolio turnover rate | 30% | 28% | 2% 5 | |||
| Net assets, end of period (x 1,000) | $25,391 | $14,185 | $ 955 | |||
1
Effective July 24, 2017, the Investor Share class and the
Institutional Share class were consolidated into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Institutional Shares.
2
Commencement of operations.
3
Calculated based on the average shares outstanding during
the period.
4
Per-share amount was less than $0.005.
5
Not annualized.
6
The expenses incurred by
the underlying funds in which the fund invests are not included in these ratios. If the expenses incurred by the underlying funds were included in these ratios they would have increased by 0.05%, 0.05% and 0.06% (annualized), respectively, for the
periods ended March 31, 2019, March 31, 2018 and March 31, 2017.
7
Annualized.
Schwab
Target Index Funds | Financial Highlights
67
Schwab Target 2015 Index Fund
|
4/1/18–
3/31/19 |
4/1/17–
3/31/18 1 |
8/25/16
2
–
3/31/17 |
||||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $ 10.61 | $ 10.17 | $10.00 | |||
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) 3 | 0.27 | 0.22 | 0.13 | |||
| Net realized and unrealized gains (losses) | 0.22 | 0.38 | 0.12 | |||
| Total from investment operations | 0.49 | 0.60 | 0.25 | |||
| Less distributions: | ||||||
| Distributions from net investment income | (0.17) | (0.15) | (0.08) | |||
| Distributions from net realized gains | (0.01) | (0.01) | – | |||
| Total distributions | (0.18) | (0.16) | (0.08) | |||
| Net asset value at end of period | $ 10.92 | $ 10.61 | $10.17 | |||
| Total return | 4.74% | 5.83% | 2.49% 4 | |||
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses 5 | 0.03% | 0.03% | 0.02% 6 | |||
| Gross operating expenses 5 | 0.08% | 0.08% | 0.08% 6 | |||
| Net investment income (loss) | 2.54% | 2.06% | 2.15% 6 | |||
| Portfolio turnover rate | 29% | 47% | 15% 4 | |||
| Net assets, end of period (x 1,000) | $45,688 | $20,229 | $ 797 | |||
1
Effective July 24, 2017, the Investor Share class and the
Institutional Share class were consolidated into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Institutional Shares.
2
Commencement of operations.
3
Calculated based on the average shares outstanding during
the period.
4
Not annualized.
5
The expenses incurred by
the underlying funds in which the fund invests are not included in these ratios. If the expenses incurred by the underlying funds were included in these ratios they would have increased by 0.05%, 0.05% and 0.06% (annualized), respectively, for the
periods ended March 31, 2019, March 31, 2018 and March 31, 2017.
6
Annualized.
68
Schwab Target Index Funds | Financial Highlights
Schwab Target 2020 Index Fund
|
4/1/18–
3/31/19 |
4/1/17–
3/31/18 1 |
8/25/16
2
–
3/31/17 |
||||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $ 10.92 | $ 10.30 | $10.00 | |||
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) 3 | 0.27 | 0.23 | 0.16 | |||
| Net realized and unrealized gains (losses) | 0.22 | 0.52 | 0.21 | |||
| Total from investment operations | 0.49 | 0.75 | 0.37 | |||
| Less distributions: | ||||||
| Distributions from net investment income | (0.23) | (0.13) | (0.07) | |||
| Distributions from net realized gains | (0.00) 4 | (0.00) 4 | – | |||
| Total distributions | (0.23) | (0.13) | (0.07) | |||
| Net asset value at end of period | $ 11.18 | $ 10.92 | $10.30 | |||
| Total return | 4.73% | 7.30% | 3.69% 5 | |||
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses 6 | 0.03% | 0.03% | 0.03% 7 | |||
| Gross operating expenses 6 | 0.08% | 0.08% | 0.08% 7 | |||
| Net investment income (loss) | 2.48% | 2.15% | 2.68% 7 | |||
| Portfolio turnover rate | 13% | 21% | 17% 5 | |||
| Net assets, end of period (x 1,000) | $129,760 | $70,841 | $ 5,455 | |||
1
Effective July 24, 2017, the Investor Share class and the
Institutional Share class were consolidated into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Institutional Shares.
2
Commencement of operations.
3
Calculated based on the average shares outstanding during
the period.
4
Per-share amount was less
than $0.005.
5
Not annualized.
6
The expenses incurred by
the underlying funds in which the fund invests are not included in these ratios. If the expenses incurred by the underlying funds were included in these ratios they would have increased by 0.05%, 0.05% and 0.05% (annualized), respectively, for the
periods ended March 31, 2019, March 31, 2018 and March 31, 2017.
7
Annualized.
Schwab
Target Index Funds | Financial Highlights
69
Schwab Target 2025 Index Fund
|
4/1/18–
3/31/19 |
4/1/17–
3/31/18 1 |
8/25/16
2
–
3/31/17 |
||||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $ 11.18 | $ 10.40 | $10.00 | |||
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) 3 | 0.28 | 0.25 | 0.14 | |||
| Net realized and unrealized gains (losses) | 0.23 | 0.68 | 0.34 | |||
| Total from investment operations | 0.51 | 0.93 | 0.48 | |||
| Less distributions: | ||||||
| Distributions from net investment income | (0.23) | (0.15) | (0.08) | |||
| Distributions from net realized gains | (0.00) 4 | (0.00) 4 | – | |||
| Total distributions | (0.23) | (0.15) | (0.08) | |||
| Net asset value at end of period | $ 11.46 | $ 11.18 | $10.40 | |||
| Total return | 4.79% | 8.93% | 4.82% 5 | |||
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses 6 | 0.03% | 0.04% | 0.03% 7 | |||
| Gross operating expenses 6 | 0.08% | 0.08% | 0.08% 7 | |||
| Net investment income (loss) | 2.46% | 2.22% | 2.41% 7 | |||
| Portfolio turnover rate | 13% | 14% | 6% 5 | |||
| Net assets, end of period (x 1,000) | $154,328 | $84,235 | $ 1,649 | |||
1
Effective July 24, 2017, the Investor Share class and the
Institutional Share class were consolidated into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Institutional Shares.
2
Commencement of operations.
3
Calculated based on the average shares outstanding during
the period.
4
Per-share amount was less than $0.005.
5
Not annualized.
6
The expenses incurred by
the underlying funds in which the fund invests are not included in these ratios. If the expenses incurred by the underlying funds were included in these ratios they would have increased by 0.05%, 0.04% and 0.05% (annualized), respectively, for the
periods ended March 31, 2019, March 31, 2018 and March 31, 2017.
7
Annualized.
70
Schwab Target Index Funds | Financial Highlights
Schwab Target 2030 Index Fund
|
4/1/18–
3/31/19 |
4/1/17–
3/31/18 1 |
8/25/16
2
–
3/31/17 |
||||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $ 11.37 | $ 10.46 | $10.00 | |||
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) 3 | 0.28 | 0.26 | 0.15 | |||
| Net realized and unrealized gains (losses) | 0.24 | 0.80 | 0.41 | |||
| Total from investment operations | 0.52 | 1.06 | 0.56 | |||
| Less distributions: | ||||||
| Distributions from net investment income | (0.24) | (0.15) | (0.10) | |||
| Distributions from net realized gains | – | (0.00) 4 | – | |||
| Total distributions | (0.24) | (0.15) | (0.10) | |||
| Net asset value at end of period | $ 11.65 | $ 11.37 | $10.46 | |||
| Total return | 4.76% | 10.12% | 5.66% 5 | |||
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses 6 | 0.03% | 0.04% | 0.03% 7 | |||
| Gross operating expenses 6 | 0.08% | 0.08% | 0.08% 7 | |||
| Net investment income (loss) | 2.46% | 2.30% | 2.49% 7 | |||
| Portfolio turnover rate | 8% | 8% | 7% 5 | |||
| Net assets, end of period (x 1,000) | $201,250 | $109,554 | $ 3,258 | |||
1
Effective July 24, 2017, the Investor Share class and the
Institutional Share class were consolidated into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Institutional Shares.
2
Commencement of operations.
3
Calculated based on the average shares outstanding during
the period.
4
Per-share amount was less than $0.005.
5
Not annualized.
6
The expenses incurred by
the underlying funds in which the fund invests are not included in these ratios. If the expenses incurred by the underlying funds were included in these ratios they would have increased by 0.05%, 0.04% and 0.05% (annualized), respectively, for the
periods ended March 31, 2019, March 31, 2018 and March 31, 2017.
7
Annualized.
Schwab
Target Index Funds | Financial Highlights
71
Schwab Target 2035 Index Fund
|
4/1/18–
3/31/19 |
4/1/17–
3/31/18 1 |
8/25/16
2
–
3/31/17 |
||||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $ 11.53 | $ 10.54 | $10.00 | |||
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) 3 | 0.29 | 0.26 | 0.12 | |||
| Net realized and unrealized gains (losses) | 0.22 | 0.90 | 0.52 | |||
| Total from investment operations | 0.51 | 1.16 | 0.64 | |||
| Less distributions: | ||||||
| Distributions from net investment income | (0.22) | (0.17) | (0.10) | |||
| Distributions from net realized gains | (0.00) 4 | (0.00) 4 | – | |||
| Total distributions | (0.22) | (0.17) | (0.10) | |||
| Net asset value at end of period | $ 11.82 | $ 11.53 | $10.54 | |||
| Total return | 4.68% | 10.96% | 6.44% 5 | |||
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses 6 | 0.03% | 0.04% | 0.03% 7 | |||
| Gross operating expenses 6 | 0.08% | 0.08% | 0.08% 7 | |||
| Net investment income (loss) | 2.49% | 2.29% | 2.04% 7 | |||
| Portfolio turnover rate | 6% | 14% | 13% 5 | |||
| Net assets, end of period (x 1,000) | $126,200 | $62,526 | $ 1,904 | |||
1
Effective July 24, 2017, the Investor Share class and the
Institutional Share class were consolidated into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Institutional Shares.
2
Commencement of operations.
3
Calculated based on the average shares outstanding during
the period.
4
Per-share amount was less than $0.005.
5
Not annualized.
6
The expenses incurred by
the underlying funds in which the fund invests are not included in these ratios. If the expenses incurred by the underlying funds were included in these ratios they would have increased by 0.05%, 0.04% and 0.05% (annualized), respectively, for the
periods ended March 31, 2019, March 31, 2018 and March 31, 2017.
7
Annualized.
72
Schwab Target Index Funds | Financial Highlights
Schwab Target 2040 Index Fund
|
4/1/18–
3/31/19 |
4/1/17–
3/31/18 1 |
8/25/16
2
–
3/31/17 |
||||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $ 11.69 | $ 10.59 | $10.00 | |||
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) 3 | 0.29 | 0.27 | 0.15 | |||
| Net realized and unrealized gains (losses) | 0.21 | 1.00 | 0.55 | |||
| Total from investment operations | 0.50 | 1.27 | 0.70 | |||
| Less distributions: | ||||||
| Distributions from net investment income | (0.24) | (0.17) | (0.11) | |||
| Distributions from net realized gains | – | (0.00) 4 | – | |||
| Total distributions | (0.24) | (0.17) | (0.11) | |||
| Net asset value at end of period | $ 11.95 | $ 11.69 | $10.59 | |||
| Total return | 4.49% | 11.97% | 7.09% 5 | |||
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses 6 | 0.03% | 0.04% | 0.03% 7 | |||
| Gross operating expenses 6 | 0.08% | 0.08% | 0.08% 7 | |||
| Net investment income (loss) | 2.48% | 2.33% | 2.48% 7 | |||
| Portfolio turnover rate | 2% | 15% | 8% 5 | |||
| Net assets, end of period (x 1,000) | $143,404 | $72,830 | $ 1,514 | |||
1
Effective July 24, 2017, the Investor Share class and the
Institutional Share class were consolidated into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Institutional Shares.
2
Commencement of operations.
3
Calculated based on the average shares outstanding during
the period.
4
Per-share amount was less than $0.005.
5
Not annualized.
6
The expenses incurred by
the underlying funds in which the fund invests are not included in these ratios. If the expenses incurred by the underlying funds were included in these ratios they would have increased by 0.05%, 0.04% and 0.05% (annualized), respectively, for the
periods ended March 31, 2019, March 31, 2018 and March 31, 2017.
7
Annualized.
Schwab
Target Index Funds | Financial Highlights
73
Schwab Target 2045 Index Fund
|
4/1/18–
3/31/19 |
4/1/17–
3/31/18 1 |
8/25/16
2
–
3/31/17 |
||||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $ 11.81 | $ 10.64 | $10.00 | |||
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) 3 | 0.29 | 0.28 | 0.10 | |||
| Net realized and unrealized gains (losses) | 0.19 | 1.06 | 0.65 | |||
| Total from investment operations | 0.48 | 1.34 | 0.75 | |||
| Less distributions: | ||||||
| Distributions from net investment income | (0.24) | (0.17) | (0.11) | |||
| Distributions from net realized gains | (0.00) 4 | (0.00) 4 | – | |||
| Total distributions | (0.24) | (0.17) | (0.11) | |||
| Net asset value at end of period | $ 12.05 | $ 11.81 | $10.64 | |||
| Total return | 4.33% | 12.57% | 7.51% 5 | |||
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses 6 | 0.03% | 0.03% | 0.02% 7 | |||
| Gross operating expenses 6 | 0.08% | 0.08% | 0.08% 7 | |||
| Net investment income (loss) | 2.43% | 2.39% | 1.68% 7 | |||
| Portfolio turnover rate | 7% | 11% | 8% 5 | |||
| Net assets, end of period (x 1,000) | $84,790 | $44,817 | $ 1,261 | |||
1
Effective July 24, 2017, the Investor Share class and the
Institutional Share class were consolidated into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Institutional Shares.
2
Commencement of operations.
3
Calculated based on the average shares outstanding during
the period.
4
Per-share amount was less than $0.005.
5
Not annualized.
6
The expenses incurred by
the underlying funds in which the fund invests are not included in these ratios. If the expenses incurred by the underlying funds were included in these ratios they would have increased by 0.05%, 0.05% and 0.06% (annualized), respectively, for the
periods ended March 31, 2019, March 31, 2018 and March 31, 2017.
7
Annualized.
74
Schwab Target Index Funds | Financial Highlights
Schwab Target 2050 Index Fund
|
4/1/18–
3/31/19 |
4/1/17–
3/31/18 1 |
8/25/16
2
–
3/31/17 |
||||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $ 11.85 | $ 10.65 | $10.00 | |||
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) 3 | 0.29 | 0.28 | 0.15 | |||
| Net realized and unrealized gains (losses) | 0.18 | 1.09 | 0.62 | |||
| Total from investment operations | 0.47 | 1.37 | 0.77 | |||
| Less distributions: | ||||||
| Distributions from net investment income | (0.23) | (0.17) | (0.12) | |||
| Distributions from net realized gains | – | (0.00) 4 | – | |||
| Total distributions | (0.23) | (0.17) | (0.12) | |||
| Net asset value at end of period | $ 12.09 | $ 11.85 | $10.65 | |||
| Total return | 4.23% | 12.85% | 7.80% 5 | |||
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses 6 | 0.03% | 0.03% | 0.02% 7 | |||
| Gross operating expenses 6 | 0.08% | 0.08% | 0.08% 7 | |||
| Net investment income (loss) | 2.48% | 2.37% | 2.54% 7 | |||
| Portfolio turnover rate | 0% 8 | 15% | 4% 5 | |||
| Net assets, end of period (x 1,000) | $88,727 | $37,619 | $ 793 | |||
1
Effective July 24, 2017, the Investor Share class and the
Institutional Share class were consolidated into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Institutional Shares.
2
Commencement of operations.
3
Calculated based on the average shares outstanding during
the period.
4
Per-share amount was less than $0.005.
5
Not annualized.
6
The expenses incurred by
the underlying funds in which the fund invests are not included in these ratios. If the expenses incurred by the underlying funds were included in these ratios they would have increased by 0.05%, 0.05% and 0.06% (annualized), respectively, for the
periods ended March 31, 2019, March 31, 2018 and March 31, 2017.
7
Annualized.
8
Less than 0.5%
Schwab Target Index Funds | Financial Highlights
75
Schwab Target 2055 Index Fund
|
4/1/18–
3/31/19 |
4/1/17–
3/31/18 1 |
8/25/16
2
–
3/31/17 |
||||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $ 11.91 | $ 10.67 | $10.00 | |||
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) 3 | 0.31 | 0.27 | 0.15 | |||
| Net realized and unrealized gains (losses) | 0.15 | 1.15 | 0.65 | |||
| Total from investment operations | 0.46 | 1.42 | 0.80 | |||
| Less distributions: | ||||||
| Distributions from net investment income | (0.23) | (0.18) | (0.13) | |||
| Distributions from net realized gains | – | (0.00) 4 | – | |||
| Total distributions | (0.23) | (0.18) | (0.13) | |||
| Net asset value at end of period | $ 12.14 | $ 11.91 | $10.67 | |||
| Total return | 4.15% | 13.25% | 8.03% 5 | |||
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses 6 | 0.03% | 0.03% | 0.02% 7 | |||
| Gross operating expenses 6 | 0.08% | 0.08% | 0.08% 7 | |||
| Net investment income (loss) | 2.60% | 2.33% | 2.53% 7 | |||
| Portfolio turnover rate | 6% | 23% | 14% 5 | |||
| Net assets, end of period (x 1,000) | $50,403 | $17,713 | $ 147 | |||
1
Effective July 24, 2017, the Investor Share class and the
Institutional Share class were consolidated into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Institutional Shares.
2
Commencement of operations.
3
Calculated based on the average shares outstanding during
the period.
4
Per-share amount was less than $0.005.
5
Not annualized.
6
The expenses incurred by
the underlying funds in which the fund invests are not included in these ratios. If the expenses incurred by the underlying funds were included in these ratios they would have increased by 0.05%, 0.05% and 0.06% (annualized), respectively, for the
periods ended March 31, 2019, March 31, 2018 and March 31, 2017.
7
Annualized.
76
Schwab Target Index Funds | Financial Highlights
Schwab Target 2060 Index Fund
|
4/1/18–
3/31/19 |
4/1/17–
3/31/18 1 |
8/25/16
2
–
3/31/17 |
||||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $ 11.92 | $ 10.68 | $10.00 | |||
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) 3 | 0.30 | 0.29 | 0.18 | |||
| Net realized and unrealized gains (losses) | 0.17 | 1.12 | 0.62 | |||
| Total from investment operations | 0.47 | 1.41 | 0.80 | |||
| Less distributions: | ||||||
| Distributions from net investment income | (0.23) | (0.17) | (0.12) | |||
| Distributions from net realized gains | (0.00) 4 | (0.00) 4 | – | |||
| Total distributions | (0.23) | (0.17) | (0.12) | |||
| Net asset value at end of period | $ 12.16 | $ 11.92 | $10.68 | |||
| Total return | 4.23% | 13.22% | 8.11% 5 | |||
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses 6 | 0.03% | 0.03% | 0.02% 7 | |||
| Gross operating expenses 6 | 0.08% | 0.08% | 0.08% 7 | |||
| Net investment income (loss) | 2.50% | 2.43% | 2.94% 7 | |||
| Portfolio turnover rate | 2% | 19% | 0% 5 | |||
| Net assets, end of period (x 1,000) | $58,895 | $24,224 | $ 166 | |||
1
Effective July 24, 2017, the Investor Share class and the
Institutional Share class were consolidated into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Institutional Shares.
2
Commencement of operations.
3
Calculated based on the average shares outstanding during
the period.
4
Per-share amount was less than $0.005.
5
Not annualized.
6
The expenses incurred by
the underlying funds in which the fund invests are not included in these ratios. If the expenses incurred by the underlying funds were included in these ratios they would have increased by 0.05%, 0.05% and 0.06% (annualized), respectively, for the
periods ended March 31, 2019, March 31, 2018 and March 31, 2017.
7
Annualized.
Schwab
Target Index Funds | Financial Highlights
77
The Funds’ Investments in Asset
Classes and Sub-Asset Classes
Through each fund’s investments in its
underlying funds, each fund aims to provide diversification across major asset classes as well as diversification across a range of sub-asset classes within the major asset classes. Each fund’s allocation to an asset or sub-asset class will
change over time. The investment adviser may add or remove asset classes and sub-asset classes at any time without prior notice. For additional details regarding how the adviser determines the funds’ underlying fund and asset class
allocations, please refer back to the “Principal Investment Strategies” section in the Fund Summary sections and the section “Fund details: Investment Objectives, Strategies and Risks” in this prospectus.
The following table provides a list of the asset classes and
sub-asset classes and the target allocation in which each fund expects to be invested as of February 1, 2019.
The allocations may not add to 100% due to rounding.
| Major Asset Class | Sub-Asset Class |
Schwab
Target
2010 Index Fund |
Schwab
Target
2015 Index Fund |
Schwab
Target
2020 Index Fund |
Schwab
Target
2025 Index Fund |
| U.S. Stocks | Large-Cap | 23.1% | 24.4% | 26.5% | 33.6% |
| Small-Cap | 1.5% | 1.6% | 1.8% | 2.7% | |
| International Stocks | Developed | 9.6% | 10.6% | 11.7% | 15.5% |
| Emerging Markets | 0.0% | 0.0% | 1.1% | 2.2% | |
| Real Estate | U.S. REITs | 1.8% | 1.9% | 2.2% | 2.8% |
| Fixed Income | Intermediate-Term Bonds | 41.7% | 40.3% | 38.7% | 33.2% |
| Short-Term Bonds | 8.7% | 8.2% | 6.9% | 3.7% | |
| Inflation-Protected Bonds | 6.4% | 6.2% | 5.1% | 1.9% | |
| Cash and Cash Equivalents (including Money Market Funds) | 7.3% | 6.8% | 6.1% | 4.5% | |
| 100% | 100% | 100% | 100% |
| Major Asset Class | Sub-Asset Class |
Schwab
Target
2030 Index Fund |
Schwab
Target
2035 Index Fund |
Schwab
Target
2040 Index Fund |
Schwab
Target
2045 Index Fund |
| U.S. Stocks | Large-Cap | 38.5% | 42.0% | 44.9% | 47.1% |
| Small-Cap | 3.5% | 4.3% | 5.1% | 5.8% | |
| International Stocks | Developed | 18.2% | 20.4% | 22.3% | 23.9% |
| Emerging Markets | 3.2% | 4.2% | 5.2% | 6.2% | |
| Real Estate | U.S. REITs | 3.3% | 3.7% | 4.1% | 4.4% |
| Fixed Income | Intermediate-Term Bonds | 27.8% | 21.5% | 15.7% | 10.9% |
| Short-Term Bonds | 2.1% | 1.3% | 0.8% | 0.5% | |
| Inflation-Protected Bonds | 0.0% | 0.0% | 0.0% | 0.0% | |
| Cash and Cash Equivalents (including Money Market Funds) | 3.3% | 2.5% | 1.8% | 1.3% | |
| 100% | 100% | 100% | 100% |
78
Schwab Target Index Funds | The Funds’ Investments in Underlying Funds
| Major Asset Class | Sub-Asset Class |
Schwab
Target
2050 Index Fund |
Schwab
Target
2055 Index Fund |
Schwab
Target
2060 Index Fund |
| U.S. Stocks | Large-Cap | 48.3% | 49.1% | 49.8% |
| Small-Cap | 6.2% | 6.5% | 6.8% | |
| International Stocks | Developed | 24.8% | 25.5% | 26.1% |
| Emerging Markets | 6.7% | 7.2% | 7.5% | |
| Real Estate | U.S. REITs | 4.5% | 4.7% | 4.8% |
| Fixed Income | Intermediate-Term Bonds | 8.2% | 6.1% | 4.3% |
| Short-Term Bonds | 0.4% | 0.3% | 0.2% | |
| Inflation-Protected Bonds | 0.0% | 0.0% | 0.0% | |
| Cash and Cash Equivalents (including Money Market Funds) | 1.0% | 0.7% | 0.5% | |
| 100% | 100% | 100% |
For more detailed information,
including portfolio holdings for each of the funds, please visit the funds’ website at
www.schwabfunds.com/schwabfunds_prospectus
.
Schwab Target Index Funds | The Funds’ Investments in
Underlying Funds
79
Description of Underlying Funds
The funds invest primarily in the underlying
funds. Therefore, each fund’s investment performance is directly related to the investment performance of these underlying funds. The adviser may exclude one or more underlying funds from a fund’s asset allocation strategy at any given
time. The adviser reserves the right to substitute other underlying funds and add additional underlying funds from time to time should circumstances warrant a change. The following chart provides a brief description of the investment objective and
principal investment strategies of the funds’ current underlying funds. Additional information about the underlying funds is provided in each underlying fund’s prospectus.
| Asset Class, Style Class (if Applicable) & Underlying Fund | Investment Objective and Principal Investment Strategy |
| EQUITY ETFs—DOMESTIC | |
| Schwab U.S. Large-Cap ETF | Seeks to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Large-Cap Total Stock Market Index. The fund invests, under normal circumstances, at least 90% of its net assets (including, for this purpose, any borrowings for investment purposes) in stocks that are included in the Dow Jones U.S. Large-Cap Total Stock Market Index, which includes the components ranked 1-750 by full market capitalization. |
| Schwab U.S. Small-Cap ETF | Seeks to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Small-Cap Total Stock Market Index. The fund invests, under normal circumstances, at least 90% of its net assets (including, for this purpose, any borrowings for investment purposes) in stocks that are included in the Dow Jones U.S. Small-Cap Total Stock Market Index, which includes the components ranked 751-2500 by full market capitalization. |
| Schwab U.S. REIT ETF | Seeks to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Select REIT Index. The fund invests, under normal circumstances, at least 90% of its net assets (including, for this purpose, any borrowings for investment purposes) in securities that are included in the Dow Jones U.S. Select REIT Index, a float-adjusted market capitalization weighted index comprised of real estate investment trusts (REITs). |
| EQUITY ETFs—INTERNATIONAL | |
| Schwab International Equity ETF | Seeks to track as closely as possible, before fees and expenses, the total return of the FTSE Developed ex US Index. The fund invests, under normal circumstances, at least 90% of its net assets (including, for this purpose, any borrowings for investment purposes) in stocks that are included in the FTSE Developed ex US Index, comprised of large and mid capitalization companies in developed countries outside the United States. |
| Schwab Emerging Markets Equity ETF | Seeks to track as closely as possible, before fees and expenses, the total return of the FTSE Emerging Index. The fund invests, under normal circumstances, at least 90% of its net assets (including, for this purpose, any borrowings for investment purposes) in stocks that are included in the FTSE Emerging Index, comprised of large and mid capitalization companies in emerging market countries. |
| FIXED INCOME ETFs | |
| Schwab U.S. Aggregate Bond ETF | Seeks to track as closely as possible, before fees and expenses, the total return of the Bloomberg Barclays US Aggregate Bond Index. The fund invests, under normal circumstances, at least 90% of its net assets (including, for this purpose, any borrowings for investment purposes) in securities that are included in the Bloomberg Barclays US Aggregate Bond Index, a broad-based benchmark measuring the performance of the U.S. investment grade, taxable bond market, including U.S. Treasuries, government-related and corporate bonds, mortgage pass-through securities, commercial mortgage-backed securities, and asset-backed securities that are publicly available for sale in the United States. |
80
Schwab Target Index Funds | The Funds’ Investments in Underlying Funds
| Asset Class, Style Class (if Applicable) & Underlying Fund | Investment Objective and Principal Investment Strategy |
| Schwab Short-Term U.S. Treasury ETF | Seeks to track as closely as possible, before fees and expenses, the total return of the Bloomberg Barclays US Treasury 1-3 Year Index. The fund invests, under normal circumstances, at least 90% of its net assets (including, for this purpose, any borrowings for investment purposes) in securities that are included in the Bloomberg Barclays US Treasury 1-3 Year Index, which includes all publicly-issued U.S. Treasury securities that have a remaining maturity of greater than or equal to one year and less than three years, are rated investment grade, and have $300 million or more of outstanding face value. |
| Schwab U.S. TIPS ETF | Seeks to track as closely as possible, before fees and expenses, the total return of the Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L). The fund invests, under normal circumstances, at least 90% of its net assets (including, for this purpose, any borrowings for investment purposes) in securities that are included in the Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L), which includes all publicly-issued U.S. Treasury Inflation-Protected Securities that have at least one year remaining to maturity, are rated investment grade, and have $500 million or more of outstanding face value. |
| MONEY MARKET FUNDS | |
| Schwab Variable Share Price Money Fund | Seeks current income consistent with stability of capital and liquidity. The fund invests in high-quality short-term money market investments issued by U.S. and foreign issuers. Unlike a traditional stable share price money market fund, the fund will not use the amortized cost method of valuation or round the per share net asset value (NAV) to the nearest whole cent and does not seek to maintain a stable share price. As a result, the fund’s share price, which is its NAV, will vary and reflect the effects of unrealized appreciation and depreciation and realized losses and gains. |
| Schwab Treasury Obligations Money Fund | Seeks current income consistent with stability of capital and liquidity. The fund will invest at least 99.5% of its total assets in cash, government securities and/or repurchase agreements that are collateralized fully by cash and/or government securities; under normal circumstances, at least 80% of the fund’s net assets (including, for this purpose, any borrowings for investment purposes) will be invested solely in U.S. Treasury obligations or repurchase agreements backed by such obligations (excluding cash). |
| Schwab Government Money Fund | Seeks the highest current income consistent with stability of capital and liquidity. The fund will invest at least 99.5% of its total assets in cash, U.S. government securities and/or repurchase agreements that are collateralized fully by cash and/or U.S. government securities; under normal circumstances, at least 80% of the fund’s net assets (including, for this purpose, any borrowings for investment purposes) will be invested solely in U.S. government securities including repurchase agreements that are collateralized fully by U.S. government securities (excluding cash). |
Schwab Target Index Funds | The Funds’ Investments in
Underlying Funds
81
Fund Management
The investment adviser for the funds is
Charles Schwab Investment Management, Inc. (CSIM), 211 Main Street, San Francisco, CA 94105. CSIM was founded in 1989 and, as of June 30, 2019, managed approximately $422.5 billion in assets.
As the investment adviser, CSIM oversees the asset management
and administration of the funds. As compensation for these services, CSIM receives a management fee from each fund, expressed as a percentage of each fund’s average daily net assets, representing the actual amounts paid, including the effects
of reductions.
For the period ended March 31, 2019, these
fees were:
| Schwab Target 2010 Index Fund | 0.03% |
| Schwab Target 2015 Index Fund | 0.03% |
| Schwab Target 2020 Index Fund | 0.03% |
| Schwab Target 2025 Index Fund | 0.03% |
| Schwab Target 2030 Index Fund | 0.03% |
| Schwab Target 2035 Index Fund | 0.03% |
| Schwab Target 2040 Index Fund | 0.03% |
| Schwab Target 2045 Index Fund | 0.03% |
| Schwab Target 2050 Index Fund | 0.03% |
| Schwab Target 2055 Index Fund | 0.03% |
| Schwab Target 2060 Index Fund | 0.03% |
A discussion regarding the basis
for the Board of Trustees’ approval of each fund’s Amended and Restated Advisory Agreement is available in each fund’s 2018 semiannual report, which covers the period from April 1, 2018 through September 30, 2018.
Pursuant to the Amended and Restated Advisory
Agreement between CSIM and each fund, CSIM pays the operating expenses of the fund, excluding shareholder servicing fees, acquired fund fees and expenses, taxes, any brokerage expenses, and extraordinary or non-routine expenses. CSIM and its
affiliates have contractually agreed to limit the total annual fund operating expenses (including acquired fund fees and expenses, but excluding taxes and certain non-routine expenses) of each fund to 0.08% for so long as CSIM serves as adviser to
the fund.
CSIM or its affiliates may invest
“seed” capital in the funds. These investments are generally intended to enable the funds to commence investment operations and achieve sufficient economic scale. CSIM or its affiliates may hedge the exposure resulting from seed
investments. As a result of Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and certain rules promulgated thereunder known as the “Volcker Rule,” CSIM or its affiliates may be required to reduce their seed
investment in a fund at an earlier time than they otherwise would, which could result in losses, increased brokerage costs and/or adverse tax consequences, or could ultimately result in the fund’s liquidation.
Zifan Tang, Ph.D., CFA,
Senior
Portfolio Manager, is responsible for the co-management of the funds. She has served as portfolio manager of the funds since August 2016. Prior to joining CSIM in 2012, Ms. Tang was a product manager at Thomson Reuters and, from 1997 to 2009, worked
as a portfolio manager at Barclays Global Investors, which was subsequently acquired by BlackRock.
Patrick Kwok, CFA,
Portfolio Manager, is responsible for the co-management of the funds. He has served as portfolio manager of the funds since July 2018. Prior to joining CSIM in 2008, Mr. Kwok spent two years as an asset operations
specialist at Charles Schwab Trust Company. He also previously worked for one year at State Street Bank & Trust Company as a portfolio accountant and pricing specialist.
Additional information about the portfolio managers’
compensation, other accounts managed by the portfolio managers and the portfolio managers’ ownership of securities in each fund is available in the SAI.
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Investing in the Funds
In this section, you will find information
on buying, selling and exchanging shares. Investors may only invest in the funds through an intermediary by placing orders through your brokerage account at Schwab or an account with another broker/dealer, investment adviser, 401(k) plan, employee
benefit plan, administrator, bank, or other financial intermediary (intermediary) that is authorized to accept orders on behalf of a fund (intermediary orders). No new accounts can be opened directly with the funds’ transfer agent. Eligible
Shareholders (as defined herein) who purchased fund shares prior to October 2, 2017 directly from, and continue to hold such shares directly through, the funds’ transfer agent may continue to place additional purchase, exchange or redemption
orders through the funds’ transfer agent (direct orders). You also will see how to choose a distribution option for your investment. Helpful information on taxes is included as well.
The funds generally are not registered for sale in
jurisdictions outside the United States and are intended for purchase by persons residing in the United States. A person is considered resident in the United States if at the time of the investment (i) the account has an address of record in the
United States or a U.S. territory (including APO/FPO/DPO) and (ii) all account owners are resident in the United States or a U.S. territory and have a valid U.S. taxpayer identification number. If an existing account is updated to reflect a non-U.S.
address, the account may be restricted from making additional investments.
Investing Through a Financial Intermediary
Placing Orders Through Your Intermediary
When you place orders through Schwab or other intermediary,
you are not placing your orders directly with the funds, and you must follow Schwab’s or the other intermediary’s transaction procedures. Your intermediary may impose different or additional conditions than the funds on purchases,
redemptions and exchanges of fund shares. These differences may include initial, subsequent and maintenance investment requirements, exchange policies, fund choices, cut-off times for investment and trading restrictions. Your intermediary may
independently establish and charge its customers transaction fees, account fees and other fees in addition to the fees charged by the funds, and the intermediary may require its customers to pay a commission when transacting in fund shares. These
additional fees will vary between intermediaries and may vary over time and would increase the cost of your investment and lower investment returns. You should consult your intermediary directly for information regarding these conditions and fees.
The funds are not responsible for the failure of your intermediary to carry out its responsibilities.
Only certain intermediaries are authorized to accept orders on
behalf of a fund. If your fund shares are no longer held by an authorized intermediary, a fund may impose restrictions on your ability to manage or maintain your shares. For example, you will not be able to place orders to purchase additional
shares. To remove these restrictions, you may move your shares to Schwab or another intermediary that is authorized to accept fund orders.
Buying, Selling and Exchanging Shares Through an
Intermediary
To purchase, redeem or exchange shares held
in your Schwab account or in your account at another intermediary, you must place your orders with the intermediary that holds your shares. You may not purchase, redeem or exchange shares held in your intermediary account directly with a fund.
When selling or exchanging shares, you should be aware of the
following fund policies:
| • | For accounts held through a financial intermediary, each fund typically expects to pay sale proceeds to the financial intermediary for payment to redeeming shareholders within two business days following receipt of a shareholder redemption order; however, each fund may take up to seven days to pay sale proceeds. |
| • | Each fund reserves the right to honor redemptions in liquid portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of the fund’s assets, whichever is less. You may incur transaction expenses and taxable gains in converting these securities to cash. In addition, a redemption in liquid portfolio securities would be treated as a taxable event for you and may result in the recognition of gain or loss for federal income tax purposes. |
| • | Exchange orders are limited to other Schwab Funds (that are not Sweep Investments ® ) and the Laudus International MarketMasters Fund, and must meet the minimum investment and other requirements for the fund and share class, if applicable, into which you are exchanging. |
| • | You should obtain and read the prospectus for the fund into which you are exchanging prior to placing your order. |
Schwab Target Index Funds | Investing in the Funds
83
Investing Directly with the Funds
Investor Eligibility Requirements for Placing Direct
Orders
Investors may not purchase shares directly
from the funds’ transfer agent, DST Asset Manager Solutions, Inc. Eligible Shareholders (as defined below) who previously purchased fund shares directly from, and continue to hold such shares directly through, the transfer agent may continue
to place additional purchase orders in the same account(s) directly with the transfer agent. Prior to October 2, 2017, Eligible Shareholders that could purchase shares directly from the transfer agent included, but were not limited to, qualified and
non-qualified employee benefit plans (including but not limited to defined benefit plans, defined contribution plans and 401(k) plans), foundations and endowments, banks, trusts, investment companies and corporate capital and cash management
accounts. Eligible Shareholders may also be shareholders who received shares of a Schwab Fund as a result of a reorganization of a fund. The funds reserve the right to suspend the privilege of purchasing additional shares of the funds at any
time.
Additional Direct Purchases by Wire
Subject to acceptance by a fund, only
Eligible Shareholders may make additional purchases of a fund’s shares in the same account(s) by wiring federal funds to the transfer agent. You must call the transfer agent at 1-800-407-0256 prior to the close of a fund (generally 4:00 p.m.
Eastern time or the close of the NYSE, whichever is earlier) to place your order and to receive wire instructions. Orders received by the transfer agent in good order on or prior to the close of a fund will be processed at the net asset value per
share of the fund for that day. Your wired funds must be received and accepted by the transfer agent prior to 6:00 p.m. Eastern time or the deadline for the Fedwire Funds Service for initiating third party transfers, whichever is earlier, on the day
your purchase order is placed. Please call the transfer agent at 1-800-407-0256 if you have any questions or need additional information. The funds reserve the right to suspend the privilege of direct purchase of additional shares of the funds at
any time.
Additional Direct Purchases by
Mail
Subject to acceptance by a fund, only
Eligible Shareholders may make additional purchases of a fund’s shares in the same account(s) by mail. Additional investments may be made at any time by mailing a check (payable to Schwab Funds) to the transfer agent at DST Asset Manager
Solutions, Inc., Attn: Schwab Funds, P.O. Box 219647, Kansas City, MO 64121-9647. Be sure to include your account number on your check. The funds reserve the right to suspend the privilege of direct purchase of additional shares of the funds at any
time.
Subject to acceptance by a fund, payment
for the purchase of shares received by mail will be credited to a shareholder’s account at the net asset value per share of the fund next determined after receipt, even though the check may not yet have been converted into federal funds. For
purposes of calculating the purchase price of fund shares, a purchase order is received by a fund on the day that it is in good order unless it is rejected by the fund’s transfer agent. For a cash purchase order of fund shares to be in good
order on a particular day, a check must be received on or before the close of a fund (generally 4:00 p.m. Eastern time or the close of the NYSE, whichever is earlier) on that day. If the payment is received by a fund after the deadline, the purchase
price of fund shares will be based upon the next determination of net asset value of fund shares. No currency, third party checks, foreign checks, starter checks, credit card checks, traveler’s checks or money orders will be accepted by a
fund.
Direct Redemptions and Exchanges
Eligible Shareholders may continue to
exchange and redeem shares held directly with the fund’s transfer agent. When selling or exchanging shares directly, you should be aware of the following fund policies:
| • | Each fund typically expects to pay sale proceeds by wire, ACH, or by mailing a check, to redeeming shareholders within two business days following receipt of a shareholder redemption order; however, each fund may take up to seven days to pay sale proceeds. |
| • | Each fund reserves the right to honor redemptions in liquid portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of the fund’s assets, whichever is less. You may incur transaction expenses and taxable gains in converting these securities to cash. In addition, a redemption in liquid portfolio securities would be treated as a taxable event for you and may result in the recognition of gain or loss for federal income tax purposes. |
| • | Exchange orders are limited to other Schwab Funds (that are not Sweep Investments) and the Laudus International MarketMasters Fund, and must meet the minimum investment and other requirements for the fund and share class, if applicable, into which you are exchanging. |
| • | You should obtain and read the prospectus for the fund into which you are exchanging prior to placing your order. |
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Direct Redemptions by Telephone
If you authorized the telephone redemption option in the
account application, you may place a redemption order by calling the transfer agent at 1-800-407-0256 and requesting that the redemption proceeds be wired per the authorized instructions in the account application or mailed to the primary
registration address. Your redemption order will be processed at the net asset value per share of the fund next determined after receipt of your telephone redemption order by the transfer agent. Please note that the transfer agent may only act on
telephone instructions believed by the transfer agent to be genuine. The transfer agent’s records of such instructions are binding on the shareholder. The funds and their service providers (including the transfer agent, Schwab and CSIM) are
not responsible for any losses or costs that may arise from following telephone instructions that the transfer agent reasonably believes to be genuine. The transfer agent will employ reasonable procedures to confirm that instructions communicated
are genuine. These procedures include tape recording of telephone instructions and requiring some form of personal identification prior to acting upon instructions received by telephone.
Direct Redemptions by Mail
You may redeem your fund shares by mail by
sending a request letter to the funds’ transfer agent at DST Asset Manager Solutions, Inc., Attn: Schwab Funds, P.O. Box 219647, Kansas City, MO 64121-9647. Your redemption request will be processed by a fund at the net asset value per share
of the fund next determined after the request is received in good order. To be in good order, the redemption request must include the name of the fund and the number of shares or the dollar amount to be redeemed, all required signatures and
authorizations and any required signature guarantees.
Additional Direct Redemption Information
To protect you, the funds and their service providers from
fraud, signature guarantees may be required to enable the transfer agent to verify the identity of the person who has authorized a redemption from an account. Signature guarantees are required for (1) redemptions where the proceeds are to be sent to
someone other than the registered shareholder(s) at the registered address, (2) redemptions if your account address has changed within the last 10 business days, (3) share transfer requests, and (4) redemptions where the proceeds are wired in
connection with bank instructions not already on file with the transfer agent. Signature guarantees may be obtained from certain eligible financial institutions, including, but not limited to, the following: U.S. banks, trust companies, credit
unions, securities brokers and dealers, savings and loan associations and participants in the Securities and Transfer Association Medallion Program (STAMP), the Stock Exchange Medallion Program (SEMP) or the New York Stock Exchange Medallion
Signature Program (MSP). Signature guarantees from non-U.S. banks that do not include a stamp may require a U.S. consulate stamp. You may contact the transfer agent at 1-800-407-0256 for further details.
Direct Exchange Privileges
Upon request, and subject to certain
limitations, shares of the funds may be exchanged into shares of any other Schwab Fund (that is not a Sweep Investment) or the Laudus International MarketMasters Fund. To exchange your shares to another fund, you must meet the minimum investment and
other requirements for the fund and share class into which you are exchanging. Further, you should obtain and read the prospectus for the fund into which you are exchanging prior to placing your order. A new account opened by exchange must be
established with the same name(s), address(es) and tax identification number(s) as the existing account. All exchanges will be made based on the respective net asset values next determined following receipt of the request by a fund containing the
information indicated below.
The funds reserve
the right to suspend the privilege of exchanging shares of the funds by mail or by telephone at any time. The funds further reserve the right to materially modify or terminate the exchange privilege upon 60 days’ written notice to
shareholders.
Direct Exchanges by Telephone
If you authorized the telephone redemption option in the
account application, you may exchange fund shares by telephone by calling the funds’ transfer agent at 1-800-407-0256. Please be prepared to provide the following information: (a) the account number, tax identification number and account
registration; (b) the class of shares to be exchanged (if applicable); (c) the name of the fund from which and the fund into which the exchange is to be made; and (d) the dollar or share amount to be exchanged. Please note that the transfer agent
may act only on telephone instructions believed by the transfer agent to be genuine. Please see the section entitled “Direct Redemptions by Telephone” for more information regarding transacting with the funds’ transfer agent via
telephone.
Direct Exchanges by Mail
To exchange fund shares by mail, simply send
a letter of instruction to the funds’ transfer agent at DST Asset Manager Solutions, Inc., Attn: Schwab Funds, P.O. Box 219647, Kansas City, MO 64121-9647. The letter of instruction must include: (a) your account number; (b) the class of
shares to be exchanged (if applicable); (c) the fund from and the fund into which the exchange is to be made; (d) the dollar or share amount to be exchanged; and (e) the signatures of all registered owners or authorized parties.
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Index Funds | Investing in the Funds
85
Share Price
The funds are open for business each day
that the NYSE is open. Each fund calculates its share price each business day as of the close of the NYSE (generally 4:00 p.m. Eastern time). If the NYSE is closed due to weather or other extenuating circumstances on a day it would typically be open
for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the funds reserve the right to treat such day as a business day and accept purchase and redemption orders and calculate their share prices as of the
normally scheduled close of regular trading on the NYSE for that day. A fund’s share price is its net asset value per share, or NAV, which is the fund’s net assets divided by the number of its shares outstanding. Orders received by a
fund in good order at or prior to the close of the fund (generally 4:00 p.m. Eastern time) will be executed at the next share price calculated that day.
If you place an order through your Schwab account or an
account at another intermediary, please consult with your intermediary to determine when your order will be executed. Generally, you will receive the share price next calculated after a fund receives your order from your intermediary. However, some
intermediaries, such as Schwab, may arrange with a fund for you to receive the share price next calculated after your intermediary has received your order. Some intermediaries may require that they receive orders prior to a specified cut-off
time.
In valuing underlying fund investments, the funds
use the NAVs reported by their underlying funds. In valuing other portfolio securities, the funds use market quotes or official closing prices if they are readily available. In cases where quotes are not readily available or the adviser deems them
unreliable, a fund may value securities based on fair values developed using methods approved by the funds’ Board of Trustees.
Shareholders of a fund should be aware that because foreign
markets are often open on weekends and other days when the fund is closed, the value of the fund’s portfolio may change on days when it is not possible to buy or sell shares of the fund.
Additional Policies Affecting Your Investment
Each fund reserves certain rights, including the
following:
| • | To materially modify or terminate the exchange privilege upon 60 days’ written notice to shareholders. |
| • | To change or waive a fund’s investment minimums. |
| • | To suspend the right to sell shares back to the fund, and delay sending proceeds, during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the SEC. |
| • | To withdraw or suspend any part of the offering made by this prospectus. |
Minimum Investment
None
Options for Fund Distributions
Choose an option for fund distributions.
If you are an Eligible Shareholder who previously placed direct orders with a fund’s transfer agent, you had one of the three options described below for fund distributions. If you did not indicate a choice, you
received the first option. If you are placing orders through an intermediary, you will select from the options for fund distributions provided by your intermediary, which may be different than those provided by the funds to Eligible Shareholders.
You should consult with your financial intermediary to discuss available options.
| Option | Feature |
| Reinvestment | All dividends and capital gains distributions are invested automatically in shares of the fund. |
| Cash/reinvestment mix | You receive payment for dividends, while any capital gains distributions are invested in shares of the fund. |
| Cash | You receive payment for all dividends and capital gains distributions. |
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Payments by the Investment Adviser or its Affiliates
The investment adviser or its affiliates may make payments out
of their own resources, or provide products and services at a discount, to certain brokerage firms, banks, insurance companies, retirement plan service providers and other financial intermediaries that perform shareholder, recordkeeping,
sub-accounting and other administrative services in connection with investments in fund shares. The investment adviser or its affiliates may also make payments out of their own resources, or provide products and services at a discount, to certain
financial intermediaries in connection with certain activities or services which may facilitate, directly or indirectly, investment in the funds. These payments may relate to marketing and/or fund promotion activities and presentations, educational
training programs, conferences, the development and support of technology platforms and/or reporting systems, data analytics and support, or making shares of the funds available to their customers. These payments, which may be significant, are paid
by the investment adviser or its affiliates out of their own resources and not from the assets of the funds.
Payments to a financial intermediary may create potential
conflicts of interest between the intermediary and its clients as the payments may provide such intermediary with an incentive to favor sales of shares of the funds over other investment options they make available to their customers. Please see the
SAI for additional information.
Policy Regarding
Short-Term or Excessive Trading
The funds are intended
for long-term investment and not for short-term or excessive trading (collectively market timing). Market timing may adversely impact the funds’ performance by disrupting the efficient management of the funds, increasing fund transaction costs
and taxes, causing the funds to maintain higher cash balances, and diluting the value of the funds’ shares.
To discourage market timing, the
funds’ Board of Trustees has adopted policies and procedures that are reasonably designed to reduce the risk of market timing by fund shareholders. Each fund seeks to deter market timing through several methods. These methods may include: fair
value pricing and trade activity monitoring. Fair value pricing is discussed more thoroughly in the subsequent pages of this prospectus and is considered an element of the funds’ policy regarding short-term or excessive trading. Trade activity
monitoring is risk based and seeks to identify patterns of activity in amounts that might be detrimental to the funds.
The funds and their service providers maintain risk-based
surveillance procedures designed to detect market timing in fund shares in amounts that might be detrimental to the fund. Under these procedures, the funds have requested that service providers to the funds monitor transactional activity in amounts
and frequency determined by each fund to be significant to the fund and in a pattern of activity that potentially could be detrimental to the fund. Generally, excessive trading activity in a fund is measured by the number of roundtrip transactions
in a shareholder’s account. A roundtrip transaction occurs when a shareholder completes a purchase of shares and then sells the same fund’s shares (including exchanges). If an investor engages in multiple roundtrips in a fund within a
60-day period or the fund, in its sole discretion based on these or other factors, determines that a shareholder has engaged in market timing, it may refuse to process future purchases or exchanges into such fund by that shareholder for a period of
90 days. Subsequent violations within a 12-month period will be evaluated to determine whether a permanent block is appropriate. These procedures may be modified from time to time as appropriate to improve the detection of market timing and to
comply with applicable laws.
If trades are
effected through a financial intermediary, each fund or its service providers will work with the intermediary to monitor possible market timing activity. The funds reserve the right to request that the intermediary provide certain shareholder
transaction information to the funds and may require the intermediary to restrict the shareholder from future purchases or exchanges in the funds. Transactions by fund shareholders investing through intermediaries may also be subject to the
restrictions of the intermediary’s own frequent trading policies, which may differ from those of the funds. Each fund may defer to an intermediary’s frequent trading policies with respect to those shareholders who invest in the fund
through such intermediary. Each fund will defer to an intermediary’s policies only after the fund determines that the intermediary’s frequent trading policies are reasonably designed to deter transactional activity in amounts and
frequency that are deemed to be significant to the fund and in a pattern of activity that potentially could be detrimental to the fund. Shareholders should consult with their intermediary to determine if additional frequent trading restrictions
apply to their fund transactions. A fund’s ability to impose restrictions with respect to accounts traded through particular intermediaries may vary depending on the systems’ capabilities, applicable contractual and legal restrictions
and cooperation of those intermediaries.
Although these
methods are designed to discourage market timing, there can be no guarantee that the funds will be able to identify and restrict investors that engage in such activities. In addition, some of these methods are inherently subjective and involve
judgment in their application. Each fund and its service providers seek to make these judgments and applications uniformly and in a manner that they believe is consistent with interests of the fund’s long-term shareholders. The funds may amend
these policies and procedures without prior notice in response to changing regulatory requirements or to enhance the effectiveness of the program.
The funds reserve the right to restrict, reject or cancel
within a reasonable time, without prior notice, any purchase or exchange order for any reason.
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87
Fair Value Pricing
The Board of Trustees has adopted procedures to fair value the
funds’ securities when market prices are not “readily available” or are unreliable. For example, a fund may fair value a security when a security is de-listed or its trading is halted or suspended; when a security’s primary
pricing source is unable or unwilling to provide a price; when a security’s primary trading market is closed during regular market hours; or when a security’s value is materially affected by events occurring after the close of the
security’s primary trading market.
By fair valuing
securities whose prices may have been affected by events occurring after the close of trading, the funds seek to establish prices that investors might expect to realize upon the current sales of these securities. This methodology is designed to
deter “arbitrage” market timers, who seek to exploit delays between the change in the value of each fund’s holdings and the net asset value of the funds’ shares, and seeks to help ensure that the prices at which the
funds’ shares are purchased and redeemed are fair and do not result in dilution of shareholder interest or other harm to shareholders.
Each fund makes fair value determinations in
good faith in accordance with the fund’s valuation procedures. Due to the subjective and variable nature of fair value pricing, there can be no assurance that a fund could obtain the fair value assigned to the security upon the sale of such
security. The respective prospectuses for the underlying funds in which the funds invest explain the circumstances in which those funds will use fair value pricing and the effect of fair value pricing.
Methods to Meet Redemptions
Under normal market conditions, each fund expects to meet
redemption orders by using holdings of cash/cash equivalents or by the sale of portfolio investments. In unusual or stressed market conditions or as CSIM determines appropriate, each fund may borrow through the fund’s bank lines of credit or
through the fund’s interfund lending facility to meet redemption requests. Each fund may also utilize its custodian overdraft facility to meet redemptions, if necessary. As noted above, each fund also reserves the right to honor redemptions in
liquid portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of the fund’s assets, whichever is less. You may be subject to market risk and you may incur transaction expenses and taxable gains in
converting the securities to cash. In addition, a redemption in liquid portfolio securities would be treated as a taxable event for you and may result in the recognition of gain or loss for federal income tax purposes.
Large Shareholder Redemptions
Certain accounts or Schwab affiliates may from time to time
own (beneficially or of record) or control a significant percentage of a fund’s shares. Redemptions by these shareholders of their holdings in a fund may impact the fund’s liquidity and NAV. These redemptions may also force a fund to
sell securities, which may negatively impact the fund’s brokerage costs.
Customer Identification and Verification and Anti-Money
Laundering Program
Customer identification and
verification is part of each fund’s overall obligation to deter money laundering under federal law. Each fund has adopted an Anti-Money Laundering Compliance Program designed to prevent the fund from being used for money laundering or the
financing of terrorist activities. In this regard, the funds reserve the right to (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in
cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of fund management, they are deemed to be in the best interest of a fund or in cases when a fund is requested or
compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if a fund is required to withhold such
proceeds.
Federal law requires all financial
institutions to obtain, verify and record information that identifies each person who opens an account. When you open your account, you will have to provide your name, address, date of birth, identification number and other information that will
allow your financial intermediary to identify you. This information is subject to verification to ensure the identity of all persons opening an account.
Your financial intermediary is required by law to reject your
new account application if the required identifying information is not provided. Your financial intermediary may contact you in an attempt to collect any missing information required on the application, and your application may be rejected if they
are unable to obtain this information. In certain instances, your financial intermediary is required to collect documents that will be used solely to establish and verify your identity.
Each fund reserves the right to close and/or liquidate your
account at the then-current day’s price if the fund or your financial intermediary is unable to verify your identity. As a result, you may be subject to a gain or loss on fund shares and will be subject to corresponding tax consequences.
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Schwab Target Index Funds | Investing in the Funds
Distributions and Taxes
Any investment in a fund typically involves several tax
considerations. The information below is meant as a general summary for U.S. citizens and residents. Please see the SAI for additional information. Because each person’s tax situation is different, you should consult your tax advisor about the
tax implications of your investment in a fund. You also can visit the Internal Revenue Service (IRS) website at
www.irs.gov
.
As a shareholder, you are entitled to your share of the
dividends and gains a fund earns. Every year, each fund distributes to its shareholders substantially all of its net investment income and net capital gains, if any. These distributions typically are paid in December to all shareholders of record.
During the fourth quarter of the year, typically in early November, an estimate of each fund’s capital gain distribution, if any, may be made available on the funds’ website:
www.schwabfunds.com
.
Unless you are investing through an IRA, 401(k) or other
tax-advantaged retirement account, your fund distributions generally have tax consequences. Each fund’s net investment income and short-term capital gains are distributed as dividends and will be taxable as ordinary income or qualified
dividend income. Other capital gain distributions are taxable as long-term capital gains, regardless of how long you have held your shares in a fund. The maximum individual rate applicable to “qualified dividend income” and long-term
capital gains is generally either 15% or 20%, depending on whether the individual’s income exceeds certain threshold amounts. Distributions generally are taxable in the tax year in which they are declared, whether you reinvest them
or take them in cash.
Generally, any sale or exchange of your
shares is a taxable event. For tax purposes, an exchange of your shares for shares of another Schwab Fund or the Laudus International MarketMasters Fund is treated the same as a sale. A sale may result in a capital gain or loss for you. The gain or
loss generally will be treated as short term if you held the shares for one year or less, long term if you held the shares longer. The maximum individual rate applicable to long-term capital gains is generally either 15% or 20%, depending on whether
the individual’s income exceeds certain threshold amounts. Any loss realized upon a taxable disposition of shares held for six months or less will be treated as long-term, rather than short-term, to the extent of any long-term capital gains
distributions received (or deemed received) by you with respect to the shares. All or a portion of any loss realized upon a taxable disposition of shares will be disallowed if you purchase other substantially identical shares within 30 days before
or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.
An additional 3.8% Medicare tax is imposed on certain net
investment income (including ordinary dividends and capital gain distributions received from a fund and net gains from redemptions or other taxable dispositions of fund shares) of U.S. individuals, estates and trusts to the extent that such
person’s “modified adjusted gross income” (in the case of an individual) or “adjusted gross income” (in the case of an estate or trust) exceeds a threshold amount.
Shareholders in a fund may have additional tax considerations
as a result of foreign tax payments made by the fund. Typically, these payments will reduce the fund’s dividends but, if eligible, the fund may elect for these payments to be included in your taxable income. In such event, you may be
able to claim a tax credit or deduction for your portion of foreign taxes paid by the fund.
At the beginning of every year, the funds provide shareholders
with information detailing the tax status of any distributions a fund paid during the previous calendar year. Schwab customers also receive information on distributions and transactions in their monthly account statements.
Prior to January 1, 2012, when shareholders
sold fund shares from a taxable account, they typically received information on their tax forms that calculated their gain or loss using the average cost method. This information was not previously reported to the IRS, and shareholders had the
option of calculating gains or losses using an alternative IRS permitted method. However, in accordance with legislation passed by Congress in 2008, each fund reports cost basis information to the IRS for shares purchased on or after January 1,
2012 and sold thereafter. Shareholders elect their preferred cost basis method; however, in the absence of an election, a fund will use an average cost basis method. Please consult your tax adviser to determine the appropriate cost basis method
for your particular tax situation and to learn more about how the new cost basis reporting laws apply to you and your investments, including investments made prior to January 1, 2012 and sold thereafter.
The funds may be required to withhold U.S. federal income tax
on all taxable distributions and redemption proceeds payable to shareholders if they fail to provide the funds with their correct taxpayer identification number or to make required certifications, or if they have been notified by the IRS that they
are subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against U.S. federal income tax liability.
Foreign shareholders may be subject to different U.S. federal
income tax treatment, including withholding tax at the rate of 30% on amounts treated as ordinary dividends from the funds, as discussed in more detail in the funds’ SAI. Furthermore, each fund is required to
Schwab Target Index
Funds | Investing in the Funds
89
withhold U.S. tax (at a 30% rate) on
payments of taxable dividends made to certain non-U.S. entities that fail to comply (or be deemed compliant) with extensive reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign
investment accounts. Shareholders may be requested to provide additional information to the funds to enable the funds to determine whether withholding is required.
90
Schwab
Target Index Funds | Investing in the Funds
Prospectus
| July
29, 2019
Schwab
®
Target Index Funds
To Learn More
This prospectus contains important information on the funds
and should be read and kept for reference. You also can obtain more information from the following sources:
Annual and semiannual reports,
which are sent to current fund investors, contain more information about the funds’ holdings and detailed financial information about the funds. Annual reports also contain information from the funds’
manager(s) about strategies, recent market conditions and trends and their impact on fund performance during the funds’ last fiscal period.
The
Statement of Additional
Information (SAI)
includes a more detailed discussion of investment policies and the risks associated with various investments. The SAI is incorporated by reference into the prospectus, making it legally part of the prospectus.
For a free copy of any of these documents or to request other
information or ask questions about the funds, call Schwab Funds at 1-877-824-5615. In addition, you may visit the Schwab Funds’ website at
www.schwabfunds.com/schwabfunds_prospectus
for a free copy of a
prospectus, SAI or an annual or semiannual report.
The SAI, the funds’ annual and
semiannual reports and other related materials are available from the EDGAR Database on the SEC’s website (
www.sec.gov
). You can obtain copies of this information, after paying a duplicating fee, by
sending a request by e-mail to publicinfo@sec.gov.
SEC File Number
| Schwab Capital Trust | 811-07704 |
REG92696-04
Table of Contents
Schwab Funds
®
| Schwab ® Target 2010 Index Fund | SWYAX |
| Schwab ® Target 2015 Index Fund | SWYBX |
| Schwab ® Target 2020 Index Fund | SWYLX |
| Schwab ® Target 2025 Index Fund | SWYDX |
| Schwab ® Target 2030 Index Fund | SWYEX |
| Schwab ® Target 2035 Index Fund | SWYFX |
| Schwab ® Target 2040 Index Fund | SWYGX |
| Schwab ® Target 2045 Index Fund | SWYHX |
| Schwab ® Target 2050 Index Fund | SWYMX |
| Schwab ® Target 2055 Index Fund | SWYJX |
| Schwab ® Target 2060 Index Fund | SWYNX |
Statement Of Additional Information
July 29, 2019
The Statement of Additional Information (SAI) is not a
prospectus. It should be read in conjunction with each fund’s prospectus dated July 29, 2019 (each as amended from time to time).
The funds’ audited financial statements and the report
of the independent registered public accounting firm thereon from the funds’ annual report for the fiscal year ended March 31, 2019, are incorporated by reference into this SAI.
For a free copy of these documents or to request other
information or ask questions about the funds, call Schwab Funds
®
at 1-877-824-5615. For TDD service call 1-800-345-2550. In addition, you may visit
the Schwab Funds’ website at
www.schwabfunds.com/schwabfunds_prospectus
for a free copy of a prospectus, SAI, annual report or semiannual report.
Each fund is a series of Schwab Capital Trust (the Trust). The
funds are part of the Schwab complex of funds (Schwab Funds).
REG92697-04
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| Appendix – Principal Holders Of Securities | |
| appendix – proxy voting policy and procedures |
INVESTMENT OBJECTIVES
The
Schwab Target 2010 Index
Fund, Schwab Target 2015 Index Fund, Schwab Target 2020 Index Fund, Schwab Target 2025 Index Fund, Schwab Target 2030 Index Fund, Schwab Target 2035 Index Fund, Schwab Target 2040 Index Fund, Schwab Target 2045 Index Fund, Schwab Target 2050 Index
Fund, Schwab Target 2055 Index Fund and Schwab Target 2060 Index Fund
(collectively, the “
Schwab Target Index Funds
”) seek to provide capital appreciation and income consistent with their
current asset allocation.
Change of Investment
Objective
The investment objective for each fund is not
fundamental and therefore may be changed by the funds’ Board of Trustees (the Board) without shareholder approval. There is no guarantee the funds will achieve their investment objectives.
Investment Strategies
Each Schwab Target Index Fund seeks to achieve its investment
objective by investing primarily in affiliated Schwab exchange-traded funds (ETFs). The funds may also invest in affiliated Schwab Funds and Laudus Funds, and unaffiliated third party ETFs and mutual funds (all such ETFs and mutual funds are
referred to herein as the “underlying funds”). Each fund has a policy to invest, under normal circumstances, at least 80% of its assets (net assets, including, for this purpose, any borrowings for investment purposes) in underlying funds
that are managed to seek investment returns that track particular market indices. Each fund will provide shareholders with at least 60 days’ prior written notice of any change in this investment policy. Each Schwab Target Index Fund invests in
the underlying funds in accordance with its target portfolio allocation. These underlying funds invest their assets directly in equity, fixed income, cash and cash equivalents (including money market funds) in accordance with their own investment
objectives and policies. For each target index fund, the target asset allocation will be adjusted annually based on the adviser’s asset allocation strategy. In general, each target index fund’s allocation to equity securities will
decrease and its allocation to fixed income securities will increase as the fund approaches its target retirement date. At the stated target date, each target year index fund’s allocation will be approximately 40% equity securities, 53.5%
fixed income securities and 6.5% cash and cash equivalents (including money market funds). Each Schwab Target Index Fund will continue to reduce its allocation to equity securities for 20 years beyond the fund’s stated target date. Each fund
intends to invest in a combination of underlying funds; however, each fund may invest directly in equity and fixed income securities, and money market securities. These investments and the risks normally associated with these investments are
discussed below.
Exchange-Traded Funds (ETFs)
such as Standard and Poor’s Depositary Receipts (SPDRs) Trusts, are investment companies that typically are registered under the Investment Company Act of 1940, as amended (the 1940 Act), as open-end funds or unit
investment trusts (UITs). ETFs are actively traded on national securities exchanges and are generally based on specific domestic and foreign market indices. Shares of an ETF may be bought and sold throughout the day at market prices, which may be
higher or lower than the shares’ net asset value. Market prices of ETF shares will fluctuate, sometimes rapidly and materially, in response to various factors including changes in the ETF’s net asset value, the value of ETF holdings, and
supply of and demand for ETF shares. Although the creation/redemption feature of ETFs generally makes it more likely that ETF shares will trade close to their net asset value, market volatility, lack of an active trading market for ETF shares,
disruptions at market participants (such as Authorized Participants or market makers) and any disruptions in the ordinary functioning of the creation/redemption process may result in ETF shares trading significantly above (at a
“premium”) or below (“at a discount”) their net asset value. An ETF’s investment results are based on the ETF’s daily net asset value. Investors transacting in ETF shares in the secondary market, where market
prices may differ from net asset value, may experience investment results that differ from results based on the ETF’s daily net asset value. An “index-based ETF” seeks to track the performance of an index by holding in its
portfolio either the contents of the index or a representative sample of the securities in the index. Because ETFs are based on an underlying basket of stocks or an index, they are subject to the same market fluctuations as these types of securities
in volatile market swings. ETFs, like mutual funds, have expenses associated with their operation, including advisory fees. When a fund invests in an ETF, in addition to directly bearing expenses associated with its own operations, it will bear a
pro rata portion of the ETF’s expenses. As with any exchange listed security, ETF shares purchased in the secondary market are subject to customary brokerage charges.
Pursuant to an exemptive order issued by the SEC to iShares
and certain additional ETFs and procedures approved by the Board, each fund may invest in iShares beyond the limits set forth in Section 12(d)(1)(A) of the 1940 Act but not to exceed 25% of the fund’s total assets, provided that the fund has
described ETF investments in its prospectus and otherwise complies with the conditions of the exemptive order and other applicable investment limitations. Neither the permitted ETFs nor their investment adviser make any representations regarding the
advisability of investing in a fund.
Mutual Funds
(open-end mutual funds) are registered investment companies that issue and redeem their shares on a continuous basis.
Closed-End Funds
are registered investment companies that
offer a fixed number of shares and are usually listed on an exchange. These funds generally offer investors the advantages of diversification and professional investment management, by combining shareholders’ money and investing it in various
types of securities, such as stocks, bonds and money market securities. These funds also make various investments and use certain techniques to enhance their performance. These may include entering into delayed-delivery and when-issued securities
transactions or swap agreements; buying and selling futures contracts, illiquid and restricted securities and repurchase agreements; and borrowing or lending money and/or portfolio securities. The risks of investing in these funds generally reflect
the risks of the securities in which these funds invest and the investment techniques they may employ. Also, these funds charge fees and incur operating expenses.
1
Equity Funds
typically seek
growth of capital and invest primarily in equity securities. Other investments generally include debt securities, such as U.S. government securities, and some illiquid and restricted securities. Equity funds typically may enter into delayed-delivery
or when-issued securities transactions, repurchase agreements, swap agreements and futures and options contracts. Some equity funds invest exclusively in equity securities and may focus on a specialized segment of the stock market, like stocks of
small companies or foreign issuers, or may focus on a specific industry or group of industries. The greater a fund’s investment in stock, the greater exposure it will have to stock risk and stock market risk. Stock risk is the risk that a
stock may decline in price over the short or long term. When a stock’s price declines, its market value is lowered even though the intrinsic value of the company may not have changed. Some stocks, like small company and international stocks,
are more sensitive to stock risk than others. Diversifying investments across companies can help to lower the stock risk of a portfolio. Market risk is typically the result of a negative economic condition that affects the value of an entire class
of securities, such as stocks or bonds. Diversification among various asset classes, such as stocks, bonds and cash, can help to lower the market risk of a portfolio. The underlying equity fund(s) that the Schwab Target Index Funds may currently
invest in are listed in each fund’s prospectus. An equity fund’s other investments and use of investment techniques also will affect its performance and portfolio value.
Small-Cap Equity Funds
typically seek capital growth and invest primarily in equity securities of companies with smaller market capitalizations. Small-cap equity funds generally make similar types of investments and employ similar types of techniques as other equity
funds, except that they focus on stocks issued by companies at the lower end of the total capitalization of the U.S. stock market. These stocks tend to be more volatile than stocks of companies of larger capitalized companies. Small-cap equity
funds, therefore, tend to be more volatile than equity funds that invest in mid- or large-cap stocks, and are normally recommended for long-term investors. The underlying small-cap equity fund(s) that the Schwab Target Index Funds may currently
invest in are listed in each fund’s prospectus. For a more detailed discussion of the risks of small-cap stocks, please refer to “Equity Securities” later in the document.
International Equity Funds
typically seek capital growth and invest primarily in equity securities of foreign issuers. Global equity funds invest primarily in equity securities of both domestic and foreign issuers. International and global equity funds generally make similar
types of investments and employ similar types of investment techniques as other equity funds, except they focus on stocks of foreign issuers. Some international and global equity funds invest exclusively in foreign securities. Some of these funds
may invest in securities of issuers located in emerging or developing securities markets. These funds have greater exposure to the risks associated with international investing. International and global equity funds also may invest in foreign
currencies and depositary receipts and enter into futures and options contracts on foreign currencies and forward foreign currency exchange contracts. The underlying international equity fund(s) that the Schwab Target Index Funds may currently
invest in are listed in each fund’s prospectus. For a more detailed discussion of the risks of international stocks, please refer to “Foreign Securities” later in the document.
Fixed Income Funds
typically
seek high current income by investing primarily in debt securities, including U.S. government securities, corporate bonds, stripped securities and mortgage- and asset-backed securities. Other investments may include some illiquid and restricted
securities. Fixed income funds typically may enter into delayed-delivery or when-issued securities transactions, repurchase agreements, swap agreements and futures contracts. Fixed income funds are subject to interest rate and income risks as well
as credit and prepayment risks. When interest rates fall, the prices of debt securities generally rise, which may affect the values of fixed income funds and their yields. For example, when interest rates fall, issuers tend to pre-pay their
outstanding debts and issue new ones paying lower interest rates. A fixed income fund holding these securities would be forced to invest the principal received from the issuer in lower yielding debt securities. Conversely, in a rising interest rate
environment, prepayment on outstanding debt securities generally will not occur. This risk is known as extension risk and may affect the value of a fixed income fund if the value of its securities are depreciated as a result of the higher market
interest rates. In addition, when interest rates rise, bond prices fall as a general rule. This means that the value of an investor’s shares in a fixed income fund could decline in response to a rise in interest rates. Fixed income funds also
are subject to the risk that the issuers of the securities in their portfolios will not make timely interest and/or principal payments or fail to make them at all. The underlying bond fund(s) that the Schwab Target Index Funds may currently invest
in are listed in each fund’s prospectus. For a more detailed discussion of the risks of bonds, please refer to “Debt Securities” later in the document.
Money Market Funds
typically
seek current income by investing in money market securities. Certain money market funds seek a stable share price of $1.00, while others have a share price that fluctuates. Money market securities include commercial paper and short-term U.S.
government securities, certificates of deposit, bankers’ acceptances and repurchase agreements. Some money market securities may be illiquid or restricted securities or purchased on a delayed-delivery or when-issued basis. Certain underlying
money market funds may impose a fee upon the sale of shares or may temporarily suspend the ability to sell shares if such fund’s liquidity falls below required minimums. The underlying money market fund(s) that the Schwab Target Index Funds
may currently invest in is listed in each fund’s prospectus. For a more detailed discussion of the risks of money market securities, please refer to “Money Market Securities” later in the document.
Investments, Securities And Risks
The different types of investments that the underlying funds
typically may invest in, the investment techniques they may use and the risks normally associated with these investments are also discussed below. The following investment strategies, risks and limitations supplement those set forth in the
prospectus and may be changed without shareholder approval unless otherwise noted. Also, policies and limitations that state a maximum percentage of assets that may be invested in a security or other asset, or that set forth a quality standard,
shall be measured immediately after and as a result of a fund’s acquisition of such security or asset unless otherwise noted. Thus, any subsequent change in
2
values, net assets or other circumstances does not require a fund to sell an
investment if it could not then make the same investment. Not all investment securities or techniques discussed below are eligible investments for each fund.
From time to time the funds may hold certain securities not
otherwise discussed in this SAI as a permissible investment for a particular fund. To the extent an investment becomes part of a fund’s principal or non-principal investment strategy, the fund will take the necessary steps to identify them as
permissible investments. In addition, a fund may receive (i.e., not actively invest) certain securities as a result of a corporate action, such as securities dividends, spin-offs or rights issues. In such cases, the fund will not actively add to its
position and generally will dispose of the securities as soon as reasonably practicable.
Each of the Schwab Target Index Funds also may invest in
securities other than shares of underlying funds, such as stocks, bonds, and money market securities, and engage in certain investment techniques, which are outlined below. For purposes of the descriptions below, references to “a fund”
or “the funds” include each fund of the Schwab Target Index Funds. Not all securities or techniques discussed below are eligible investments for each fund.
Borrowing.
A fund may borrow
for temporary or emergency purposes; for example, a fund may borrow at times to meet redemption requests rather than sell portfolio securities to raise the necessary cash. A fund’s borrowings will be subject to interest costs. Borrowing can
also involve leveraging when securities are purchased with the borrowed money. Leveraging creates interest expenses that can exceed the income from the assets purchased with the borrowed money. In addition, leveraging may magnify changes in the net
asset value of a fund’s shares and in its portfolio yield. A fund will earmark or segregate assets to cover such borrowings in accordance with positions of the Securities and Exchange Commission (SEC). If assets used to secure a borrowing
decrease in value, a fund may be required to pledge additional collateral to avoid liquidation of those assets.
A fund may establish lines-of-credit (lines) with certain
banks by which it may borrow funds for temporary or emergency purposes. A borrowing is presumed to be for temporary or emergency purposes if it is repaid by a fund within 60 days and is not extended or renewed. Each fund may use the lines to meet
large or unexpected redemptions that would otherwise force a fund to liquidate securities under circumstances which are unfavorable to a fund’s remaining shareholders. Each fund will pay fees to the banks for using its lines.
Build America Bonds
are
taxable municipal bonds with federal subsidies for a portion of the issuer’s borrowing costs. Build America Bonds were issued through the Build America Bond program, which was created as part of the American Recovery and Reinvestment Act of
2009 (the Act). The objective of the program was to reduce the borrowing costs of state and local governments. Because the Act was not extended beyond its expiration date on December 31, 2010, tax subsidies will not apply to Build America Bonds
issued following such date (if any). However, Build America Bonds outstanding and issued before such date remain eligible for the federal interest rate subsidy, which continues for the life of the Build America Bonds.
If a fund holds Build America Bonds, the fund may be eligible
to receive a federal income tax credit; however, the issuer of a Build America Bond may instead elect to receive a cash payment directly from the federal government in lieu of holders such as the fund receiving a tax credit. The interest on Build
America Bonds is taxable for federal income tax purposes and will be distributed to shareholders as taxable ordinary income. For any tax credit Build America Bond held by a fund, the fund may elect to pass through to its shareholders any tax credits
from those bonds that otherwise would be allowed to the fund. These tax credits can generally be used to offset U.S. federal income taxes and the federal alternative minimum tax, but such credits are generally not refundable. Any unused credits may
be carried forward to succeeding taxable years.
Concentration
means that
substantial amounts of assets are invested in a particular industry or group of industries. Concentration increases investment exposure to industry risk. For example, the automobile industry may have a greater exposure to a single factor, such as an
increase in the price of oil, which may adversely affect the sale of automobiles and, as a result, the value of the industry’s securities. Certain underlying funds may concentrate their investments in a particular industry or group of
industries.
Debt Securities
are obligations issued by domestic and foreign entities, including governments and corporations, in order to raise money. They are basically “IOUs,” but are commonly referred to as bonds or money market
securities. These securities normally require the issuer to pay a fixed-, variable- or floating-rate of interest on the amount of money borrowed (the principal) until it is paid back upon maturity.
Debt securities experience price changes when interest rates
change. For example, when interest rates fall, the prices of debt securities generally rise. Conversely, when interest rates rise, the prices of debt securities generally fall. Certain debt securities have call features that allow issuers to redeem
their outstanding debts prior to final maturity. Depending on the call feature, an issuer may pre-pay its outstanding debts and issue new ones paying lower interest rates. This is especially true for bonds with sinking fund provisions, which commit
the issuer to set aside a certain amount of money to cover timely repayment of principal and typically allow the issuer to annually repurchase certain of its outstanding bonds from the open market or at a pre-set call price. If an issuer redeems the
debt securities prior to final maturity, a fund may have to replace these securities with lower yielding securities, which could result in a lower return. This is known as prepayment risk and is more likely to occur in a falling interest rate
environment. In a rising interest rate environment, prepayment on outstanding debt securities is less likely to occur. This is known as extension risk and may cause the value of debt securities to depreciate as a result of the higher market interest
rates. Typically, longer-maturity securities react to interest rate changes more severely than shorter-term securities (all things being equal), but generally offer greater rates of interest.
3
A change in a central bank’s monetary
policy or economic conditions may lead to a change in interest rates, which could have sudden and unpredictable effects on the markets and significantly impact the value of debt securities in which a fund invests. Some debt securities, such as bonds
with longer durations, are more sensitive to interest rate changes than others and may experience an immediate and considerable reduction in value if interest rates rise. Longer duration securities tend to be more volatile than shorter duration
securities. As the values of debt securities in a fund’s portfolio adjust to a rise in interest rates, a fund’s share price may fall. In the event that a fund holds a large portion of its portfolio in longer duration securities when
interest rates increase, the share price of the fund may fall significantly.
Debt securities also are subject to the risk that the issuers
will not make timely interest and/or principal payments or fail to make them at all. This is called credit risk. Corporate debt securities (bonds) tend to have higher credit risk generally than U.S. government debt securities. Debt securities also
may be subject to price volatility due to market perception of future interest rates, the creditworthiness of the issuer and general market liquidity (market risk). Investment-grade debt securities are considered medium- and/or high-quality
securities, although some still possess varying degrees of speculative characteristics and risks. Debt securities rated below investment-grade are riskier, but may offer higher yields. These securities are sometimes referred to as high yield
securities or “junk bonds.” The market for these securities has historically been less liquid and more volatile than for investment-grade securities.
Corporate bonds are debt securities issued by corporations.
Although a higher return is expected from corporate bonds, these securities, while subject to the same general risks as U.S. government securities, are subject to greater credit risk than U.S. government securities. Their prices may be affected by
the perceived credit quality of their issuer.
Depositary
Receipts
include American Depositary Receipts (ADRs) as well as other “hybrid” forms of ADRs, including European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs), and are certificates
evidencing ownership of shares of a foreign issuer. Depositary receipts may be sponsored or unsponsored. These certificates are issued by depository banks and generally trade on an established market in the United States or elsewhere. The underlying
shares are held in trust by a custodian bank or similar financial institution in the issuer’s home country. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services,
including forwarding dividends and interest and corporate actions. ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies. However, ADRs continue to be subject to many of the risks
associated with investing directly in foreign securities.
Investments in the securities of foreign issuers may subject a
fund to investment risks that differ in some respects from those related to investments in securities of U.S. issuers. Such risks include future adverse political and economic developments; withholding taxes on income, or possible imposition of
withholding taxes on income; possible seizure, nationalization or expropriation of foreign deposits; possible establishment of exchange controls; or taxation at the source or greater fluctuation in value due to changes in exchange rates. Foreign
issuers of securities often engage in business practices different from those of domestic issuers of similar securities, and there may be less information publicly available about foreign issuers. In addition, foreign issuers are, generally
speaking, subject to less government supervision and regulation and different accounting treatment than are those in the United States. Please see the section titled “Foreign Securities” for more detail.
Although the two types of depositary receipt facilities
(unsponsored or sponsored) are similar, there are differences regarding a holder’s rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence
of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility.
The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. The
depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying
securities.
Sponsored depositary receipt facilities are
created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and
responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the
depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and
other shareholder communications and information to the depositary receipt holders at the underlying issuer’s request.
Derivative Instruments
are commonly defined to include instruments or contracts whose values depend on (or “derive” from) the value of one or more other assets such as securities, currencies, or commodities. These “other
assets” are commonly referred to as “underlying assets.”
A derivative instrument generally consists of, is based upon,
or exhibits characteristics similar to options or forward contracts. Options and forward contracts are considered to be the basic “building blocks” of derivatives. For example, forward-based derivatives include forward contracts, as well
as exchange-traded futures. Option-based derivatives include privately negotiated, over-the-counter (OTC) options (including caps, floors, collars, and options on forward and swap contracts) and exchange-traded options on futures. Diverse types of
derivatives may be created by combining options or forward contracts in different ways, and applying these structures to a wide range of underlying assets. Risk
4
management strategies include investment techniques designed to facilitate
the sale of portfolio securities, manage the average duration of the portfolio or create or alter exposure to certain asset classes, such as equity, other debt or foreign securities.
In addition to the derivative instruments
and strategies described in this SAI, the investment adviser expects to discover additional derivative instruments and other investment, hedging or risk management techniques. The investment adviser may utilize these new derivative instruments and
techniques to the extent that they are consistent with a fund’s investment objective and permitted by a fund’s investment limitations, operating policies and applicable regulatory authorities.
The Commodity Futures Trading Commission (CFTC) regulates the
trading of commodity interests, including certain futures contracts, options, and swaps in which a fund may invest. A fund that invests in commodity interests will generally be subject to certain CFTC regulatory requirements if it is considered a
“commodity pool”. The Trust, on behalf of each fund, has filed a notice of eligibility for exclusion from the definition of the term “commodity pool operator” (CPO) under the Commodity Exchange Act, as amended (CEA), with
respect to each fund’s operation. Therefore, each fund and its investment adviser are not subject to registration or regulation as a commodity pool or CPO under the CEA and the investment adviser is not subject to registration as a CPO. If a
fund were no longer able to claim the exclusion, the fund’s investment adviser may be required to register as a CPO and the fund and its investment adviser would be subject to regulation as a commodity pool or CPO under the CEA. If a fund or
its investment adviser is subject to CFTC regulation, it may incur additional expenses and/or may choose to make changes to its investment strategies.
Forward
Contracts
are sales contracts between a buyer (holding the “long” position) and the seller (holding the “short” position) for an asset with delivery deferred to a future date. The buyer
agrees to pay a fixed price at the agreed future date and the seller agrees to deliver the asset. The seller hopes that the market price on the delivery date is less than the agreed upon price, while the buyer hopes for the contrary. The change in
value of a forward-based derivative generally is roughly proportional to the change in value of the underlying asset.
Futures
Contracts
are instruments that represent an agreement between two parties that obligates one party to buy, and the other party to sell, specific instruments at an agreed-upon price on a stipulated future date.
In the case of futures contracts relating to an index or otherwise not calling for physical delivery at the close of the transaction, the parties usually agree to deliver the final cash settlement price of the contract. A fund may purchase and sell
futures contracts based on securities, securities indices and foreign currencies, interest rates, or any other futures contracts traded on U.S. exchanges or boards of trade that the CFTC licenses and regulates on foreign exchanges. Although
positions are usually marked to market on a daily basis with an intermediary (executing broker), there remains a credit risk with the futures exchange.
A fund must maintain a small portion of its assets in cash to
process shareholder transactions and to pay its expenses. To reduce the effect this otherwise uninvested cash would have on its performance, a fund may purchase futures contracts. Such transactions allow a fund’s cash balance to produce a
return similar to that of the underlying security or index on which the futures contract is based. Also, a fund may purchase or sell futures contracts on a specified foreign currency to “fix” the price in U.S. dollars of the foreign
security it has acquired or sold or expects to acquire or sell. A fund may enter into futures contracts for other reasons as well.
When buying or selling futures contracts, a
fund must place a deposit with its broker equal to a fraction of the contract amount. This amount is known as “initial margin” and must be in the form of liquid assets, including cash, cash-equivalents and U.S. government securities.
Subsequent payments to and from the broker, known as “variation margin,” may be made daily, if necessary, as the value of the futures contracts fluctuates. This process is known as “marking-to-market.” The initial margin
amount will be returned to a fund upon termination of the futures contracts assuming all contractual obligations are satisfied. Because margin requirements are normally only a fraction of the amount of the futures contracts in a given transaction,
futures trading can involve a great deal of leverage. To avoid the creation of a senior security, a fund will earmark or segregate liquid assets for any outstanding futures contracts as may be required under the federal securities laws.
While a fund may purchase and sell futures contracts
in order to simulate full investment, there are risks associated with these transactions. Adverse market movements could cause a fund to experience substantial losses when buying and selling futures contracts. Of course, barring significant market
distortions, similar results would have been expected if a fund had instead transacted in the underlying securities directly. There also is the risk of losing any margin payments held by a broker in the event of its bankruptcy. Additionally, a fund
incurs transaction costs (e.g., brokerage fees) when engaging in futures trading. To the extent a fund also invests in futures in order to simulate full investment, these same risks apply.
When interest rates are rising or securities
prices are falling, a fund may seek, through the sale of futures contracts, to offset a decline in the value of its current portfolio securities. When interest rates are falling or prices are rising, a fund, through the purchase of futures
contracts, may attempt to secure better rates or prices than might later be available in the market when it effects anticipated purchases. Similarly, a fund may sell futures contracts on a specified currency to protect against a decline in the value
of that currency and its portfolio securities that are denominated in that currency. A fund may purchase futures contracts on a foreign currency to fix the price in U.S. dollars of a security denominated in that currency that a fund has acquired or
expects to acquire.
Futures contracts may
require actual delivery or acquisition of an underlying security or cash value of an index on the expiration date of the contract. In most cases, however, the contractual obligation is fulfilled before the date of the contract by buying or selling,
as the case may be, identical futures contracts. Such offsetting transactions terminate the original contracts and cancel the obligation to take or make delivery of the underlying securities or cash. There may not always be a liquid secondary market
at the time a fund seeks to close out a futures position. If a fund is unable to close out its position and prices move adversely, a fund would have to continue to make daily cash payments to maintain its
5
margin requirements. If a fund had insufficient cash to meet these
requirements it may have to sell portfolio securities at a disadvantageous time or incur extra costs by borrowing the cash. Also, a fund may be required to make or take delivery and incur extra transaction costs buying or selling the underlying
securities. A fund seeks to reduce the risks associated with futures transactions by buying and selling futures contracts that are traded on national exchanges or for which there appears to be a liquid secondary market.
With respect to futures contracts that are not legally
required to “cash settle,” a fund may cover the open position by setting aside or earmarking liquid assets in an amount equal to the notional value (i.e., the purchase or delivery obligation) of the futures contracts. With respect to
futures contracts that are required to “cash settle,” however, a fund is permitted to set aside or earmark liquid assets in an amount equal to the fund’s daily marked to market (net) obligation, if any, (in other words, the
fund’s daily net liability, if any) rather than the notional value of the futures contracts. By setting aside assets or earmarking equal to only its net obligation under cash-settled futures, a fund will have the ability to employ leverage to
a greater extent than if the fund were required to set aside or earmark assets equal to the full notional value of the futures contract.
Options
Contracts
generally provide the right to buy or sell a security, commodity, futures contract or foreign currency in exchange for an agreed upon price. If the right is not exercised after a specified period,
the option expires and the option buyer forfeits the money paid to the option seller.
A call option gives the buyer the right to buy a specified
number of shares of a security at a fixed price on or before a specified date in the future. For this right, the call option buyer pays the call option seller, commonly called the call option writer, a fee called a premium. Call option buyers are
usually anticipating that the price of the underlying security will rise above the price fixed with the call writer, thereby allowing them to profit. If the price of the underlying security does not rise, the call option buyer’s losses are
limited to the premium paid to the call option writer. For call option writers, a rise in the price of the underlying security will be offset, in part, by the premium received from the call option buyer. If the call option writer does not own the
underlying security, however, the losses that may ensue if the price rises could be potentially unlimited. If the call option writer owns the underlying security or commodity, this is called writing a covered call. All call and put options written
by a fund will be covered, which means that a fund will own the securities subject to the option so long as the option is outstanding or a fund will earmark or segregate assets for any outstanding option contracts.
A put option is the opposite of a call option. It gives the
buyer the right to sell a specified number of shares of a security at a fixed price on or before a specified date in the future. Put option buyers are usually anticipating a decline in the price of the underlying security, and wish to offset those
losses when selling the security at a later date. All put options a fund writes will be covered, which means that a fund will earmark or segregate cash, U.S. government securities or other liquid securities with a value at least equal to the
exercise price of the put option, or will otherwise “cover” its position as required by the 1940 Act (e.g., the fund will hold a put option on the same underlying security with the same or higher strike price). The purpose of writing
such options is to generate additional income for a fund. However, in return for the option premium, a fund accepts the risk that it may be required to purchase the underlying securities at a price in excess of the securities’ market value at
the time of purchase.
A fund may purchase and write put
and call options on any securities in which it may invest or any securities index or basket of securities based on securities in which it may invest. In addition, a fund may purchase and sell foreign currency options and foreign currency futures
contracts and related options. A fund may purchase and write such options on securities that are listed on domestic or foreign securities exchanges or traded in the over-the-counter market. Like futures contracts, option contracts are rarely
exercised. Option buyers usually sell the option before it expires. Option writers may terminate their obligations under a written call or put option by purchasing an option identical to the one it has written. Such purchases are referred to as
“closing purchase transactions.” A fund may enter into closing sale transactions in order to realize gains or minimize losses on options it has purchased or written.
An exchange-traded currency option position may be closed out
only on an options exchange that provides a secondary market for an option of the same series. Although a fund generally will purchase or write only those options for which there appears to be an active secondary market, there is no assurance that a
liquid secondary market will exist for any particular option or at any particular time. If a fund is unable to effect a closing purchase transaction with respect to options it has written, it will not be able to sell the underlying securities or
dispose of assets earmarked or held in a segregated account until the options expire or are exercised. Similarly, if a fund is unable to effect a closing sale transaction with respect to options it has purchased, it would have to exercise the
options in order to realize any profit and will incur transaction costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an
exchange include the following: (1) there may be insufficient trading interest in certain options; (2) an exchange may impose restrictions on opening transactions or closing transactions or both; (3) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options; (4) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (5) the facilities of an exchange or the Options Clearing Corporation (OCC) may not at
all times be adequate to handle current trading volume; or (6) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options),
although outstanding options on that exchange that had been issued by the OCC as a result of trades on that exchange would continue to be exercisable in accordance with their terms.
The ability to terminate over-the-counter options is more
limited than with exchange-traded options and may involve the risk that broker-dealers participating in such transactions will not fulfill their obligations. Until such time as the staff of the SEC changes its position, a
6
fund will treat purchased over-the-counter options and all assets used to
cover written over-the-counter options as illiquid securities, except that with respect to options written with primary dealers in U.S. government securities pursuant to an agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to a formula the staff of the SEC approves.
Options trading involves additional risks because of the low
margin deposits required and the extremely high degree of leverage that options trading may involve. There may be imperfect correlation between the change in market value of the securities held by a fund and the prices of the options, possible lack
of a liquid secondary market, and the resulting inability to close such positions prior to their maturity dates.
A fund may write or purchase an option only when the market
value of that option, when aggregated with the market value of all other options transactions made on behalf of a fund, does not exceed 5% of its net assets.
Puts
are agreements that allow the buyer to sell a security at a specified price and time to the seller or “put provider.” When a fund buys a security with a put feature, losses could occur if the put provider
does not perform as agreed. If a put provider fails to honor its commitment upon a fund’s attempt to exercise the put, a fund may have to treat the security’s final maturity as its effective maturity. If that occurs, the security’s
price may be negatively impacted, and its sensitivity to interest rate changes may be increased, possibly contributing to increased share price volatility for a fund. This also could lengthen a fund’s overall average effective maturity.
Standby commitments are types of puts.
Diversification
involves
investing in a wide range of securities and thereby spreading and reducing the risks of investment. Each fund is a series of an open-end investment management company. Each fund is a diversified mutual fund.
Emerging or Developing Markets
exist in countries that are considered to be in the initial stages of industrialization. The risks of investing in these markets are similar to the risks of international investing in general, although the risks are greater in emerging and
developing markets. Countries with emerging or developing securities markets tend to have economic structures that are less stable than countries with developed securities markets. This is because their economies may be based on only a few
industries and their securities markets may trade a small number of securities. Prices on these exchanges tend to be volatile, and securities in these countries historically have offered greater potential for gain (as well as loss) than securities
of companies located in developed countries.
A
fund’s investments in emerging markets can be considered speculative, and therefore may offer higher potential for gains and losses than investments in developed markets of the world. With respect to an emerging market country, there may be a
greater potential for nationalization, expropriation or confiscatory taxation, political changes, government regulation, social instability or diplomatic developments (including war) which could affect adversely the economies of such countries or
investments in such countries. The economies of developing countries generally are heavily dependent upon international trade and, accordingly, have been and may continue to be adversely affected by trade barriers, exchange or currency controls,
managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade.
In addition to the risks of investing in emerging market
country debt securities, a fund’s investment in government or government-related securities of emerging market countries and restructured debt instruments in emerging markets are subject to special risks, including the inability or
unwillingness to repay principal and interest, requests to reschedule or restructure outstanding debt, and requests to extend additional loan amounts. A fund may have limited recourse in the event of default on such debt instruments.
Investing in China
involves certain additional risks and considerations not typically associated with investing in other more established economies or securities markets.
China based companies that incorporate in the People’s Republic of China (PRC) can issue different classes of shares depending on where they are listed and which investors are allowed to own them. These are referred to as Class A Shares, Class
B shares, and Class H shares, which are all renminbi-denominated shares that trade in different currencies depending on what stock exchange they are listed on. Class H Shares trade on the Hong Kong Stock Exchange, are quoted and traded in Hong Kong
dollars, and have no restrictions on who can trade them. Class B Shares trade on either the Shanghai or Shenzhen stock exchanges and can only be traded by non-residents of the PRC or residents with appropriate foreign currency dealing accounts. They
trade in U.S. dollars on the Shanghai exchange and in Hong Kong dollars on the Shenzhen exchange. Class A Shares trade on either the Shanghai or Shenzhen exchanges and are quoted in renminbi. Class A Shares may only be traded by residents of the
PRC, or under the Qualified Foreign Institutional Investor (QFII) rules, or through the Stock Connect programs (Shanghai-Hong Kong or Shenzhen-Hong Kong). Finally, China based companies that are controlled by PRC residents or PRC state entities and
have a majority of their revenue or assets in the PRC may incorporate outside the PRC and trade on an exchange outside the PRC in the currency of the exchange. These are referred to as “Red Chip” (Hong Kong), “P Chip” (Hong
Kong), “S Chip” (Singapore), or “N Shares” (United States). The multiplicity of share classes and various restrictions on ownership, in addition to the ability of Chinese regulatory authorities and Chinese issuers to suspend
trading and their willingness to exercise this option in response to market volatility and other events, can significantly impact liquidity and volatility of the Chinese market and the markets for Chinese securities. In addition, to the extent that
a fund invests in China A Shares, there may be legal restrictions imposed by the PRC on the repatriation of assets or proceeds from the sale of China A Shares. Further, there are quotas on the amount China A Shares available either to QFIIs or
through the Stock Connect programs. These quotas are applicable to the entire market, not to a specific fund, but they impact the ability of a fund to implement its investment strategy.
Equity Securities
represent
ownership interests in a company, and are commonly called “stocks.” Equity securities historically have outperformed most other securities, although their prices can fluctuate based on changes in a company’s financial condition,
market conditions and political, economic or even company-specific news. When a stock’s price declines, its market value is lowered even though the intrinsic
7
value of the company may not have changed. Sometimes factors, such as
economic conditions or political events, affect the value of stocks of companies of the same or similar industry or group of industries, and may affect the entire stock market.
Types of equity securities include common stocks, preferred
stocks, convertible securities, rights and warrants, ADRs, GDRs, EDRs, interests in real estate investment trusts and business development companies (for more information on real estate investment trusts (REITs), see the section entitled “Real
Estate Investment Trusts”).
Common Stocks
, which are probably the most recognized type of equity security, represent an equity or ownership interest in an issuer and usually entitle the owner to voting
rights in the election of the corporation’s directors and any other matters submitted to the corporation’s shareholders for voting, as well as to receive dividends on such stock. The market value of common stock can fluctuate widely, as
it reflects increases and decreases in an issuer’s earnings. In the event an issuer is liquidated or declares bankruptcy, the claims of bond owners, other debt holders and owners of preferred stock take precedence over the claims of common
stock owners.
Common stocks are typically
categorized by their market capitalization as large-, mid- or small-cap. Small-cap stocks include common stocks issued by operating companies with market capitalizations that place them at the lower end of the stock market, as well as the stocks of
companies that are determined to be small based on several factors, including the capitalization of the company and the amount of revenues. Historically, small-cap company stocks have been riskier than stocks issued by large- or mid-cap companies
for a variety of reasons. Small-cap companies may have less certain growth prospects and are typically less diversified and less able to withstand changing economic conditions than larger capitalized companies. Small-cap companies also may have more
limited product lines, markets or financial resources than companies with larger capitalizations, and may be more dependent on a relatively small management group. In addition, small-cap companies may not be well known to the investing public, may
not have institutional ownership and may have only cyclical, static or moderate growth prospects. Most small-cap company stocks pay low or no dividends.
These factors and others may cause sharp changes in the value
of a small-cap company’s stock, and even cause some small-cap companies to fail. Additionally, small-cap stocks may not be as broadly traded as large- or mid-cap stocks, and a fund’s positions in securities of such companies may be
substantial in relation to the market for such securities. Accordingly, it may be difficult for a fund to dispose of securities of these small-cap companies at prevailing market prices in order to meet redemptions. This lower degree of liquidity can
adversely affect the value of these securities. For these reasons and others, the value of a fund’s investments in small-cap stocks is expected to be more volatile than other types of investments, including other types of stock investments.
While small-cap stocks are generally considered to offer greater growth opportunities for investors, they involve greater risks and the share price of a fund that invests in small-cap stocks may change sharply during the short term and long
term.
Preferred
Stocks
represent an equity or ownership interest in an issuer but do not ordinarily carry voting rights, though they may carry limited voting rights. Preferred stocks normally have preference over the
corporation’s assets and earnings, however. For example, preferred stocks have preference over common stock in the payment of dividends. Preferred stocks normally pay dividends at a specified rate. However, preferred stock may be purchased
where the issuer has omitted, or is in danger of omitting, payment of its dividend. Such investments would be made primarily for their capital appreciation potential. In the event an issuer is liquidated or declares bankruptcy, the claims of bond
owners take precedence over the claims of preferred and common stock owners. Certain classes of preferred stock are convertible into shares of common stock of the issuer. By holding convertible preferred stock, a fund can receive a steady stream of
dividends and still have the option to convert the preferred stock to common stock. Preferred stock is subject to many of the same risks as common stock and debt securities.
Convertible
Securities
are typically preferred stocks or bonds that are exchangeable for a specific number of another form of security (usually the issuer’s common stock) at a specified price or ratio. A convertible
security generally entitles the holder to receive interest paid or accrued on bonds or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. A corporation may issue a convertible security
that is subject to redemption after a specified date, and usually under certain circumstances. A holder of a convertible security that is called for redemption would be required to tender it for redemption to the issuer, convert it to the underlying
common stock or sell it to a third party. The convertible structure allows the holder of the convertible bond to participate in share price movements in the company’s common stock. The actual return on a convertible bond may exceed its stated
yield if the company’s common stock appreciates in value and the option to convert to common stocks becomes more valuable.
Convertible securities typically pay a lower interest rate
than nonconvertible bonds of the same quality and maturity because of the conversion feature. Convertible securities are also rated below investment grade (high yield) or are not rated, and are subject to credit risk.
Prior to conversion, convertible securities have
characteristics and risks similar to nonconvertible debt and equity securities. In addition, convertible securities are often concentrated in economic sectors, which, like the stock market in general, may experience unpredictable declines in value,
as well as periods of poor performance, which may last for several years. There may be a small trading market for a particular convertible security at any given time, which may adversely impact market price and a fund’s ability to liquidate a
particular security or respond to an economic event, including deterioration of an issuer’s creditworthiness.
Convertible preferred stocks are nonvoting equity securities
that pay a fixed dividend. These securities have a conversion feature similar to convertible bonds, but do not have a maturity date. Due to their fixed income features, convertible securities provide higher income potential than the issuer’s
common stock, but typically are more sensitive to interest rate changes than the underlying common stock. In the event of a
8
company’s liquidation, bondholders have claims on company assets senior
to those of shareholders; preferred shareholders have claims senior to those of common shareholders.
Convertible securities typically trade at prices above their
conversion value, which is the current market value of the common stock received upon conversion, because of their higher yield potential than the underlying common stock. The difference between the conversion value and the price of a convertible
security will vary depending on the value of the underlying common stock and interest rates. When the underlying value of the common stocks declines, the price of the issuer’s convertible securities will tend not to fall as much because the
convertible security’s income potential will act as a price support. While the value of a convertible security also tends to rise when the underlying common stock value rises, it will not rise as much because its conversion value is more
narrow. The value of convertible securities also is affected by changes in interest rates. For example, when interest rates fall, the value of convertible securities may rise because of their fixed income component.
Initial Public
Offering
(IPO). A fund may purchase shares issued as part of, or a short period after, a company’s IPO, and may at times dispose of those shares shortly after their acquisition. A fund’s purchase
of shares issued in IPOs exposes it to the risks associated with companies that have little operating history as public companies, as well as to the risks inherent in those sectors of the market where these new issuers operate. The market for IPO
issuers has been volatile, and share prices of newly-public companies have fluctuated significantly over short periods of time.
Master Limited
Partnerships
(MLPs)
.
MLPs are limited partnerships in which the common units are publicly traded. MLP common units are freely traded on a securities exchange or in the
over-the-counter market and are generally registered with the SEC. MLPs often own several properties or businesses (or own interests) that are related to real estate development and oil and gas industries, but they also may finance motion pictures,
research and development and other projects. MLPs generally have two classes of owners, the general partner and limited partners. The general partner is typically owned by a major energy company, an investment fund, the direct management of the MLP
or is an entity owned by one or more of such parties. The general partner may be structured as a private or publicly traded corporation or other entity. The general partner typically controls the operations and management of the MLP through an up to
2% equity interest in the MLP plus, in many cases, ownership of common units and subordinated units. Limited partners own the remainder of the partnership, through ownership of common units, and have a limited role, if any, in the
partnership’s operations and management.
MLPs are typically structured such that common units and
general partner interests have first priority to receive quarterly cash distributions up to an established minimum amount (minimum quarterly distributions). Common and general partner interests also accrue arrearages in distributions to the extent
the minimum quarterly distribution is not paid. Once common and general partner interests have been paid, subordinated units receive distributions of up to the minimum quarterly distribution; however, subordinated units do not accrue arrearages.
Distributable cash in excess of the minimum quarterly distribution paid to both common and subordinated units is distributed to both common and subordinated units generally on a pro rata basis. The general partner is also eligible to receive
incentive distributions if the general partner operates the business in a manner which results in distributions paid per common unit surpassing specified target levels. As the general partner increases cash distributions to the limited partners, the
general partner receives an increasingly higher percentage of the incremental cash distributions. A common arrangement provides that the general partner can reach a tier where it receives 50% of every incremental dollar paid to common and
subordinated unit holders. These incentive distributions are intended to encourage the general partner to streamline costs, increase capital expenditures and acquire assets in order to increase the partnership’s cash flow and raise the
quarterly cash distribution in order to reach higher tiers. Such results are intended to benefit all security holders of the MLP, however, such incentive distribution payments give rise to potential conflicts of interest between the common unit
holders and the general partner.
MLP common units
represent a limited partnership interest in the MLP. Common units are listed and traded on U.S. securities exchanges or over-the-counter, with their value fluctuating predominantly based on prevailing market conditions and the success of the MLP.
The funds may purchase common units in market transactions as well as directly from the MLP or other parties in private placements. Unlike owners of common stock of a corporation, owners of common units have limited voting rights and have no ability
to annually elect directors. MLPs generally distribute all available cash flow (cash flow from operations less maintenance capital expenditures) in the form of quarterly distributions. Common units along with general partner units have first
priority to receive quarterly cash distributions up to the minimum quarterly distribution and have arrearage rights. In the event of liquidation, common units have preference over subordinated units, but not debt or preferred units, to the remaining
assets of the MLP.
MLP subordinated units are typically
issued by MLPs to their original sponsors, such as their founders, corporate general partners of MLPs, entities that sell assets to the MLP, and investors. Subordinated units may be purchased directly from these persons as well as newly-issued
subordinated units from MLPs themselves. Subordinated units have similar voting rights as common units and are generally not publicly traded. Once the minimum quarterly distribution on the common units, including any arrearages, has been paid,
subordinated units receive cash distributions up to the minimum quarterly distribution prior to any incentive payments to the MLP’s general partner. Unlike common units, subordinated units do not have arrearage rights. In the event of
liquidation, common units and general partner interests have priority over subordinated units. Subordinated units are typically converted into common units on a one-to-one basis after certain time periods and/or performance targets have been
satisfied. The purchase or sale price of subordinated units is generally tied to the common unit price less a discount. The size of the discount varies depending on the likelihood of conversion, the length of time remaining to conversion, the size
of the block purchased relative to trading volumes, and other factors, including smaller capitalization partnerships or companies potentially having
9
limited product lines, markets or financial resources, lacking management
depth or experience, and being more vulnerable to adverse general market or economic development than larger more established companies.
General partner interests of MLPs are typically retained by an
MLP’s original sponsors, such as its founders, corporate partners, entities that sell assets to the MLP and investors. A holder of general partner interests can be liable under certain circumstances for amounts greater than the amount of the
holder’s investment in the general partner interest. General partner interests often confer direct board participation rights and in many cases, operating control, over the MLP. These interests themselves are not publicly traded, although they
may be owned by publicly traded entities. General partner interests receive cash distributions, typically 2% of the MLP’s aggregate cash distributions, which are contractually defined in the partnership agreement. In addition, holders of
general partner interests typically hold incentive distribution rights, which provide them with a larger share of the aggregate MLP cash distributions as the distributions to limited partner unit holders are increased to prescribed levels. General
partner interests generally cannot be converted into common units. The general partner interest can be redeemed by the MLP if the MLP unitholders choose to remove the general partner, typically with a supermajority vote by limited partner
unitholders.
Additional risks involved with investing in
an MLP are risks associated with the specific industry or industries in which the partnership invests, such as the risks of investing in real estate, or oil and gas industries.
Certain MLPs are dependent on their parent companies or
sponsors for a majority of their revenues. Any failure by an MLP’s parents or sponsors to satisfy their payments or obligations would impact the MLP’s revenues and cash flows and ability to make distributions.
Real Estate
Investment Trusts
(REITs) are pooled investment vehicles, which invest primarily in income producing real estate or real estate related loans or interests and, in some cases, manage real estate. REITs are
sometimes referred to as equity REITs, mortgage REITs or hybrid REITs. An equity REIT invests primarily in properties and generates income from rental and lease properties and, in some cases, from the management of real estate. Equity REITs also
offer the potential for growth as a result of property appreciation and from the sale of appreciated property. Mortgage REITs invest primarily in real estate mortgages, which may secure construction, development or long-term loans, and derive income
for the collection of interest payments. Hybrid REITs may combine the features of equity REITs and mortgage REITs. REITs are generally organized as corporations or business trusts, but are not taxed as a corporation if they meet certain requirements
of Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). To qualify, a REIT must, among other things, invest substantially all of its assets in interests in real estate (including other REITs), cash and government securities,
distribute at least 90% of its taxable income to its shareholders and receive at least 75% of that income from rents, mortgages and sales of property.
Like any investment in real estate, a REIT’s performance
depends on many factors, such as its ability to find tenants for its properties, to renew leases, and to finance property purchases and renovations. In general, REITs may be affected by changes in underlying real estate values, which may have an
exaggerated effect to the extent a REIT concentrates its investment in certain regions or property types. For example, rental income could decline because of extended vacancies, increased competition from nearby properties, tenants’ failure to
pay rent, or incompetent management. Property values could decrease because of overbuilding, environmental liabilities, uninsured damages caused by natural disasters, a general decline in the neighborhood, losses due to casualty or condemnation,
increases in property taxes, or changes in zoning laws. Ultimately, a REIT’s performance depends on the types of properties it owns and how well the REIT manages its properties. Additionally, declines in the market value of a REIT may reflect
not only depressed real estate prices, but may also reflect the degree of leverage utilized by the REIT.
In general, during periods of rising interest rates, REITs may
lose some of their appeal for investors who may be able to obtain higher yields from other income-producing investments, such as long-term bonds. Higher interest rates also mean that financing for property purchases and improvements is more costly
and difficult to obtain. During periods of declining interest rates, certain mortgage REITs may hold mortgages that mortgagors elect to prepay, which can reduce the yield on securities issued by mortgage REITs. Mortgage REITs may be affected by the
ability of borrowers to repay debts to the REIT when due and equity REITs may be affected by the ability of tenants to pay rent.
Like small-cap stocks in general, certain
REITs have relatively small market capitalizations and their securities can be more volatile than-and at times will perform differently from-large-cap stocks. In addition, because small-cap stocks are typically less liquid than large-cap stocks,
REIT stocks may sometimes experience greater share-price fluctuations than the stocks of larger companies. Further, REITs are dependent upon specialized management skills, have limited diversification, and are therefore subject to risks inherent in
operating and financing a limited number of projects. By investing in REITs indirectly through a fund, a shareholder will bear indirectly a proportionate share of the REIT’s expenses in addition to their proportionate share of a fund’s
expenses. Finally, REITs could possibly fail to qualify for tax-free pass-through of income under the Code or to maintain their exemptions from registration under the 1940 Act and CFTC regulations.
Rights and
Warrants
. Rights and warrants are types of securities that entitle the holder to purchase a proportionate amount of common stock at a specified price for a specific period of time. Rights allow a shareholder
to buy more shares directly from the company, usually at a price somewhat lower than the current market price of the outstanding shares. Warrants are usually issued with bonds and preferred stock. Rights and warrants can trade on the market
separately from the company’s stock. The prices of rights and warrants do not necessarily move parallel to the prices of the underlying common stock. Rights usually expire within a few weeks of issuance, while warrants may not expire for
several years. If a right or warrant is not exercised within the specified time period, it will become worthless and a fund will lose the purchase price it paid for the right or warrant and the right to purchase the underlying security.
Stock Substitution
Strategy
is a strategy, whereby certain underlying index funds may, in certain circumstances, substitute a similar stock for a security in their indexes.
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Business Development
Companies
(BDCs) are closed-end investment companies that have elected to be BDCs under the 1940 Act and are taxed as regulated investment companies (RICs) under the Internal Revenue Code. BDCs operate as
venture capital companies and typically invest in, lend capital to, and provide significant managerial assistance to developing private companies or thinly-traded public companies. Under the 1940 Act, BDCs are required to invest at least 70% of
their total assets primarily in securities of privately-held U.S. companies or thinly-traded U.S. public companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, a
BDC may only incur indebtedness in amounts such that the BDC’s coverage ratio of total assets to total senior securities equals at least 200% after such incurrence.
BDCs generally invest in debt securities that are not rated by
a credit rating agency and are considered below investment grade quality (junk bonds). Little public information generally exists for the type of companies in which a BDC may invest and, therefore, there is a risk that investors may not be able to
make a fully informed evaluation of the BDC and its portfolio of investments. In addition, investments made by BDCs are typically illiquid and are difficult to value for purposes of determining a BDC’s net asset value (for more information on
BDCs, see the section titled “Securities of Other Investment Companies”).
Foreign Currency Transactions.
A fund may invest in foreign currency-denominated securities, purchase and sell foreign currency options and foreign currency futures contracts and related options and engage in foreign currency transactions either on a
spot (cash) basis at the rate prevailing in the currency exchange market at the time or through forward currency contracts (forwards) with terms generally of less than one year. A fund may engage in these transactions in order to protect against
uncertainty in the level of future foreign exchange rates in the purchase and sale of securities.
A fund may use foreign currency options and foreign currency
forward contracts to increase exposure to a foreign currency or to shift exposure to foreign currency fluctuations from one country to another. A fund will earmark or segregate assets for any open positions in forwards used for non-hedging purposes
and mark to market daily as may be required under the federal securities laws.
A forward involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts may be bought or sold to protect a fund against a
possible loss resulting from an adverse change in the relationship between foreign currencies and the U.S. dollar or to increase exposure to a particular foreign currency. Many foreign securities markets do not settle trades within a time frame that
would be considered customary in the U.S. stock market. Therefore, a fund may engage in forward foreign currency exchange contracts in order to secure exchange rates for fund securities purchased or sold, but awaiting settlement. These transactions
do not seek to eliminate any fluctuations in the underlying prices of the securities involved. Instead, the transactions simply establish a rate of exchange that can be expected when a fund settles its securities transactions in the future. Forwards
involve certain risks. For example, if the counterparties to the contracts are unable to meet the terms of the contracts or if the value of the foreign currency changes unfavorably, a fund could sustain a loss.
A fund may engage in forward foreign currency exchange options
and contracts to protect the value of specific portfolio positions, which is called “position hedging.” When engaging in position hedging, a fund may enter into forward foreign currency exchange transactions to protect against a decline
in the values of the foreign currencies in which portfolio securities are denominated (or against an increase in the value of currency for securities that a fund expects to purchase).
Buying and selling foreign currency exchange options and
contracts involves costs and may result in losses. The ability of a fund to engage in these transactions may be limited by tax considerations. Although these techniques tend to minimize the risk of loss due to declines in the value of the hedged
currency, they tend to limit any potential gain that might result from an increase in the value of such currency. Transactions in these contracts involve certain other risks. Unanticipated fluctuations in currency prices may result in a poorer
overall performance for a fund than if it had not engaged in any such transactions. Moreover, there may be imperfect correlation between a fund’s holdings of securities denominated in a particular currency and forward contracts into which a
fund enters. Such imperfect correlation may cause a fund to sustain losses, which will prevent it from achieving a complete hedge or expose it to risk of foreign exchange loss.
Suitable hedging transactions may not be available in all
circumstances and there can be no assurance that a fund will engage in such transactions at any given time or from time to time. Also, such transactions may not be successful and may eliminate any chance for a fund to benefit from favorable
fluctuations in relevant foreign currencies.
Forwards will be used primarily to adjust
the foreign exchange exposure of the fund and the fund might be expected to enter into such contracts under the following circumstances:
Lock In
. When the investment adviser desires to lock in the U.S. dollar price on the purchase or sale of a security denominated in a foreign currency.
Cross Hedge
. If a particular currency is expected to decrease against another currency, a fund may sell the currency expected to decrease and purchase a currency which is expected to increase against the currency sold in an amount
approximately equal to some or all of a fund’s portfolio holdings denominated in the currency sold.
Direct Hedge
. If the investment adviser wants to eliminate substantially all of the risk of owning a particular currency, and/or if the investment adviser thinks that a fund can benefit from price appreciation in a given
country’s bonds but does not want to hold the currency, it may employ a direct hedge back into the U.S. dollar. In either case, a fund would enter into a forward contract to sell the currency in which a portfolio security
11
is denominated and purchase U.S. dollars at an exchange rate established at
the time it initiated the contract. The cost of the direct hedge transaction may offset most, if not all, of the yield advantage offered by the foreign security, but a fund would benefit from an increase in value of the bond.
Proxy Hedge
. The investment adviser might choose to use a proxy hedge, which may be less costly than a direct hedge. In this case, a fund, having purchased a security, will sell a currency whose value is believed to be closely
linked to the currency in which the security is denominated. Interest rates prevailing in the country whose currency was sold would be expected to be closer to those in the U.S. and lower than those of securities denominated in the currency of the
original holding. This type of hedging entails greater risk than a direct hedge because it is dependent on a stable relationship between the two currencies paired as proxies and the relationships can be very unstable at times.
Costs of
Hedging
. When a fund purchases a foreign bond with a higher interest rate than is available on U.S. bonds of a similar maturity, the additional yield on the foreign bond could be substantially reduced or lost
if a fund were to enter into a direct hedge by selling the foreign currency and purchasing the U.S. dollar. This is what is known as the “cost” of hedging. Proxy hedging attempts to reduce this cost through an indirect hedge back to the
U.S. dollar. It is important to note that hedging costs are treated as capital transactions and are not, therefore, deducted from a fund’s dividend distribution and are not reflected in its yield. Instead such costs will, over time, be
reflected in a fund’s net asset value per share.
Tax Consequences of
Hedging
. Under applicable tax law, a fund may be required to limit its gains from hedging in foreign currency forwards, futures, and options. Although a fund is expected to comply with such limits, the extent
to which these limits apply is subject to tax regulations as yet unissued. Hedging may also result in the application of the mark-to-market and straddle provisions of the Internal Revenue Code. Those provisions could result in an increase (or
decrease) in the amount of taxable dividends paid by a fund and could affect whether dividends paid by a fund are classified as capital gains or ordinary income.
Foreign Securities.
Investments in foreign securities involve additional risks, including foreign currency exchange rate risks, because they are issued by foreign entities, including foreign governments, banks and corporations or
because they are traded principally overseas. Foreign securities in which a fund may invest include those issued by foreign entities that are not subject to uniform accounting, auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. corporations. In addition, there may be less publicly available information about foreign entities. Foreign economic, political and legal developments, as well as fluctuating foreign currency exchange rates and
withholding taxes, could have more dramatic effects on the value of foreign securities. For example, conditions within and around foreign countries, such as the possibility of expropriation or confiscatory taxation, political or social instability,
diplomatic developments, the imposition of trade sanctions, change of government or war could affect the value of foreign investments. Moreover, individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects
as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position.
Foreign securities typically have less volume and are
generally less liquid and more volatile than securities of U.S. companies. Fixed commissions on foreign securities exchanges are generally higher than negotiated commissions on U.S. exchanges, although a fund will endeavor to achieve the most
favorable overall results on portfolio transactions. There is generally less government supervision and regulation of foreign securities exchanges, brokers, dealers and listed companies than in the United States, thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio securities. There may be difficulties in obtaining or enforcing judgments against foreign issuers as well. Bankruptcy laws in some foreign countries are sometimes biased to
the borrowers and against the creditors. These factors and others may increase the risks with respect to the liquidity of a fund, and its ability to meet a large number of shareholder redemption requests.
In addition, a fund’s investments in foreign securities
may be subject to economic sanctions or other government restrictions. These restrictions may negatively impact the value or liquidity of a fund’s investments, and could impair a fund’s ability to meet its investment objective or invest
in accordance with its investment strategy. For example, a fund may be prohibited from investing in securities issued by companies subject to such restrictions. In addition, these restrictions may require a fund to freeze its existing investments in
certain foreign securities, which would prohibit the fund from buying, selling, receiving or delivering those securities or other financial instruments. As a result, such restrictions may limit a fund’s ability to meet a large number of
shareholder redemption requests.
International trade tensions may arise from
time to time which could result in trade tariffs, embargos or other restrictions or limitations on trade. The imposition of any actions on trade could trigger a significant reduction in international trade, an oversupply of certain manufactured
goods, substantial price reductions of goods and possible failure of individual companies or industries which could have a negative impact on a fund’s performance. Events such as these are difficult to predict and may or may not occur in the
future.
Foreign markets also have different
clearance and settlement procedures and, in certain markets, there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Such delays in settlement
could result in temporary periods when a portion of the assets of a fund is uninvested and no return is earned thereon. The inability to make intended security purchases due to settlement problems could cause a fund to miss attractive investment
opportunities. Losses to a fund arising out of the inability to fulfill a contract to sell such securities also could result in potential liability for a fund.
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Investments in the securities of foreign issuers may be made
and held in foreign currencies. In addition, a fund may hold cash investments in foreign currencies. These investments may be affected favorably or unfavorably by changes in currency rates and in exchange control regulations, and may cause a fund to
incur costs in connection with conversions between various currencies. The rate of exchange between the U.S. dollar and other currencies is determined by the forces of supply and demand in the foreign exchange market as well as by political and
economic factors. Changes in the foreign currency exchange rates also may affect the value of dividends and interest earned, gains and losses realized on the sale of securities, and net investment income and gains, if any, to be distributed to
shareholders by a fund.
During the 2008-2009 global
financial crisis, financial markets in Europe experienced significant volatility due, in part, to concerns about rising levels of government debt and the prevalence of increased budget deficits. As a result, many economies in the region suffered
through prolonged economic downturns. Due to the economic integration of the region, another economic downturn in one European country may have a negative impact on the economies of other European countries.
In a 2016 referendum, citizens of
the United Kingdom (the UK) voted to withdraw from the European Union (the EU), which caused significant volatility in global financial markets. The UK has formally notified the European Council of its intention to withdraw from the EU (commonly
referred to as “Brexit”) by invoking Article 50, which triggered negotiations on the terms of Brexit. There is significant uncertainty regarding the final terms and consequences of Brexit. During this period of uncertainty, the UK and
European economies and the broader global economy may experience increased volatility and illiquidity, and companies that conduct a significant amount of business in the UK or Europe may experience lower revenue and/or profit growth, all of which
may adversely affect the value of a fund’s investments. Brexit also may cause additional member states to contemplate departing the EU, which would likely perpetuate political and economic instability in the region and cause additional market
disruption in global financial markets.
As a
fund may hold investments in issuers that are located in Europe or that depend on revenues generated from operations in Europe, any material negative developments in Europe could have a negative impact on the value and liquidity of these
investments, which could harm a fund’s performance.
Foreign Institutions
involve
additional risks. The funds may invest in U.S. dollar-denominated securities issued by foreign institutions or securities that are subject to credit or liquidity enhancements provided by foreign institutions. Foreign institutions may not be subject
to uniform accounting, auditing and financial reporting standards, practices and requirements that are comparable to those applicable to U.S. corporations. In addition, there may be less publicly available information about foreign entities. Foreign
economic, political and legal developments could have effects on the value of securities issued or supported by foreign institutions. For example, conditions within and around foreign countries, such as the possibility of expropriation or
confiscatory taxation, political or social instability, diplomatic developments, change of government or war could affect the value of these securities. In addition, there may be difficulties in obtaining or enforcing judgments against foreign
institutions that issue or support securities in which a fund may invest. These factors and others may increase the risks with respect to the liquidity of a fund, and its ability to meet a large number of shareholder redemption
requests.
High-Yield Securities
, also called lower quality bonds (junk bonds), are frequently issued by companies without long track records of sales and earnings, or by those of questionable credit strength, and are more speculative and volatile
(though typically higher yielding) than investment grade bonds. Adverse economic developments could disrupt the market for high-yield securities, and severely affect the ability of issuers, especially highly-leveraged issuers, to service their debt
obligations or to repay their obligations upon maturity.
Also, the secondary market for high-yield securities at times
may not be as liquid as the secondary market for higher-quality debt securities. As a result, the investment adviser could find it difficult to sell these securities or experience difficulty in valuing certain high-yield securities at certain times.
Prices realized upon the sale of such lower rated securities, under these circumstances, may be less than the prices at which a fund purchased them.
Thus, high-yield securities are more likely to react to
developments affecting interest rates and market and credit risk than are more highly rated securities, which primarily react to movements in the general level of interest rates. When economic conditions appear to be deteriorating, medium- to
lower-quality debt securities may decline in value more than higher-quality debt securities due to heightened concern over credit quality, regardless of prevailing interest rates. Prices for high-yield securities also could be affected by
legislative and regulatory developments. These laws could adversely affect a fund’s net asset value and investment practices, the secondary market value for high-yield securities, the financial condition of issuers of these securities and the
value of outstanding high-yield securities.
Hybrid
Instruments
are a type of potentially high-risk derivative that combines a traditional stock, bond, or commodity with an option or forward contract. Generally, the principal amount, amount payable upon
maturity or redemption, or interest rate of a hybrid is tied (positively or negatively) to the price of some commodity, currency or securities index or another interest rate or some other economic factor (each a benchmark). The interest rate or
(unlike most fixed income securities) the principal amount payable at maturity of a hybrid security may be increased or decreased, depending on changes in the value of the benchmark. An example of a hybrid could be a bond issued by an oil company
that pays a small base level of interest with additional interest that accrues in correlation to the extent to which oil prices exceed a certain predetermined level. Such a hybrid instrument would be a combination of a bond and a call option on
oil.
Hybrids can be used as an efficient means of
pursuing a variety of investment goals, including currency hedging, duration management, and increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as
a result, may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be
13
sensitive to economic and political events, such as commodity shortages and
currency devaluations, which cannot be readily foreseen by the purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not
associated with a similar investment in a traditional, U.S. dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes a fund to the credit risk of the issuer of
the hybrids. These risks may cause significant fluctuations in the net asset value of a fund. A fund will not invest more than 5% of its total assets in hybrid instruments.
Certain hybrid instruments may provide exposure to the
commodities markets. These are derivative securities with one or more commodity-linked components that have payment features similar to commodity futures contracts, commodity options, or similar instruments. Commodity-linked hybrid instruments may
be either equity or debt securities, and are considered hybrid instruments because they have both security and commodity-like characteristics. A portion of the value of these instruments may be derived from the value of a commodity, futures
contract, index or other economic variable. A fund will only invest in commodity-linked hybrid instruments that qualify under applicable rules of the CFTC for an exemption from the provisions of the CEA.
Certain issuers of structured products such as hybrid
instruments may be deemed to be investment companies as defined in the 1940 Act. As a result, a fund’s investments in these products may be subject to limits applicable to investments in investment companies and may be subject to restrictions
contained in the 1940 Act.
Illiquid Securities or Investments
means any investment that a fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the
investment. The liquidity of a fund’s investments is monitored under the supervision and direction of the Board. Investments currently not considered liquid include, among others, repurchase agreements not maturing within seven days that are
not subject to a demand feature of seven days or less and certain restricted securities. Any investment may become illiquid at times of market dislocation.
Indexing Strategies
involve
tracking the securities represented in, and, therefore, the performance of, an index. Each index fund normally will invest primarily in the securities of its index. Moreover, each index fund seeks to invest so that its portfolio performs similarly
to that of its index. Each index fund will seek to achieve over time a correlation between its performance and that of its index, before fees and expenses, of 0.90 or better. Correlation for each index fund is calculated using daily returns,
according to a mathematical formula which measures correlation between a fund’s portfolio and index returns. A perfect correlation of 1.0 is unlikely as the index funds incur operating and trading expenses unlike their indices. Each index fund
may rebalance its holdings in order to track its index more closely. In the event its intended correlation is not achieved, the Board will consider alternative arrangements for each index fund.
There can be no guarantee that the performance of an index
fund will achieve a high degree of correlation with that of its index. A number of factors may affect an index fund’s ability to achieve a high correlation with its index, including the degree to which an index fund utilizes a sampling
technique. The correlation between the performance of an index fund and its index may also diverge due to transaction costs, asset valuations, corporate actions (such as mergers and spin-offs), timing variances, and differences between an index
fund’s portfolio and the index resulting from legal restrictions (such as diversification requirements) that apply to an index fund but not to the index.
Inflation-Protected Securities
are fixed-income securities whose value is periodically adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers utilize a structure that accrues inflation into
the principal value of the bond. Other issuers pay out the Consumer Price Index (CPI) accruals as part of a semiannual coupon.
Inflation-protected securities issued by the U.S. Treasury
have maturities of approximately five, ten or thirty years, although it is possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semiannual basis equal to a fixed percentage of
the inflation adjusted principal amount.
If the periodic adjustment rate measuring
inflation falls, the principal value of inflation-protected bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original
bond principal upon maturity (as adjusted for inflation) is guaranteed by the U.S. Treasury in the case of U.S. Treasury inflation-protected bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed
and will fluctuate. An underlying fund may also invest in other inflation related bonds, which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond to be repaid at maturity
may be less than the original principal amount and, therefore, is subject to credit risk.
The value of inflation-protected bonds is expected to change
in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the expected rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal
interest rates, real interest rates might decline, leading to an increase in value of inflation-protected bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease
in value of inflation-protected bonds.
While
these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency
exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s inflation measure.
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The periodic adjustment of U.S.
inflation-protected bonds is tied to the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U), published monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the
cost of living, made up of components such as housing, food, transportation and energy. Inflation-protected bonds issued by a foreign government are generally adjusted to reflect a comparable inflation index, calculated by that government. There can
be no assurance that the CPI-U or any foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of inflation in a foreign country will be
correlated to the rate of inflation in the United States.
Any increase in principal for an inflation-protected security
resulting from inflation adjustments is considered by the IRS to be taxable income in the year it occurs. An underlying fund’s distributions to shareholders may include interest income and the income attributable to principal adjustments, both
of which will be taxable to shareholders. The tax treatment of the income attributable to principal adjustments may result in the situation where an underlying fund needs to make its required annual distributions to shareholders in amounts that
exceed the cash received. As a result, the underlying fund may need to liquidate certain investments when it is not advantageous to do so. Also, if the principal value of an inflation-protected security is adjusted downward due to deflation, amounts
previously distributed in the taxable year may be characterized in some circumstances as a return of capital.
Interfund Borrowing and Lending.
The SEC has granted an exemption to the funds that permits the funds to borrow money from and/or lend money to other funds in the Fund Complex as defined under “Management of the Funds.” All loans are for
temporary or emergency purposes and the interest rates to be charged will be the average of the overnight repurchase agreement rate and the short term bank loan rate. All loans are subject to numerous conditions designed to ensure fair and equitable
treatment of all participating funds. The interfund lending facility is subject to the oversight and periodic review of the Board.
International Bonds
are
certain obligations or securities of foreign issuers, including Eurodollar Bonds, which are U.S. dollar-denominated bonds issued by foreign issuers payable in Eurodollars (U.S. dollars held in banks located outside the United States, primarily
Europe), Yankee Bonds, which are U.S. dollar-denominated bonds issued in the U.S. by foreign banks and corporations, and EuroBonds, which are bonds denominated in U.S. dollars and usually issued by large underwriting groups composed of banks and
issuing houses from many countries. Investments in securities issued by foreign issuers, including American Depositary Receipts and securities purchased on foreign securities exchanges, may subject a fund to additional investment risks, such as
adverse political and economic developments, possible seizure, nationalization or expropriation of foreign investments, less stringent disclosure requirements, non-U.S. withholding taxes and the adoption of other foreign governmental
restrictions.
Additional risks include less
publicly available information, the risk that companies may not be subject to the accounting, auditing and financial reporting standards and requirements of U.S. companies, the risk that foreign securities markets may have less volume and therefore
may be less liquid and their prices more volatile than U.S. securities, and the risk that custodian and transaction costs may be higher. Foreign issuers of securities or obligations are often subject to accounting requirements and engage in business
practices different from those respecting domestic issuers of similar securities or obligations. Foreign branches of U.S. banks and foreign banks may be subject to less stringent reserve requirements than those applicable to domestic branches of
U.S. banks.
Money Market Securities
are high-quality, short term debt securities that may be issued by entities such as the U.S. government, corporations and financial institutions (like banks). Money market securities include commercial paper,
certificates of deposit, bankers’ acceptances, notes and time deposits. Certificates of deposit and time deposits are issued against funds deposited in a banking institution for a specified period of time at a specified interest rate.
Bankers’ acceptances are credit instruments evidencing a bank’s obligation to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the full amount of the instrument
upon maturity. Commercial paper consists of short term, unsecured promissory notes issued to finance short term credit needs.
Money market securities pay fixed-,
variable- or floating-rates of interest and are generally subject to credit and interest rate risks. The maturity date or price of and financial assets collateralizing a security may be structured in order to make it qualify as or act like a money
market security. These securities may be subject to greater credit and interest rate risks than other money market securities because of their structure. Money market securities may be issued with puts or sold separately; these puts, which are
sometimes called demand features or guarantees, are agreements that allow the buyer to sell a security at a specified price and time to the seller or “put provider.” When a fund buys a put, losses could occur as a result of the costs of
the put or if it exercises its rights under the put and the put provider does not perform as agreed. Standby commitments are types of puts.
A fund may keep a portion of its assets in cash for business
operations. A fund may invest in money market securities to reduce the effect this otherwise uninvested cash would have on its performance. A fund may also invest in money market securities to the extent it is consistent with its investment
objective.
Bankers’
Acceptances or Notes
are credit instruments evidencing a bank’s obligation to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the
full amount of the instrument upon maturity. A fund will invest only in bankers’ acceptances of banks that have capital, surplus and undivided profits in the aggregate in excess of $100 million.
Certificates of
Deposit or Time Deposits
are issued against funds deposited in a banking institution for a specified period of time at a specified interest rate. A fund will invest only in certificates of deposit of banks
that have capital, surplus and undivided profits in the aggregate in excess of $100 million.
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Commercial
Paper
consists of short-term, promissory notes issued by banks, corporations and other institutions to finance short-term credit needs. These securities generally are discounted but sometimes may be interest
bearing. Commercial paper, which also may be unsecured, is subject to credit risk.
Fixed Time
Deposits
are bank obligations payable at a stated maturity date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early withdrawal
penalties, which vary depending upon market conditions and the remaining maturity of the obligation. There are no contractual restrictions on the right to transfer a beneficial interest in a fixed time deposit to a third party, although there is no
market for such deposits. A fund will not invest in fixed time deposits, that (1) are not subject to prepayment or (2) provide for withdrawal penalties upon prepayment (other than overnight deposits) if, in the aggregate, more than 15% of its net
assets would be invested in such deposits, repurchase agreements maturing in more than seven days and other illiquid assets.
Promissory
Notes
are written agreements committing the maker or issuer to pay the payee a specified amount either on demand or at a fixed date in the future, with or without interest. These are sometimes called
negotiable notes or instruments and are subject to credit risk. Bank notes are notes used to represent obligations issued by banks in large denominations.
Repurchase
Agreements
are instruments under which a buyer acquires ownership of certain securities (usually U.S. government securities) from a seller who agrees to repurchase the securities at a mutually agreed-upon
time and price, thereby determining the yield during the buyer’s holding period. Any repurchase agreements a fund enters into will involve a fund as the buyer and banks or broker-dealers as sellers. The period of repurchase agreements is
usually short, from overnight to one week, although the securities collateralizing a repurchase agreement may have longer maturity dates. Default by the seller might cause a fund to experience a loss or delay in the liquidation of the collateral
securing the repurchase agreement. A fund also may incur disposition costs in liquidating the collateral. In the event of a bankruptcy or other default of a repurchase agreement’s seller, a fund might incur expenses in enforcing its rights,
and could experience losses, including a decline in the value of the underlying securities and loss of income. Certain repurchase agreements a fund may enter into may or may not be subject to an automatic stay in bankruptcy proceedings. A fund will
make payment under a repurchase agreement only upon physical delivery or evidence of book entry transfer of the collateral to the account of its custodian bank.
Mortgage-Backed Securities
(MBS) and other
Asset-Backed Securities
(ABS) may be purchased by a fund. MBS represent participations in mortgage loans, and include pass-through securities, adjustable rate
mortgages, collateralized mortgage obligations and stripped mortgage-backed securities. MBS may be issued or guaranteed by U.S. government agencies or instrumentalities, such as the Government National Mortgage Association (GNMA or Ginnie Mae) and
the Federal National Mortgage Association (FNMA or Fannie Mae) or the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac). MBS may also be issued by private issuers, generally originators and investors in mortgage loans, including savings
associations, mortgage banks, commercial banks, and special purpose entities (collectively,
“private lenders”). MBS are based on different types of mortgages including those on commercial real
estate and residential property. MBS issued by private lenders may be supported by pools of mortgage loans or other MBS that are guaranteed, directly or indirectly, by the U.S. government or one of its agencies or instrumentalities, or they may be
issued without any governmental guarantee of the underlying mortgage assets but with some form of credit enhancement. To the extent that a fund invests in MBS issued by private lenders, such securities may be issued in the form of several tranches.
Depending on their respective seniority, individual tranches are subject to increased (and sometimes different) credit, prepayment and liquidity and valuation risks as compared to other tranches. These securities are often subject to greater credit,
prepayment and liquidity and valuation risks than an MBS issued by a U.S. government agency or instrumentality. The investment adviser will consider the creditworthiness of the guarantee providers and/or credit enhancement providers in determining
whether a MBS issued by a private lender meets the fund’s investment quality standards. There can be no guarantee that the enhancement provider or guarantor of a MBS can meet their obligations under the enhancement or guarantee
arrangements.
The average life of a
mortgage-backed security is likely to be substantially shorter than the original maturity of the mortgages underlying the securities. Scheduled payments and prepayments of principal by mortgagors and mortgage foreclosures will usually result in the
return of the greater part of principal investment long before the maturity of the mortgages in the pool.
The National Housing Act authorized GNMA to guarantee the
timely payment of principal and interest on securities backed by a pool of mortgages insured by the Federal Housing Administration (FHA) or guaranteed by the U.S. Department of Veterans Affairs. The GNMA guarantee is backed by the full faith and
credit of the U.S. government. GNMA is also empowered to borrow without limitation from the U.S. Treasury if necessary to make any payments required under its guarantee.
Freddie Mac was created in 1970 to promote development of a
nationwide secondary market in conventional residential mortgages.
Fannie Mae was established in 1938 to create a secondary
market in mortgages the FHA insures. Securities issued by Freddie Mac and Fannie Mae are not backed by the full faith and credit of the U.S. government.
For more information on securities issued by Fannie Mae and
Freddie Mac, see the section titled “U.S. Government Securities.” On June 3, 2019, under the “Single Security Initiative” undertaken by the Federal Housing Finance Agency (FHFA) seeking to maximize the liquidity for both
Fannie Mae and Freddie Mac MBS in the “to-be-announced” or “TBA” market, Fannie Mae and Freddie Mac are expected to start issuing uniform mortgage-backed securities (UMBS) in place of their current offerings of TBA-eligible
MBS. The effects of the issuance of UMBS on the market for MBS and on a fund’s ability to invest in UMBS are uncertain.
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Commercial
Mortgage-Backed Securities
include securities that reflect an interest in, and are secured by, mortgage loans on commercial real property. The market for commercial mortgage-backed securities developed more
recently and in terms of total outstanding principal amount of issues is relatively small compared to the market for residential single-family MBS. Many of the risks of investing in commercial MBS reflect the risks of investing in the real estate
securing the underlying mortgage loans. These risks reflect the effects of local and other economic conditions on real estate markets, the ability of tenants to make loan payments, and the ability of a property to attract and retain tenants.
Commercial MBS may be less liquid and exhibit greater price volatility than other types of mortgage- or asset-backed securities.
Collateralized
Debt Obligations.
A fund may invest in collateralized debt obligations (CDOs), which include collateralized bond obligations (CBOs), collateralized loan obligations (CLOs) and other similarly structured
securities. CBOs and CLOs are types of asset-backed securities. A CBO is a trust that is backed by a diversified pool of high risk, below investment grade fixed income securities. A CLO is a trust typically collateralized by a pool of loans, which
may include, among others, domestic and foreign senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated loans.
For both CBOs and CLOs, the cash flows from the trust are
split into two or more portions, called tranches, varying in risk and yield. The riskiest portion is the “equity” tranche which bears the bulk of defaults from the bonds or loans in the trust and serves to protect the other, more senior
tranches from default in all but the most severe circumstances. Since it is partially protected from defaults, a senior tranche from a CBO trust or CLO trust typically has higher ratings and lower yields than their underlying securities, and can be
rated investment grade. Despite the protection from the equity tranche, CBO or CLO tranches can experience substantial losses due to actual defaults, increased sensitivity to defaults due to collateral default and disappearance of protecting
tranches, market anticipation of defaults, as well as aversion to CBO or CLO securities as a class.
The risks of an investment in a CDO depend largely on the type
of the collateral securities and the class of the CDO in which a fund invests. Normally, CBOs, CLOs and other CDOs are privately offered and sold, and thus, are not registered under the securities laws. As a result, investments in CDOs may be
characterized by a fund as illiquid securities, however an active dealer market may exist for CDOs allowing a CDO to qualify for Rule 144A transactions. In addition to the normal risks associated with fixed income securities discussed elsewhere in
this SAI and a fund’s prospectus (e.g., interest rate risk and default risk), CDOs carry additional risks including, but not limited to: (i) the possibility that distributions from collateral securities will not be adequate to make interest or
other payments; (ii) the quality of the collateral may decline in value or default; (iii) a fund may invest in CDOs that are subordinate to other classes; (iv) the complex structure of the security may not be fully understood at the time of
investment and may produce disputes with the issuer or unexpected investment results; and (v) credit ratings by major credit rating agencies may be no indication of the creditworthiness of the security.
Collateralized
Mortgage Obligation
(CMO) is a hybrid between a mortgage-backed bond and a mortgage pass-through security. Similar to a bond, interest and prepaid principal is paid, in most cases, on a monthly basis. CMOs may
be collateralized by whole mortgage loans, but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by Ginnie Mae, Freddie Mac, Fannie Mae, and their income streams, as well as private issuers.
CMOs are structured into multiple classes, each bearing a
different stated maturity. Actual maturity and average life will depend upon the prepayment experience of the collateral. CMOs provide for a modified form of call protection through a de facto breakdown of the underlying pool of mortgages according
to how quickly the loans are repaid. Monthly payment of principal received from the pool of underlying mortgages, including prepayments, is first returned to investors holding the shortest maturity class. Investors holding the longer maturity
classes receive principal only after the first class has been retired. An investor is partially guarded against a sooner than desired return of principal because of the sequential payments.
In a typical CMO transaction, a corporation (issuer) issues
multiple series (e.g., A, B, C, Z) of CMO bonds (Bonds). Proceeds of the Bond offering are used to purchase mortgages or mortgage pass-through certificates (Collateral). The Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds all bear current interest. Interest on the Series Z Bond is accrued and added to principal and a like
amount is paid as principal on the Series A, B, or C Bond currently being paid off. When the Series A, B, and C Bonds are paid in full, interest and principal on the Series Z Bond begins to be paid currently. With some CMOs, the issuer serves as a
conduit to allow loan originators (primarily builders or savings and loan associations) to borrow against their loan portfolios.
The rate of principal payment on MBS and ABS generally depends
on the rate of principal payments received on the underlying assets which in turn may be affected by a variety of economic and other factors. As a result, the price and yield on any MBS or ABS is difficult to predict with precision and price and
yield to maturity may be more or less than the anticipated yield to maturity. If a fund purchases these securities at a premium, a prepayment rate that is faster than expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing the yield to maturity. Conversely, if a fund purchases these securities at a discount, a prepayment rate that is faster than expected will increase yield to maturity, while a prepayment rate
that is slower than expected will reduce yield to maturity. Amounts available for reinvestment by a fund are likely to be greater during a period of declining interest rates and, as a result, are likely to be reinvested at lower interest rates than
during a period of rising interest rates.
While many MBS
and ABS are issued with only one class of security, many are issued in more than one class, each with different payment terms. Multiple class MBS and ABS are issued as a method of providing credit support, typically through creation of one or more
classes whose
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right to payments on the security is made subordinate to the right to such
payments of the remaining class or classes. In addition, multiple classes may permit the issuance of securities with payment terms, interest rates, or other characteristics differing both from those of each other and from those of the underlying
assets. Examples include stripped securities, which are MBS and ABS entitling the holder to disproportionate interest or principal compared with the assets backing the security, and securities with classes having characteristics different from the
assets backing the securities, such as a security with floating interest rates with assets backing the securities having fixed interest rates. The market value of such securities and CMO’s generally is more or less sensitive to changes in
prepayment and interest rates than is the case with traditional MBS and ABS, and in some cases such market value may be extremely volatile.
CMO Residuals
. CMO residuals
are mortgage securities issued by agencies or instrumentalities of the U.S. government or by private
originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a
series of CMOs is applied first to make required payments of principal and interest on the CMOs and second to pay the related administrative expenses of the issuer. The residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess cash flow to a holder of the related CMO residual represents income and/or a return of capital. The amount of residual cash flow resulting from a CMO will depend on,
among other things, the characteristics of the mortgage assets, the coupon rate of each class of CMO, prevailing interest rates, the amount of administrative expenses and the prepayment experience on the mortgage assets. In particular, the yield to
maturity on CMO residuals is extremely sensitive to prepayments on the related underlying mortgage assets, in the same manner as an interest-only (IO) class of stripped mortgage-backed securities. See “Stripped Mortgage-Backed
Securities.” In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity on the related CMO residual will also be extremely sensitive to changes in the level of the index upon which
interest rate adjustments are based. As described below with respect to stripped mortgage-backed securities, in certain circumstances a fund may fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by
institutional investors through several investment banking firms acting as brokers or dealers. The CMO residual market has only very recently developed and CMO residuals currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed only after careful review of the characteristics of the securities in question. In addition, CMO residuals may, or pursuant to an exemption therefrom, may not have been
registered under the Securities Act of 1933, as amended (the 1933 Act). CMO residuals, whether or not registered under the 1933 Act, may be subject to certain restrictions on transferability, and may be deemed “illiquid” and subject to a
fund’s limitations on investment in illiquid securities.
Stripped
Mortgage-Backed Securities
(SMBS)
are derivative multi-class mortgage securities. SMBS may be issued by agencies
or instrumentalities of the U.S. government, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose entities of the
foregoing.
SMBS are usually structured with two
classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common type of SMBS will have one class receiving some of the interest and most of the principal from the mortgage assets, while
the other class will receive most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the IO class), while the other class will receive all of the principal (the principal-only or
PO class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on
a fund’s yield to maturity from these securities. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a fund may fail to recoup some or all of its initial investment in these securities even if the
security is in one of the highest rating categories.
Under certain circumstances these securities may be deemed
“illiquid” and subject to a fund’s limitations on investment in illiquid securities.
Mortgage
Pass-Through Securities
.
The term “U.S. agency mortgage pass-through security” refers to a category of pass-through securities backed by
pools of mortgages and issued by one of several U.S. government-sponsored entities, such as Ginnie Mae, Fannie Mae or Freddie Mac. In the basic mortgage pass-through structure, mortgages with similar issuer, term and coupon characteristics are
collected and aggregated into a “pool” consisting of multiple mortgage loans. The pool is assigned a CUSIP number and undivided interests in the pool are traded and sold as pass-through securities. The holder of the security is entitles
to a pro rata share of principal and interest payments (including unscheduled prepayments) from the pool of mortgage loans.
An investment in a specific pool of pass-through securities
requires an analysis of the specific prepayment risk of mortgages within the covered pool (since mortgagors typically have the option to prepay their loans). The level of prepayments on a pool of mortgage securities is difficult to predict and can
impact the subsequent cash flows, value and yield of the mortgage pool. In addition, when trading specific mortgage pools, precise execution, delivery and settlement arrangements must be negotiated for each transaction. These factors combine to make
trading in mortgage pools somewhat cumbersome relative to other fund investments.
For these reasons, a fund may seek to obtain exposure to U.S.
agency mortgage pass-through securities, in part or in full, through the use of “to-be-announced” or “TBA” transactions. TBA refers to a commonly used mechanism for the forward settlement of U.S. agency mortgage pass-through
securities, and not to a separate type of mortgage-backed security. Most transactions in the fixed-rate mortgage pass-through
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securities occur through the use of TBA transactions. TBA transactions are
generally conducted in accordance with widely-accepted guidelines that establish commonly observed terms and conditions for execution, settlement and delivery. In a TBA transaction, the buyer and seller decided on general trade parameters, such as
agency, settlement date, par amount and price. The actual pools delivered generally are determined two days prior to settlement date. A fund may use TBA transactions in several ways. For example, a fund anticipates that it will regularly enter into
TBA agreements and “roll over” such agreements prior to the settlement date stipulated in such agreements. This type of TBA transaction is sometimes known as a “TBA roll.” In a TBA roll, the fund generally will sell the
obligation to purchase the pools stipulated in the TBA agreement prior to the stipulated settlement date and will enter into a new TBA agreement for future delivery of pools of mortgage pass-through securities. In addition, a fund may enter into TBA
agreements and settle such transactions on the stipulated settlement date by accepting actual receipt or delivery of the pools of mortgage pass-through securities stipulated in the TBA agreement.
Default by or bankruptcy of a counterparty to a TBA
transaction would expose a fund to possible loss because of adverse market action, expenses or delays in connection with the purchase or sale of the pools of mortgage pass-through securities specified in the TBA transaction. To help minimize this
risk, a fund will enter into TBA transactions only with established counterparties (such as major broker-dealers) and the fund’s investment adviser will monitor the creditworthiness of such counterparties. A fund may also acquire interests in
mortgage pools through means other than TBA transactions.
A fund’s use of “TBA rolls” may cause the
fund to experience higher portfolio turnover, higher transaction costs and to pay higher capital gains distributions to shareholders, which may be taxable, than if it acquired exposure to mortgage pools through means other than TBA
transactions.
The funds intend to invest cash pending
settlement of any TBA transactions in U.S. Treasury securities, money market instruments, repurchase agreements, or other high-quality, liquid short-term instruments, including money market funds.
Non-Publicly Traded Securities and Private Placements.
A fund may invest in securities that are neither listed on a stock exchange nor traded over-the-counter, including privately placed securities. Such unlisted securities may involve a higher degree of business and
financial risk that can result in substantial losses. As a result of the absence of a public trading market for these securities, they may be less liquid than publicly traded securities. Although these securities may be resold in privately
negotiated transactions, the prices realized from these sales could be less than those originally paid by a fund or less than what may be considered the fair value of such securities. Furthermore, companies whose securities are not publicly traded
may not be subject to the disclosure and other investor protection requirements which might be applicable if their securities were publicly traded. If such securities are required to be registered under the securities laws of one or more
jurisdictions before being sold, a fund may be required to bear the expenses of registration.
Quality of Fixed Income Investments
will be principally investment-grade for a fund’s assets. Investment-grade quality securities are rated by at least one NRSRO in one of the four highest rating categories (within which there may be sub-categories
or gradations indicating relative standing) or have been determined to be of equivalent quality by the investment adviser or sub-adviser. Sometimes an investment-grade quality security may be downgraded to a below investment-grade quality rating. If
a security no longer has at least one investment-quality rating from an NRSRO, the investment adviser would reanalyze the security in light of the downgrade and determine whether a fund should continue to hold the security. However, such downgrade
would not require the investment adviser or sub-advisers to sell the security on behalf of a fund. Sometimes lower-quality securities may be downgraded to an even lower quality. The investment adviser may also elect to purchase high-yield securities
that are rated (at the time of purchase) B or higher or the equivalent by Moody’s, Standard & Poor’s Financial Services LLC (S&P) or Fitch, Inc. or are determined to be of similar investment quality by the investment
manager.
Restricted Securities
are securities that are subject to legal restrictions on their sale. Difficulty in selling restricted securities may result in a loss or be costly to a fund. Restricted securities generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration under the 1933 Act, or in a registered public offering. Where registration is required, the holder of a registered security may be obligated to pay all or part of the registration
expense and a considerable period may elapse between the time it decides to seek registration and the time it may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to
develop, the holder might obtain a less favorable price than prevailed when it decided to seek registration of the security. Certain restricted securities, such as 4(a)(2) commercial paper and Rule 144A securities under the 1933 Act, may be
considered to be liquid if they meet the criteria for liquidity established by the Board. To the extent a fund invests in restricted securities that are deemed liquid, the general level of illiquidity in the fund’s portfolio may be increased
if such securities become illiquid.
Reverse Repurchase Agreements and Mortgage Dollar Rolls
may be used by a fund. A fund may engage in reverse repurchase agreements to facilitate portfolio liquidity, a practice common in the mutual fund industry, or for arbitrage transactions as discussed below. In a reverse
repurchase agreement, a fund would sell a security and enter into an agreement to repurchase the security at a specified future date and price. A fund generally retains the right to interest and principal payments on the security. If a fund uses the
cash it obtains to invest in other securities, this may be considered a form of leverage and may expose a fund to greater risk. Leverage tends to magnify the effect of any decrease or increase in the value on a fund’s portfolio securities.
Because a fund receives cash upon entering into a reverse repurchase agreement, it may be considered a borrowing. When required by guidelines of the SEC, a fund will set aside permissible liquid assets earmarked or in a segregated account to secure
its obligations to repurchase the security.
A
fund also may enter into mortgage dollar rolls, in which a fund would sell MBS for delivery in the current month and simultaneously contract to purchase substantially similar securities on a specified future date. While a fund would forego principal
and interest paid on the MBS during
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the roll period, a fund would be compensated by the difference between the
current sales price and the lower price for the future purchase as well as by any interest earned on the proceeds of the initial sale. A fund also could be compensated through the receipt of fee income equivalent to a lower forward price. At the
time a fund would enter into a mortgage dollar roll, it would set aside permissible liquid assets earmarked or in a segregated account to secure its obligation for the forward commitment to buy MBS. This transaction allows a fund to have the same
price and duration exposure in the mortgage security while having the cash for the bonds for the given time period. Mortgage dollar roll transactions may be considered a borrowing by a fund.
The mortgage dollar rolls and reverse repurchase agreements
entered into by a fund may be used as arbitrage transactions in which a fund will maintain an offsetting position in short duration investment-grade debt obligations. Since a fund will receive interest on the securities or repurchase agreements in
which it invests the transaction proceeds, such transactions may involve leverage. However, since such securities or repurchase agreements will be high quality and short duration, the investment adviser believes that such arbitrage transactions
present lower risks to a fund than those associated with other types of leverage. There can be no assurance that a fund’s use of the cash it receives from a mortgage dollar roll will provide a positive return.
A fund also may effect simultaneous purchase and sale
transactions that are known as “sale-buybacks.” A sale-buyback is similar to a reverse repurchase agreement, except that in a sale-buyback, the counterparty who purchases the security is entitled to receive any principal or interest
payments made on the underlying security pending settlement of the fund’s repurchase of the underlying security. A fund’s obligations under a sale-buyback typically would be offset by liquid assets equal in value to the amount of the
fund’s forward commitment to repurchase the subject security.
Securities Lending
of portfolio securities is a common practice in the securities industry. A fund may engage in security lending arrangements. When a fund is lending portfolio securities, a fund may receive cash collateral and may invest
it in short-term, interest-bearing obligations, including cash collateral funds, but will do so only to the extent that it will not lose the tax treatment available to regulated investment companies. Lending portfolio securities involves risks that
the borrower may fail to return the securities or provide additional collateral. Also, voting rights with respect to loaned securities may pass with the lending of the securities and efforts to recall such securities promptly may be unsuccessful,
especially for foreign securities. Securities lending involves the risk of loss of rights in, or delay in recovery of, the loaned securities, if the borrower fails to return the security loaned or becomes insolvent. The fund will also bear the risk
of any decline in value of securities acquired with cash collateral.
A fund may loan portfolio securities to qualified
broker-dealers or other institutional investors provided: (1) the loan is secured continuously by collateral consisting of U.S. government securities, letters of credit, cash or cash equivalents or other permitted instruments maintained on a daily
marked-to-market basis in an amount at least equal to the current market value of the securities loaned; (2) a fund may at any time call the loan and obtain the return of the securities loaned; (3) a fund will receive payments in lieu of any
interest or dividends paid on the loaned securities; and (4) the aggregate market value of securities loaned will not at any time exceed one-third of the total assets of a fund, including collateral received from the loan (at market value computed
at the time of the loan).
Although voting rights with
respect to loaned securities pass to the borrower, the lender retains the right to recall a security (or terminate a loan) for the purpose of exercising the security’s voting rights. Efforts to recall such securities promptly may be
unsuccessful, especially for foreign securities or thinly traded securities such as small-cap stocks. In addition, because recalling a security may involve expenses to a fund, it is expected that a fund will do so only where the items being voted
upon are, in the judgment of the investment adviser, either material to the economic value of the security or threaten to materially impact the issuer’s corporate governance policies or structure.
To the extent a fund participates in
securities lending under the current securities lending agreements with unaffiliated lending agents, costs and expenses, including agent fees, associated with securities lending activities under the securities lending program paid to the
unaffiliated lending agents start at 10% of gross lending revenue, with subsequent breakpoints to a low of 7.5%. In this context, the gross lending revenue equals the income received from the investment of cash collateral and fees paid by borrowers
less any rebates paid to borrowers. Any expenses charged by the cash collateral fund are in addition to these fees. All remaining revenue is retained by a fund, as applicable. No portion of the lending revenue is paid to or retained by Charles
Schwab Investment Management, Inc. (CSIM) or any affiliate of CSIM.
Securities of Other Investment Companies.
Investment companies generally offer investors the advantages of diversification and professional investment management, by combining shareholders’ money and investing it in securities such as stocks, bonds and
money market instruments. Investment companies include: (1) open-end funds (commonly called mutual funds) that issue and redeem their shares on a continuous basis; (2) business development companies that generally invest in, and provide services to,
privately-held companies or thinly-traded public companies (see the sub-section titled “Business Development Companies” for more information); (3) closed-end funds that offer a fixed number of shares, and are usually listed on an
exchange; (4) UITs that generally offer a fixed number of redeemable shares; and (5) money market funds that typically seek current income by investing in money market securities (see the sections titled “Money Market Funds” and
“Money Market Securities” for more information). Certain open-end funds, closed-end funds and UITs are traded on exchanges (see the section titled “Exchange-Traded Funds” for more information).
To the extent a fund invests, or has invested, in shares of
other investment companies, including BDCs, during its prior fiscal year, the fund, pursuant to SEC rules, must disclose any material fees and expenses indirectly incurred by the fund as a result of such investments. These
20
indirect fees and expenses, to the extent incurred, will appear in the fee
table of a fund’s prospectus as a separate line item captioned “Acquired Fund Fees and Expenses.”
Investment companies may make investments and use techniques
designed to enhance their performance. These may include delayed-delivery and when-issued securities transactions; swap agreements; buying and selling futures contracts, illiquid, and/or restricted securities and repurchase agreements; and borrowing
or lending money and/or portfolio securities. The risks of investing in a particular investment company will generally reflect the risks of the securities in which it invests and the investment techniques it employs. Also, investment companies
charge fees and incur expenses.
The funds may buy
securities of other investment companies, including those of foreign issuers, in compliance with the requirements of federal law or any SEC exemptive order. A fund may invest in investment companies that are not registered with the SEC or in
privately placed securities of investment companies (which may or may not be registered), such as hedge funds and offshore funds. Unregistered funds are largely exempt from the regulatory requirements that apply to registered investment companies.
As a result, unregistered funds may have a greater ability to make investments, or use investment techniques, that offer a higher potential investment return (for example, leveraging), but which may carry high risk. Unregistered funds, while not
regulated by the SEC like registered funds, may be indirectly supervised by the financial institutions (e.g., commercial and investment banks) that may provide them with loans or other sources of capital. Investments in unregistered funds may be
difficult to sell, which could cause a fund selling an interest in an unregistered fund to lose money. For example, many hedge funds require their investors to hold their investments for at least one year.
Federal law restricts the ability of one registered investment
company to invest in another. As a result, the extent to which a fund may invest in another investment company may be limited. With respect to investments in other mutual funds, the SEC has granted the funds an exemption from the limitations of the
1940 Act that restrict the amount of securities of underlying mutual funds a fund may hold, provided that certain conditions are met. The conditions requested by the SEC were designed to address certain abuses perceived to be associated with funds
of funds, including unnecessary costs (such as sales loads, advisory fees and administrative costs), and undue influence by a fund of funds over the underlying fund. The conditions apply only when a fund and its affiliates in the aggregate own more
than 3% of the outstanding shares of any one underlying fund.
Under the terms of the exemptive order, each fund and its
affiliates may not control a non-affiliated underlying fund. Under the 1940 Act, any person who owns beneficially, either directly or through one or more controlled companies, more than 25% of the voting securities of a company is assumed to control
that company. This limitation is measured at the time the investment is made.
Short Sales
may be used by a
fund as part of its overall portfolio management strategies or to offset (hedge) a potential decline in the value of a security. A fund may engage in short sales that are either “against the box” or “uncovered.” A short sale
is “against the box” if at all times during which the short position is open, a fund owns at least an equal amount of the securities or securities convertible into, or has the right to acquire, at no added cost, the securities of the
same issue as the securities that are sold short. A short sale against the box is a taxable transaction to a fund with respect to the securities that are sold short. “Uncovered” short sales are transactions under which a fund sells a
security it does not own. To complete such transaction, a fund may borrow the security through a broker to make delivery to the buyer and, in doing so, a fund becomes obligated to replace the security borrowed by purchasing the security at the
market price at the time of the replacement. A fund also may have to pay a fee to borrow particular securities, which would increase the cost of the security. In addition, a fund is often obligated to pay any accrued interest and dividends on the
securities until they are replaced. The proceeds of the short sale position will be retained by the broker until a fund replaces the borrowed securities.
A fund will incur a loss if the price of the security sold
short increases between the time of the short sale and the time the fund replaces the borrowed security and, conversely, the fund will realize a gain if the price declines. Any gain will be decreased, and any loss increased, by the transaction costs
described above. A short sale creates the risk of an unlimited loss, as the price of the underlying securities could theoretically increase without limit, thus increasing the cost of buying those securities to cover the short position. If a fund
sells securities short “against the box,” it may protect unrealized gains, but will lose the opportunity to profit on such securities if the price rises. The successful use of short selling as a hedging strategy may be adversely affected
by imperfect correlation between movements in the price of the security sold short and the securities being hedged.
A fund’s obligation to replace the securities borrowed
in connection with a short sale will be secured by collateral deposited with the broker that consists of cash or other liquid securities. In addition, a fund will earmark cash or liquid assets or place in a segregated account an amount of cash or
other liquid assets equal to the difference, if any, between (1) the market value of the securities sold short, marked-to-market daily, and (2) any cash or other liquid securities deposited as collateral with the broker in connection with the short
sale.
Temporary Defensive Investments
. During unusual economic or market conditions or for temporary defensive or liquidity purposes, each of the Schwab Target Index Funds may invest up to 100% of their assets in cash, money market instruments, repurchase
agreements and other short-term obligations.
U.S.
Government Securities
are issued by the U.S. Treasury or issued or guaranteed by the U.S. government or any of its agencies or instrumentalities. Not all U.S. government securities are backed by the full faith and
credit of the U.S. government. Some U.S. government securities, such as those issued by Fannie Mae, Freddie Mac, the Student Loan Marketing Association (Sallie Mae), and the Federal Home Loan Banks (FHLB), are supported by a line of credit the
issuing entity has with the U.S. Treasury. Securities issued by other issuers are supported
21
solely by the credit of the issuing agency
or instrumentality such as obligations issued by the Federal Farm Credit Banks Funding Corporation (FFCB). There can be no assurance that the U.S. government will provide financial support to U.S. government securities of its agencies and
instrumentalities if it is not obligated to do so under law. U.S. government securities, including U.S. Treasury securities, are among the safest securities; however, not unlike other debt securities, they are still sensitive to interest rate
changes, which will cause their yields and prices to fluctuate.
On September 7, 2008, the U.S. Treasury announced a federal
takeover of Fannie Mae and Freddie Mac, placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the
purchase of common stock of each instrumentality. Under these Senior Preferred Stock Purchase Agreements (SPAs), the U.S. Treasury has pledged to provide up to $100 billion per instrumentality as needed, including the contribution of cash capital to
the instrumentalities in the event their liabilities exceed their assets. On May 6, 2009, the U.S. Treasury increased its maximum commitment to each instrumentality under the SPAs to $200 billion per instrumentality. On December 24, 2009, the U.S.
Treasury further amended the SPAs to allow the cap on the U.S. Treasury’s funding commitment to increase as necessary to accommodate any cumulative reduction in Fannie Mae’s and Freddie Mac’s net worth through the end of 2012. On
August 17, 2012, the U.S. Treasury announced that it was again amending the SPAs to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% dividend annually on all amounts received under the funding commitment. Instead, they will
transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. The new amendment is designed to put Fannie Mae and Freddie Mac in a better position to service their debt
because Fannie Mae and Freddie Mac no longer have to borrow from the U.S. Treasury to make fixed dividend payments. Under the new arrangement, Fannie Mae and Freddie Mac are required to reduce their investment portfolios over time.
The actions of the U.S. Treasury are intended to ensure that
Fannie Mae and Freddie Mac maintain a positive net worth and meet their financial obligations preventing mandatory triggering of receivership. No assurance can be given that the U.S. Treasury initiatives will be successful. The future for Fannie Mae
and Freddie Mac remains uncertain. The U.S. Congress continues to evaluate proposals to reduce the U.S. government’s role in the mortgage market and to wind down, restructure, consolidate, or privatize Fannie Mae and Freddie Mac. Should the
federal government adopt any such proposal, the value of a fund’s investments in securities issued by Fannie Mae or Freddie Mac would be impacted. Although the risk of default with U.S. government securities is considered unlikely, any default
on the part of a portfolio investment could cause a fund’s share price or yield to fall.
The risk of default may be heightened when there is
uncertainty relating to negotiations in the U.S. Congress over increasing the statutory debt ceiling. If the U.S. Congress is unable to negotiate an increase to the statutory debt ceiling, the U.S. government may default on certain U.S. government
securities including those held by a fund, which could have an adverse impact on the fund. In recent years, the long-term credit rating of the U.S. government was downgraded by a major rating agency as a result of concern about the U.S.
government’s budget deficit and rising debt burden. Similar downgrades in the future could increase volatility in domestic and foreign financial markets, result in higher interest rates, lower prices of U.S. Treasury securities and increase
the costs of different kinds of debt. Although remote, it is at least theoretically possible that under certain scenarios the U.S. government could default on its debt, including U.S. Treasury securities.
Wrap Agreements
may be entered
into by a fund with insurance companies, banks or other financial institutions (wrapper providers). A wrap agreement typically obligates the wrapper provider to maintain the value of the assets covered under the agreement (covered assets) up to a
specified maximum dollar amount upon the occurrence of certain specified events. The value is pre-determined using the purchase price of the securities plus interest at a specified rate minus an adjustment for any defaulted securities. The specified
interest rate may be adjusted periodically under the terms of the agreement. While the rate typically will reflect movements in the market rates of interest, it may at times be less or more than the actual rate of income earned on the covered
assets. The rate also can be impacted by defaulted securities and by purchase and redemption levels in a fund. A fund also pays a fee under the agreement, which reduces the rate as well.
Wrap agreements may be used as a risk management technique
intended to help minimize fluctuations in a fund’s NAV. However, a fund’s NAV will typically fluctuate at least minimally, and may fluctuate more at times when interest rates are fluctuating. Additionally, wrap agreements do not protect
against losses a fund may incur if the issuers of portfolio securities do not make timely payments of interest and/or principal. A wrap agreement provider also could default on its obligations under the agreement. Therefore, a fund will only invest
in a wrap provider with an investment-grade credit rating. There is no active trading market for wrap agreements and none is expected to develop. Therefore, wrap agreements are considered illiquid investments. There is no guarantee that a fund will
be able to purchase any wrap agreements or replace ones that defaulted. Wrap agreements are valued using procedures adopted by the Board. There are risks that the value of a wrap agreement may not be sufficient to minimize the fluctuations in a
fund’s NAV. All of these factors might result in a decline in the value of a fund’s shares.
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities
are debt securities that do not make cash interest payments throughout the period prior to maturity. Zero-coupon and step-coupon securities are sold at a deep discount to their face value. A zero-coupon security pays no
interest to its holders during its life. Step-coupon securities are debt securities that, instead of having a fixed coupon for the life of the security, have coupon or interest payments that may increase or decrease to predetermined rates at future
dates. Some step-coupon securities are issued with no coupon payments at all during an initial period, and only become interest-bearing at a future date; these securities are sold at a deep discount to their face value. Pay-in-kind securities pay
interest through the issuance of additional securities. Because such securities do not pay current cash income, the price of these securities can be volatile when interest rates fluctuate. While these securities do not pay current cash income,
federal income tax law requires the holders of zero-coupon, step-coupon, and pay-in-kind securities to include in income
22
each year the portion of the original issue discount (or deemed discount) and
other non-cash income on such securities accruing that year. To continue to qualify as a “regulated investment company” or “RIC” under the Code and avoid a certain excise tax, a fund may be required to distribute a portion of
such discount and income and may be required to dispose of other portfolio securities, which may occur in periods of adverse market prices, to generate cash to meet these distribution requirements.
investment Limitations and restrictions
Schwab Target Index Funds
The following investment policies and restrictions may be
changed only by a vote of a majority of each fund’s outstanding voting shares:
Each fund may not:
| (1) | Concentrate investments in a particular industry or group of industries, as concentration is defined under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. |
| (2) | Purchase or sell commodities or real estate, except to the extent permitted under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. |
| (3) | Make loans to other persons, except to the extent permitted under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. |
| (4) | Borrow money, except to the extent permitted under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. |
| (5) | Issue senior securities, except to the extent permitted under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. |
| (6) | Underwrite securities issued by other persons, except to the extent permitted under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. |
| (7) | Purchase securities of an issuer, except as consistent with the maintenance of its status as an open-end diversified company under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. |
The following investment policies and restrictions are
non-fundamental and may be changed by the Board of Trustees.
Each fund may not:
| (1) | Invest more than 15% of its net assets in illiquid securities. |
| (2) | Sell securities short unless it owns the security or the right to obtain the security or equivalent securities, or unless it covers such short sale as required by current SEC rules and interpretations (transactions in futures contracts, options and other derivative instruments are not considered selling securities short). |
| (3) | Purchase securities on margin, except such short-term credits as may be necessary for the clearance of purchases and sales of securities and provided that margin deposits in connection with futures contracts, options on futures or other derivative instruments shall not constitute purchasing securities on margin. |
| (4) | Purchase or sell commodities, commodity contracts or real estate, including interests in real estate limited partnerships, provided that the fund may (1) purchase securities of companies that deal in real estate or interests therein (including REITs); (2) purchase or sell futures contracts, options contracts, equity index participations and index participation contracts; and (3) purchase securities of companies that deal in precious metals or interests therein. |
| (5) | Borrow money except that the fund may (i) borrow money from banks or through an interfund lending facility, if any, only for temporary or emergency purposes (and not for leveraging) and (ii) engage in reverse repurchase agreements with any party; provided that (i) and (ii) in combination do not exceed 33 1/3% of its total assets (any borrowings that come to exceed this amount will be reduced to the extent necessary to comply with the limitation within three business days). |
| (6) | Lend any security or make any other loan if, as a result, more than 33 1/3% of its total assets would be lent to other parties (this restriction does not apply to purchases of debt securities or repurchase agreements). |
| (7) | Purchase securities (other than securities issued or guaranteed by the U.S. government, its agencies or instrumentalities) if, as a result of such purchase, 25% or more of the value of its total assets would be invested in any industry or group of industries. |
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The following descriptions of the 1940 Act may assist investors
in understanding the above policies and restrictions.
Borrowing.
The 1940 Act restricts an investment company from borrowing (including pledging, mortgaging or hypothecating assets) in excess of 33 1/3% of its total assets (not including temporary borrowings
not in excess of 5% of its total assets). Transactions that are fully collateralized in a manner that does not involve the prohibited issuance of a “senior security” within the meaning of Section 18(f) of the 1940 Act, shall not be
regarded as borrowings for the purposes of a fund’s investment restriction.
Concentration.
The SEC has defined concentration as investing 25% or more of an investment company’s total assets in an industry or group of industries, with certain exceptions.
Diversification.
Under
the 1940 Act and the rules, regulations and interpretations thereunder, a “diversified company,” as to 75% of its total assets, may not purchase securities of any issuer (other than obligations of, or guaranteed by, the U.S. government
or its agencies, or instrumentalities or securities of other investment companies) if, as a result, more than 5% of its total assets would be invested in the securities of such issuer, or more than 10% of the issuer’s voting securities would
be held by a fund.
Lending.
Under the 1940 Act, an investment company may only make loans if expressly permitted by its investment policies.
Real Estate.
The 1940 Act does not directly restrict an investment company’s ability to invest in real estate, but does require that every investment company have a fundamental investment policy governing such investments. Each fund has adopted a
fundamental policy that would permit direct investment in real estate. However, each fund has a non-fundamental investment limitation that prohibits it from investing directly in real estate. This non-fundamental policy may be changed only by vote
of a fund’s Board of Trustees.
Senior Securities.
Senior securities may include any obligation or instrument issued by an investment company evidencing indebtedness. The 1940 Act generally prohibits each fund from issuing senior
securities, although it provides allowances for certain borrowings and certain other investments, such as short sales, reverse repurchase agreements, firm commitment agreements and standby commitments, when such investments are “covered”
or with appropriate earmarking or segregation of assets to cover such obligations.
Underwriting.
Under the 1940 Act, underwriting securities involves an investment company purchasing securities directly from an issuer for the purpose of selling (distributing) them or participating in any such activity either directly or indirectly. Under the
1940 Act, a diversified fund may not make any commitment as underwriter, if immediately thereafter the amount of its outstanding underwriting commitments, plus the value of its investments in securities of issuers (other than investment companies)
of which it owns more than 10% of the outstanding voting securities, exceeds 25% of the value of its total assets. The foregoing restriction does not apply to non-diversified funds.
Policies and investment limitations that state a maximum
percentage of assets that may be invested in a security or other asset, or that set forth a quality standard shall be measured immediately after and as a result of a fund’s acquisition of such security or asset, unless otherwise noted. Except
with respect to limitations on borrowing and futures and option contracts, any subsequent change in total assets or net assets or other circumstances does not require a fund to sell an investment if it could not then make the same investment. With
respect to the limitation on illiquid securities, in the event that a subsequent change in net assets or other circumstances cause a fund to exceed its limitation, the fund will take steps to bring the aggregate amount of illiquid instruments back
within the limitations as soon as reasonably practicable.
Management of the FUNDS
The funds are overseen by a Board of Trustees. The trustees
are responsible for protecting shareholder interests. The trustees regularly meet to review the investment activities, contractual arrangements and the investment performance of each fund. The trustees met five times during the most recent fiscal
year.
Certain trustees are “interested
persons.” A trustee is considered an interested person (Interested Trustee) of the Trust under the 1940 Act if he or she is an officer, director, or an employee of CSIM or Charles Schwab & Co., Inc. (Schwab or the distributor). A trustee
also may be considered an interested person of the Trust under the 1940 Act if he or she owns stock of The Charles Schwab Corporation (CSC), a publicly traded company and the parent company of CSIM and Schwab.
As used herein, the terms “Fund
Complex” and “Family of Investment Companies” each refer collectively to The Charles Schwab Family of Funds, Schwab Investments, Schwab Annuity Portfolios, Schwab Capital Trust, Schwab Strategic Trust and Laudus Trust which, as of
July 29, 2019, included 98 funds. As used herein, the term “Schwab Funds” refers collectively to The Charles Schwab Family of Funds, Schwab Investments, Schwab Annuity Portfolios and Schwab Capital Trust; the term “Laudus
Funds” refers to Laudus Trust; and the term “Schwab ETFs” refers to Schwab Strategic Trust.
Each of the officers and/or trustees serves in the same
capacity, unless otherwise noted, for The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust. The tables below provide information
24
about the trustees and officers for the
Trust, which includes the funds in this SAI. The address of each individual listed below is 211 Main Street, San Francisco, California 94105.
25
|
Name,
Year of Birth, and Position(s) with the Trust
(Term of Office and Length of Time Served 1 ) |
Principal
Occupations
During the Past Five Years |
Number
of Portfolios
in Fund Complex Overseen by the Trustee |
Other
Directorships During
the Past Five Years |
| INDEPENDENT TRUSTEES | |||
|
Gerald
B. Smith
1950 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2000; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Chairman, Chief Executive Officer and Founder (Mar. 1990-present), Smith Graham & Co. (investment advisors). | 98 | Director (2012-present), Eaton |
| INTERESTED TRUSTEES | |||
|
Walter
W. Bettinger II
2
1960 Chairman and Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Schwab Strategic Trust since 2009; Laudus Trust since 2010) |
Director, President and Chief Executive Officer (Oct. 2008-present), The Charles Schwab Corporation; President and Chief Executive Officer (Oct. 2008-present) and Director (May 2008-present), Charles Schwab & Co., Inc.; Director (Apr. 2006-present), Charles Schwab Bank; Director (Nov. 2017-present), Charles Schwab Premier Bank; Director (May 2008-present) and President and Chief Executive Officer (Aug. 2017-present), Schwab Holdings, Inc.; Director (July 2016-present), Charles Schwab Investment Management, Inc. | 98 | Director (2008-present), The Charles Schwab Corporation |
|
Jonathan
de St. Paer
2
1973 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2019) |
Director and Chief Executive Officer (Apr. 2019-present), President (Oct. 2018-present) Charles Schwab Investment Management, Inc.; Trustee and Chief Executive Officer (Apr. 2019-present), President (Nov. 2018-present), Schwab Funds, Laudus Funds and Schwab ETFs; Director (Apr. 2019-present), Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited; Senior Vice President (Apr. 2019-present), Senior Vice President – Strategy and Product Development (CSIM) (Jan. 2014-Mar. 2019), Vice President (Jan. 2009-Dec. 2013), Charles Schwab & Co., Inc. | 98 | None |
|
Joseph
R. Martinetto
2
1962 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Chief Operating Officer (Feb. 2018-present) and Senior Executive Vice President (July 2015-Feb. 2018), The Charles Schwab Corporation; Senior Executive Vice President (July 2015-present), Charles Schwab & Co., Inc.; Chief Financial Officer (July 2015-Aug. 2017) and Executive Vice President and Chief Financial Officer (May 2007-July 2015), The Charles Schwab Corporation and Charles Schwab & Co., Inc.; Director (May 2007-present), Charles Schwab & Co., Inc.; Director (Apr. 2010-present) and Chief Executive Officer (July 2013-Apr. 2015), Charles Schwab Bank; Director (Nov. 2017-present), Charles Schwab Premier Bank; Director (May 2007-present), Chief Financial Officer (May 2007-Aug. 2017), Senior Executive Vice President (Feb. 2016-present), and Executive Vice President (May 2007-Feb. 2016), Schwab Holdings, Inc. | 98 | None |
|
Name,
Year of Birth, and Position(s) with the Trust
(Term of Office and Length of Time Served 3 ) |
Principal Occupations During the Past Five Years |
| OFFICERS | |
|
Jonathan
de St. Paer
1973 President and Chief Executive Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2018) |
Director and Chief Executive Officer (Apr. 2019-present), President (Oct. 2018-present), Charles Schwab Investment Management, Inc.; Trustee and Chief Executive Officer (Apr. 2019-present), President (Nov. 2018-present), Schwab Funds, Laudus Funds and Schwab ETFs; Director (Apr. 2019-present), Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited; Senior Vice President (Apr. 2019-present), Senior Vice President – Strategy and Product Development (CSIM) (Jan. 2014-Mar. 2019), Vice President (Jan. 2009-Dec. 2013), Charles Schwab & Co., Inc. |
26
|
Name,
Year of Birth, and Position(s) with the Trust
(Term of Office and Length of Time Served 3 ) |
Principal Occupations During the Past Five Years |
| OFFICERS | |
|
Mark
Fischer
1970 Treasurer and Chief Financial Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2013) |
Treasurer and Chief Financial Officer (Jan. 2016-present), Schwab Funds, Laudus Funds and Schwab ETFs; Assistant Treasurer (Dec. 2013-Dec. 2015), Schwab Funds and Laudus Funds; Assistant Treasurer (Nov. 2013-Dec. 2015), Schwab ETFs; Vice President (Oct. 2013-present), Charles Schwab Investment Management, Inc.; Executive Director (Apr. 2011-Sept. 2013), J.P. Morgan Investor Services; Assistant Treasurer (May 2005-Mar. 2011), Massachusetts Financial Service Investment Management. |
|
George
Pereira
1964 Senior Vice President and Chief Operating Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2004; Laudus Trust since 2006; Schwab Strategic Trust since 2009) |
Senior Vice President and Chief Financial Officer (Nov. 2004-present) and Chief Operating Officer (Jan. 2011-present), Charles Schwab Investment Management, Inc.; Senior Vice President and Chief Operating Officer (Jan. 2016-present), Schwab Funds, Laudus Funds and Schwab ETFs; Treasurer and Chief Financial Officer (June 2006-Dec. 2015), Laudus Funds; Treasurer and Principal Financial Officer (Nov. 2004-Dec. 2015), Schwab Funds; Treasurer and Principal Financial Officer (Oct. 2009-Dec. 2015), Schwab ETFs; Director (Apr. 2005-present), Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited. |
|
Omar
Aguilar
1970 Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies (Apr. 2011-present), Charles Schwab Investment Management, Inc.; Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies (June 2011-present), Schwab Funds, Laudus Funds and Schwab ETFs; Head of the Portfolio Management Group and Vice President of Portfolio Management (May 2009-Apr. 2011), Financial Engines, Inc. (investment management firm); Head of Quantitative Equity (July 2004-Jan. 2009), ING Investment Management. |
|
Brett
Wander
1961 Senior Vice President and Chief Investment Officer – Fixed Income (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President and Chief Investment Officer – Fixed Income (Apr. 2011-present), Charles Schwab Investment Management, Inc.; Senior Vice President and Chief Investment Officer – Fixed Income (June 2011-present), Schwab Funds, Laudus Funds and Schwab ETFs; Senior Managing Director and Global Head of Active Fixed-Income Strategies (Jan. 2008-Oct. 2010), State Street Global Advisors; Director of Alpha Strategies (Apr. 2006-Jan. 2008), Loomis, Sayles & Company (investment management firm). |
|
David
Lekich
1964 Chief Legal Officer and Secretary, Schwab Funds and Schwab ETFs Vice President and Assistant Clerk, Laudus Funds (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President (Sept. 2011-present) and Vice President (Mar. 2004-Sept. 2011), Charles Schwab & Co., Inc.; Senior Vice President and Chief Counsel (Sept. 2011-present) and Vice President (Jan. 2011-Sept. 2011), Charles Schwab Investment Management, Inc.; Secretary (Apr. 2011-present) and Chief Legal Officer (Dec. 2011-present), Schwab Funds; Vice President and Assistant Clerk (Apr. 2011-present), Laudus Funds; Secretary (May 2011-present) and Chief Legal Officer (Nov. 2011-present), Schwab ETFs. |
|
Catherine
MacGregor
1964 Vice President and Assistant Secretary, Schwab Funds and Schwab ETFs Chief Legal Officer, Vice President and Clerk, Laudus Funds (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2005; Schwab Strategic Trust since 2009) |
Vice President (July 2005-present), Charles Schwab & Co., Inc.; Vice President (Sept. 2005-present), Charles Schwab Investment Management, Inc.; Vice President (Dec. 2005-present) and Chief Legal Officer and Clerk (Mar. 2007-present), Laudus Funds; Vice President (Nov. 2005-present) and Assistant Secretary (June 2007-present), Schwab Funds; Vice President and Assistant Secretary (Oct. 2009-present), Schwab ETFs. |
| 1 | Each Trustee shall hold office until the election and qualification of his or her successor, or until he or she dies, resigns or is removed. The retirement policy requires that each independent trustee retire by December 31 of the year in which the Trustee turns 74 or the Trustee’s twentieth year of service as an independent trustee on any trust in the Fund Complex, whichever occurs first. |
| 2 | Mr. Bettinger, Mr. de St. Paer and Mr. Martinetto are Interested Trustees. Mr. Bettinger is an Interested Trustee because he owns stock of CSC, the parent company of CSIM, the investment adviser for the trusts in the Fund Complex, is an employee and director of Charles Schwab & Co., Inc., the principal underwriter for The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust, and is a director of CSIM. Mr. de St. Paer is an Interested Trustee because he owns stock of CSC and is an employee and director of CSIM. Mr. Martinetto is an Interested Trustee because he owns stock of CSC and is an employee and director of Schwab. |
| 3 | The President, Treasurer and Secretary/Clerk hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each of the other officers serves at the pleasure of the Board. |
Board Leadership Structure
The Chairman of the Board, Walter W.
Bettinger II, is Chief Executive Officer and a member of the Board of Directors of CSC and an interested person of the Trust as that term is defined in the 1940 Act. The Board is comprised of a super-majority (75 percent) of trustees who are not
interested persons of the Trust (i.e., independent trustees). The Trust does not have a single lead independent trustee. There are three primary committees of the Board: the Audit, Compliance and Valuation Committee; the Governance Committee; and
the Investment Oversight Committee. Each of the Committees is chaired by an independent trustee, and each Committee is comprised solely of independent trustees. The Committee chairs preside at Committee meetings, participate in formulating agendas
for those meetings, and coordinate with management to serve as a liaison between the independent trustees and management on matters within the scope of the responsibilities of each Committee as set forth in its Board-approved charter. The Board has
determined that this leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Board made this determination in consideration of, among other things, the fact that the
27
independent trustees of the Trust constitute a super-majority of the Board,
the fact that Committee chairs are independent trustees, the number of funds (and classes) overseen by the Board, and the total number of trustees on the Board.
Board Oversight of Risk Management
Like most investment companies, fund management and its other
service providers have responsibility for day-to-day risk management for the funds. The Board’s duties, as part of its risk oversight of the Trust, consist of monitoring risks identified during regular and special reports to the Committees of
the Board, as well as regular and special reports to the full Board. In addition to monitoring such risks, the Committees and the Board oversee efforts of fund management and service providers to manage risks to which the funds of the Trust may be
exposed. For example, the Investment Oversight Committee meets with portfolio managers and receives regular reports regarding investment risk and credit risk of a fund’s portfolio. The Audit, Compliance and Valuation Committee meets with the
funds’ Chief Compliance Officer and Chief Financial Officer and receives regular reports regarding compliance risks, operational risks and risks related to the valuation and liquidity of portfolio securities. From its review of these reports
and discussions with management, each Committee receives information about the material risks of the funds of the Trust and about how management and service providers mitigate those risks, enabling the independent Committee chairs and other
independent members of the Committees to discuss these risks with the full Board.
The Board recognizes that not all risks that may affect the
funds can be identified nor can processes and controls be developed to eliminate or mitigate the occurrence or effects of certain risks; some risks are simply beyond the reasonable control of the funds, their management, and service providers.
Although the risk oversight functions of the Board, and the risk management policies of fund management and fund service providers, are designed to be effective, there is no guarantee that they will eliminate or mitigate all risks. In addition, it
may be necessary to bear certain risks (such as investment-related risks) to achieve each fund’s investment objective. As a result of the foregoing and other factors, the funds’ ability to manage risk is subject to significant
limitations.
Individual Trustee Qualifications
The Board has concluded that each of the trustees should
initially and continue to serve on the Board because of (i) his or her ability to review and understand information about the Trust provided to them by management, to identify and request other information they may deem relevant to the performance
of their duties, to question management regarding material factors bearing on the management of the Trust, and to exercise their business judgment in a manner that serves the best interests of the Trust’s shareholders and (ii) the
trustee’s experience, qualifications, attributes or skills as described below.
The Board has concluded that Mr. Bettinger should serve as
trustee of the Trust because of the experience he gained as president and chief executive officer of The Charles Schwab Corporation, his knowledge of and experience in the financial services industry, and the experience he has gained serving as
trustee of the Schwab Funds since 2008, the Schwab ETFs since 2009, and the Laudus Funds since 2010.
The Board has concluded that Mr. Burns should serve as trustee
of the Trust because of the experience he gained as managing director of Pacific Investment Management Company, LLC (PIMCO) and president of PIMCO Funds as well as the experience he has gained serving as trustee of the Schwab ETFs since 2009, and
his experience serving as chair of the Schwab ETFs’ Audit, Compliance and Valuation Committee until December 2015.
The Board has concluded that Mr. Cogan should serve as trustee
of the Trust because of the experience he has gained serving as a senior fellow and professor of public policy at a university and his former service in government, the experience he has gained serving as trustee of the Schwab Funds since 2008 and
Laudus Funds since 2010, and his service on other public company boards.
The Board has concluded that Mr. de St. Paer
should serve as trustee of the Trust because of the experience he gained as president of CSIM, the Schwab Funds, Laudus Funds and Schwab ETFs, and as senior vice president of strategy and product development at Charles Schwab & Co., Inc., as
well as his knowledge of and experience in the financial services industry and investment management services.
The Board has concluded that Ms. Heller should serve as
trustee of the Trust because of the experience she gained as president of TIAA Charitable and as senior managing director at TIAA, the experience she has gained serving on other non-public company boards and her knowledge of and experience in the
financial services industry.
The Board has
concluded that Mr. Kochis should serve as trustee of the Trust because of the experience he gained serving as chair and chief executive officer of Aspiriant, LLC, an advisory firm, as well as his knowledge of and experience in wealth management
consulting and the experience he has gained serving as trustee of the Schwab ETFs since 2012.
The Board has concluded that Mr. Mahoney should serve as
trustee of the Trust because of the experience he gained serving as trustee of the Schwab Funds and Laudus Funds since 2011, as co-chief executive officer of a healthcare services company, and his service on other public company boards.
The Board has concluded that Mr. Martinetto should serve as
trustee of the Trust because of his experience serving as senior executive vice president and chief financial officer of The Charles Schwab Corporation and Charles Schwab & Co., Inc.
28
The Board has concluded that Ms. Moncreiff
should serve as trustee of the Trust because of the experience she gained as chief investment officer of CareGroup Healthcare System, the experience she has gained serving on other non-public company boards and her knowledge of and experience in the
financial services industry.
The Board has
concluded that Mr. Patel should serve as trustee of the Trust because of the experience he gained serving as trustee of the Schwab Funds and Laudus Funds since 2011, as executive vice president, general manager and chief financial officer of a
software company, his service on other public company boards, and his experience serving as chair of the Schwab Funds’ and Laudus Funds’ Audit, Compliance and Valuation Committee.
The Board has concluded that Ms. Patmore should serve as
trustee of the Trust because of her experience serving as chief financial officer and executive vice president of First Data Payment Business and First Data Corporation, as well as her knowledge of and experience in management consulting.
The Board has concluded that Mr. Smith should serve as trustee
of the Trust because of the experience he has gained as managing partner of his own investment advisory firm, the experience he has gained serving as trustee of the Schwab Funds since 2000, as trustee of the Laudus Funds since 2010, his service on
other public company boards, and his experience serving as chair of the Schwab Funds’ and Laudus Funds’ Investment Oversight Committee.
Trustee Committees
The Board has established certain committees and adopted
Committee charters with respect to those committees, each as described below:
| • | The Audit, Compliance and Valuation Committee reviews the integrity of the Trust’s financial reporting processes and compliance policies, procedures and processes, and the Trust’s overall system of internal controls. The Audit, Compliance and Valuation Committee also reviews and evaluates the qualifications, independence and performance of the Trust’s independent auditors, and the implementation and operation of the Trust’s valuation policy and procedures. This Committee is comprised of at least three independent trustees and currently has the following members: Kiran M. Patel (Chair), John F. Cogan, Nancy F. Heller and Kimberly S. Patmore. The Committee met four times during the most recent fiscal year. |
| • | The Governance Committee reviews and makes recommendations to the Board regarding Trust governance-related matters, including but not limited to Board compensation practices, retirement policies and term limits, Board self-evaluations, the effectiveness and allocation of assignments and functions by the Board, the composition of Committees of the Board, and the training of trustees. The Governance Committee is responsible for selecting and nominating candidates to serve as trustees. The Governance Committee does not have a written policy with respect to consideration of candidates for trustee submitted by shareholders. However, if the Governance Committee determined that it would be in the best interests of the Trust to fill a vacancy on the Board, and a shareholder submitted a candidate for consideration by the Board to fill the vacancy, the Governance Committee would evaluate that candidate in the same manner as it evaluates nominees identified by the Governance Committee. Nominee recommendations may be submitted to the Secretary of the Trust at the Trust’s principal business address. This Committee is comprised of at least three independent trustees and currently has the following members: John F. Cogan (Chair), Stephen Timothy Kochis, David L. Mahoney and Kimberly S. Patmore. The Committee met five times during the most recent fiscal year. |
| • | The Investment Oversight Committee reviews the investment activities of the Trust and the performance of the funds’ investment adviser. This Committee is comprised of at least three trustees (at least two-thirds of whom shall be independent trustees) and currently has the following members: Gerald B. Smith (Chair), Robert W. Burns, Stephen Timothy Kochis, David L. Mahoney and Jane P. Moncreiff. The Committee met five times during the most recent fiscal year. |
Trustee Compensation
The following table provides trustee
compensation for the fiscal year ended March 31, 2019, earned with respect to the funds in this SAI and the Fund Complex. Trustee compensation for the funds is paid by CSIM.
| Name of Trustee |
Aggregate
Compensation
from the Funds in this SAI |
Pension
or Retirement Benefits
Accrued as Part of Fund Expenses |
Total
Compensation from the Funds
and Fund Complex Paid to Trustees |
| Interested Trustees | |||
| Walter W. Bettinger II | None | N/A | None |
| Marie A. Chandoha 1 | None | N/A | None |
| Jonathan de St. Paer 2 | None | N/A | None |
| Joseph R. Martinetto | None | N/A | None |
| Independent Trustees | |||
| Robert W. Burns | $ 9,484 | N/A | $304,000 |
| John F. Cogan | $10,108 | N/A | $324,000 |
| Nancy F. Heller 3 | $ 7,993 | N/A | $253,667 |
29
| Name of Trustee |
Aggregate
Compensation
from the Funds in this SAI |
Pension
or Retirement Benefits
Accrued as Part of Fund Expenses |
Total
Compensation from the Funds
and Fund Complex Paid to Trustees |
| Independent Trustees | |||
| Stephen Timothy Kochis | $ 9,484 | N/A | $304,000 |
| David L. Mahoney | $ 9,484 | N/A | $304,000 |
| Jane P. Moncreiff 4 | $ 2,469 | N/A | $ 77,500 |
| Kiran M. Patel | $10,108 | N/A | $324,000 |
| Kimberly S. Patmore | $ 9,484 | N/A | $304,000 |
| Charles A. Ruffel 5 | $ 2,268 | N/A | $ 75,500 |
| Gerald B. Smith | $10,108 | N/A | $324,000 |
| Joseph H. Wender 6 | $ 7,014 | N/A | $226,500 |
| 1 | Ms. Chandoha retired from the Board effective March 31, 2019. |
| 2 | Mr. de St. Paer joined the Board effective April 1, 2019. |
| 3 | Ms. Heller joined the Board effective June 1, 2018. |
| 4 | Ms. Moncreiff joined the Board effective January 1, 2019. |
| 5 | Mr. Ruffel resigned from the Board effective May 15, 2018. |
6
Mr. Wender retired from the Board effective December 31,
2018.
Securities Beneficially Owned by Each
Trustee
The following table provides each
trustee’s equity ownership of the funds and ownership of all registered investment companies overseen by each trustee in the Family of Investment Companies as of December 31, 2018.
| Name of Trustee | Dollar Range of Trustee Ownership of the Funds Included in the SAI |
Aggregate
Dollar Range of
Trustee Ownership in the Family of Investment Companies |
|
| Interested Trustees | |||
| Walter W. Bettinger II | Over $100,000 | ||
| Schwab Target 2010 Index Fund | None | ||
| Schwab Target 2015 Index Fund | None | ||
| Schwab Target 2020 Index Fund | None | ||
| Schwab Target 2025 Index Fund | None | ||
| Schwab Target 2030 Index Fund | None | ||
| Schwab Target 2035 Index Fund | None | ||
| Schwab Target 2040 Index Fund | None | ||
| Schwab Target 2045 Index Fund | None | ||
| Schwab Target 2050 Index Fund | None | ||
| Schwab Target 2055 Index Fund | None | ||
| Schwab Target 2060 Index Fund | None | ||
| Jonathan de St. Paer 1 | Over $100,000 | ||
| Schwab Target 2010 Index Fund | None | ||
| Schwab Target 2015 Index Fund | None | ||
| Schwab Target 2020 Index Fund | None | ||
| Schwab Target 2025 Index Fund | None | ||
| Schwab Target 2030 Index Fund | None | ||
| Schwab Target 2035 Index Fund | None | ||
| Schwab Target 2040 Index Fund | None | ||
| Schwab Target 2045 Index Fund | None | ||
| Schwab Target 2050 Index Fund | None | ||
| Schwab Target 2055 Index Fund | None | ||
| Schwab Target 2060 Index Fund | None | ||
30
| Name of Trustee | Dollar Range of Trustee Ownership of the Funds Included in the SAI |
Aggregate
Dollar Range of
Trustee Ownership in the Family of Investment Companies |
|
| Interested Trustees | |||
| Joseph R. Martinetto | Over $100,000 | ||
| Schwab Target 2010 Index Fund | None | ||
| Schwab Target 2015 Index Fund | None | ||
| Schwab Target 2020 Index Fund | None | ||
| Schwab Target 2025 Index Fund | None | ||
| Schwab Target 2030 Index Fund | None | ||
| Schwab Target 2035 Index Fund | None | ||
| Schwab Target 2040 Index Fund | None | ||
| Schwab Target 2045 Index Fund | None | ||
| Schwab Target 2050 Index Fund | None | ||
| Schwab Target 2055 Index Fund | None | ||
| Schwab Target 2060 Index Fund | None | ||
| Independent Trustees | |||
| Robert W. Burns | Over $100,000 | ||
| Schwab Target 2010 Index Fund | None | ||
| Schwab Target 2015 Index Fund | None | ||
| Schwab Target 2020 Index Fund | None | ||
| Schwab Target 2025 Index Fund | None | ||
| Schwab Target 2030 Index Fund | None | ||
| Schwab Target 2035 Index Fund | None | ||
| Schwab Target 2040 Index Fund | None | ||
| Schwab Target 2045 Index Fund | None | ||
| Schwab Target 2050 Index Fund | None | ||
| Schwab Target 2055 Index Fund | None | ||
| Schwab Target 2060 Index Fund | None | ||
| John F. Cogan | Over $100,000 | ||
| Schwab Target 2010 Index Fund | None | ||
| Schwab Target 2015 Index Fund | None | ||
| Schwab Target 2020 Index Fund | None | ||
| Schwab Target 2025 Index Fund | None | ||
| Schwab Target 2030 Index Fund | None | ||
| Schwab Target 2035 Index Fund | None | ||
| Schwab Target 2040 Index Fund | None | ||
| Schwab Target 2045 Index Fund | None | ||
| Schwab Target 2050 Index Fund | None | ||
| Schwab Target 2055 Index Fund | None | ||
| Schwab Target 2060 Index Fund | None | ||
| Nancy F. Heller 2 | $50,001-$100,000 | ||
| Schwab Target 2010 Index Fund | None | ||
| Schwab Target 2015 Index Fund | None | ||
| Schwab Target 2020 Index Fund | None | ||
| Schwab Target 2025 Index Fund | None | ||
| Schwab Target 2030 Index Fund | None | ||
| Schwab Target 2035 Index Fund | None | ||
| Schwab Target 2040 Index Fund | None | ||
| Schwab Target 2045 Index Fund | None | ||
| Schwab Target 2050 Index Fund | None | ||
| Schwab Target 2055 Index Fund | None | ||
| Schwab Target 2060 Index Fund | None | ||
31
| Name of Trustee | Dollar Range of Trustee Ownership of the Funds Included in the SAI |
Aggregate
Dollar Range of
Trustee Ownership in the Family of Investment Companies |
|
| Independent Trustees | |||
| Stephen Timothy Kochis | Over $100,000 | ||
| Schwab Target 2010 Index Fund | None | ||
| Schwab Target 2015 Index Fund | None | ||
| Schwab Target 2020 Index Fund | None | ||
| Schwab Target 2025 Index Fund | None | ||
| Schwab Target 2030 Index Fund | None | ||
| Schwab Target 2035 Index Fund | None | ||
| Schwab Target 2040 Index Fund | None | ||
| Schwab Target 2045 Index Fund | None | ||
| Schwab Target 2050 Index Fund | None | ||
| Schwab Target 2055 Index Fund | None | ||
| Schwab Target 2060 Index Fund | None | ||
| David L. Mahoney | Over $100,000 | ||
| Schwab Target 2010 Index Fund | None | ||
| Schwab Target 2015 Index Fund | None | ||
| Schwab Target 2020 Index Fund | None | ||
| Schwab Target 2025 Index Fund | None | ||
| Schwab Target 2030 Index Fund | None | ||
| Schwab Target 2035 Index Fund | None | ||
| Schwab Target 2040 Index Fund | None | ||
| Schwab Target 2045 Index Fund | None | ||
| Schwab Target 2050 Index Fund | None | ||
| Schwab Target 2055 Index Fund | None | ||
| Schwab Target 2060 Index Fund | None | ||
| Jane P. Moncreiff 3 | None | ||
| Schwab Target 2010 Index Fund | None | ||
| Schwab Target 2015 Index Fund | None | ||
| Schwab Target 2020 Index Fund | None | ||
| Schwab Target 2025 Index Fund | None | ||
| Schwab Target 2030 Index Fund | None | ||
| Schwab Target 2035 Index Fund | None | ||
| Schwab Target 2040 Index Fund | None | ||
| Schwab Target 2045 Index Fund | None | ||
| Schwab Target 2050 Index Fund | None | ||
| Schwab Target 2055 Index Fund | None | ||
| Schwab Target 2060 Index Fund | None | ||
| Kiran M. Patel | Over $100,000 | ||
| Schwab Target 2010 Index Fund | None | ||
| Schwab Target 2015 Index Fund | None | ||
| Schwab Target 2020 Index Fund | None | ||
| Schwab Target 2025 Index Fund | None | ||
| Schwab Target 2030 Index Fund | None | ||
| Schwab Target 2035 Index Fund | None | ||
| Schwab Target 2040 Index Fund | None | ||
| Schwab Target 2045 Index Fund | None | ||
| Schwab Target 2050 Index Fund | None | ||
| Schwab Target 2055 Index Fund | None | ||
| Schwab Target 2060 Index Fund | None | ||
32
| Name of Trustee | Dollar Range of Trustee Ownership of the Funds Included in the SAI |
Aggregate
Dollar Range of
Trustee Ownership in the Family of Investment Companies |
|
| Independent Trustees | |||
| Kimberly S. Patmore | Over $100,000 | ||
| Schwab Target 2010 Index Fund | None | ||
| Schwab Target 2015 Index Fund | None | ||
| Schwab Target 2020 Index Fund | None | ||
| Schwab Target 2025 Index Fund | None | ||
| Schwab Target 2030 Index Fund | None | ||
| Schwab Target 2035 Index Fund | None | ||
| Schwab Target 2040 Index Fund | None | ||
| Schwab Target 2045 Index Fund | None | ||
| Schwab Target 2050 Index Fund | None | ||
| Schwab Target 2055 Index Fund | None | ||
| Schwab Target 2060 Index Fund | None | ||
| Gerald B. Smith | Over $100,000 | ||
| Schwab Target 2010 Index Fund | None | ||
| Schwab Target 2015 Index Fund | None | ||
| Schwab Target 2020 Index Fund | None | ||
| Schwab Target 2025 Index Fund | None | ||
| Schwab Target 2030 Index Fund | None | ||
| Schwab Target 2035 Index Fund | None | ||
| Schwab Target 2040 Index Fund | None | ||
| Schwab Target 2045 Index Fund | None | ||
| Schwab Target 2050 Index Fund | None | ||
| Schwab Target 2055 Index Fund | None | ||
| Schwab Target 2060 Index Fund | None | ||
| 1 | Mr. de St. Paer joined the Board effective April 1, 2019. |
| 2 | Ms. Heller joined the Board effective June 1, 2018. |
| 3 | Ms. Moncreiff joined the Board effective January 1, 2019. |
As of December 31, 2018, none of the independent trustees or
their immediate family members owned beneficially or of record any securities of CSIM or Schwab, or in a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with CSIM or
Schwab.
Deferred Compensation Plan
Independent trustees may enter into a fee deferral plan. Under
this plan, deferred fees will be credited to an account established by the Trust as of the date that such fees would have been paid to the trustee. The value of this account will equal the value that the account would have if the fees credited to
the account had been invested in the shares of Schwab Funds selected by the trustee. Currently, none of the independent trustees has elected to participate in this plan.
Code of Ethics
The funds, CSIM and Schwab have adopted a Code of Ethics as
required under the 1940 Act. Subject to certain conditions or restrictions, the Code of Ethics permits the trustees, directors, officers or advisory representatives of the funds or CSIM or the directors or officers of Schwab to buy or sell directly
or indirectly securities for their own accounts. This includes securities that may be purchased or held by the funds. Securities transactions by some of these individuals may be subject to prior approval of the investment adviser’s Chief
Compliance Officer or alternate. Most securities transactions are subject to quarterly reporting and review requirements.
Control Persons And Principal Holders Of
Securities
As of June 30, 2019, the officers and
trustees of the Trust, as a group owned, of record or beneficially, less than 1% of the outstanding voting securities of the funds.
Persons who beneficially own more than 25% of a fund may be
deemed to control the fund. As a result, it may not be possible for matters subject to a vote of a majority of the outstanding voting securities of such fund to be approved without the affirmative vote of such shareholder, and it may be possible for
such matters to be approved by such shareholder without the affirmative vote of any other shareholder.
33
Please see the Appendix – Principal
Holders of Securities, for a list of persons or entities that owned, of record or beneficially, 5% or more of the outstanding voting securities of the funds.
Investment Advisory and Other Services
Investment Adviser
CSIM, a wholly owned subsidiary of
CSC, 211 Main Street, San Francisco, CA 94105, serves as each fund’s investment adviser and administrator pursuant to an Amended and Restated Advisory Agreement (Advisory Agreement) between it and the Trust. Schwab is an affiliate of CSIM and
is the Trust’s distributor. Charles R. Schwab is the founder, Chairman and Director of CSC. As a result of his ownership of and interests in CSC, Mr. Schwab may be deemed to be a controlling person of CSIM and Schwab.
Advisory Agreement
The continuation of a fund’s
Advisory Agreement must be specifically approved at least annually (1) by the vote of the trustees or by a vote of the shareholders of the fund, and (2) by the vote of a majority of the trustees who are not parties to the investment advisory
agreement or “interested persons” of any party (independent trustees), cast in person at a meeting called for the purpose of voting on such approval.
Each year, the Board calls and holds a meeting to decide
whether to renew the Advisory Agreement between the Trust and CSIM with respect to existing funds in the Trust. In preparation for the meeting, the Board requests and reviews a wide variety of materials provided by CSIM, as well as extensive data
provided by third parties, and the independent trustees receive advice from counsel to the independent trustees.
The investment adviser is entitled to receive a fee from the
funds, payable monthly, for its advisory and administrative services to the funds. As compensation for these services, the firm receives a management fee of 0.08% from each of the funds expressed as a percentage of each fund’s average daily
net assets.
Pursuant to the Advisory Agreement, the
Adviser is responsible for substantially all expenses of the funds, including the cost of transfer agency, custody, fund administration, legal, audit and other services, but excluding shareholder servicing fees, acquired fund fees and expenses,
taxes, brokerage expenses and extraordinary or non-routine expenses.
The table below sets forth the advisory fees paid to the
investment adviser for the past three fiscal years, or if shorter, for the period of its operations.
| Fund and Advisory Fee Schedule | 2019 | 2018 | 2017 1 |
Expense
Cap |
|
| Schwab Target 2010 Index Fund | Net fees paid: | $ 5,419 | $ 2,662 | $ 160 | 0.08% |
| Gross fees reduced by: | $ 9,520 | $ 3,973 | $ 473 | ||
| Schwab Target 2015 Index Fund | Net fees paid: | $ 8,684 | $ 3,728 | $ 262 | 0.08% |
| Gross fees reduced by: | $14,668 | $ 5,104 | $1,137 | ||
| Schwab Target 2020 Index Fund | Net fees paid: | $29,081 | $12,453 | $ 716 | 0.08% |
| Gross fees reduced by: | $48,396 | $16,781 | $1,240 | ||
| Schwab Target 2025 Index Fund | Net fees paid: | $37,259 | $16,826 | $1,390 | 0.08% |
| Gross fees reduced by: | $55,929 | $21,365 | $2,344 | ||
| Schwab Target 2030 Index Fund | Net fees paid: | $48,042 | $18,815 | $ 882 | 0.08% |
| Gross fees reduced by: | $70,628 | $23,603 | $2,108 | ||
| Schwab Target 2035 Index Fund | Net fees paid: | $29,258 | $12,112 | $ 907 | 0.08% |
| Gross fees reduced by: | $42,936 | $15,024 | $1,790 | ||
| Schwab Target 2040 Index Fund | Net fees paid: | $33,077 | $13,490 | $ 811 | 0.08% |
| Gross fees reduced by: | $48,996 | $17,024 | $1,708 | ||
| Schwab Target 2045 Index Fund | Net fees paid: | $19,742 | $ 8,152 | $ 472 | 0.08% |
| Gross fees reduced by: | $29,571 | $10,546 | $1,193 | ||
| Schwab Target 2050 Index Fund | Net fees paid: | $18,889 | $ 5,976 | $ 295 | 0.08% |
| Gross fees reduced by: | $28,877 | $ 7,977 | $ 833 | ||
| Schwab Target 2055 Index Fund | Net fees paid: | $ 9,715 | $ 3,151 | $ 257 | 0.08% |
| Gross fees reduced by: | $14,903 | $ 4,334 | $ 693 | ||
| Schwab Target 2060 Index Fund | Net fees paid: | $11,970 | $ 3,893 | $ 319 | 0.08% |
| Gross fees reduced by: | $18,751 | $ 5,420 | $ 842 |
1
For the period of August 26, 2016 (the fund’s commencement of operations) to the fiscal year ending
March 31, 2017.
The investment adviser and its
affiliates have contractually agreed to limit the “net operating expenses” of each of the funds (including acquired fund fees and expenses, but excluding taxes and certain non-routine expenses) to 0.08% for so long as the investment
adviser serves as adviser
34
to the funds. Acquired fund fees and expenses are indirect expenses incurred
by the fund through its investments in the underlying funds. This net operating expense agreement may only be amended or terminated with the approval of a fund’s Board of Trustees.
Distributor
Pursuant to a Second Amended and Restated Distribution
Agreement between Schwab and the Trust, Schwab, located at 211 Main Street, San Francisco, CA 94105, is the principal underwriter for shares of the funds and is the Trust’s agent for the purpose of the continuous offering of the funds’
shares. The funds pay for prospectuses and shareholder reports to be prepared and delivered to existing shareholders. Schwab pays such costs when the described materials are used in connection with the offering of shares to prospective investors and
for supplemental sales literature and advertising. Schwab receives no fee under the Distribution Agreement; however, as described below in “Payments to Financial Intermediaries,” CSIM compensates Schwab, in its capacity as a financial
intermediary and not in its capacity as distributor and principal underwriter for the funds, for providing certain additional services that may be deemed to be distribution-related.
Payments to Financial Intermediaries
CSIM and its affiliates may make payments to broker-dealers,
banks, trust companies, insurance companies, retirement plan service providers, consultants and other financial intermediaries (Intermediaries) for services and expenses incurred in connection with certain activities or services which may educate
financial advisors or facilitate, directly or indirectly, investment in the funds and other investment companies advised by CSIM, including the Schwab ETFs. These payments are made by CSIM or its affiliates at their own expense, and not from the
assets of the funds. Although a portion of CSIM’s and its affiliates’ revenue comes directly or indirectly in part from fees paid by the funds, these payments do not increase the expenses paid by investors for the purchase of fund
shares, or the cost of owning a fund.
These payments may relate to educational
efforts regarding the funds, or for other activities, such as marketing and/or fund promotion activities and presentations, educational training programs, conferences, data analytics and support, or the development and support of technology
platforms and/or reporting systems. In addition, CSIM may make payments to Intermediaries that make shares of the funds available to their customers or otherwise promote the funds, which may include Intermediaries that allow customers to buy and
sell fund shares without paying a commission or other transaction charge. Payments of this type are sometimes referred to as revenue-sharing or marketing support.
Payments made to Intermediaries may be significant and may
cause an Intermediary to make decisions about which investment options it will recommend or make available to its clients or what services to provide for various products based on payments it receives or is eligible to receive. As a result, these
payments could create conflicts of interest between an Intermediary and its clients and these financial incentives may cause the Intermediary to recommend the funds over other investments.
As of July 29, 2019, CSIM anticipates that
Cambridge Investment Research, Inc., Great-West Life & Annuity Insurance Company, Ladenburg Thalmann Advisor Network LLC, LPL Financial LLC, Morgan Stanley Smith Barney LLC, Northwestern Mutual Investment Services, LLC and Raymond James
Financial Services, Inc. will receive these payments. CSIM may enter into similar agreements with other FINRA member firms (or their affiliates) in the future. In addition to member firms of FINRA, CSIM and its affiliates may also make these
payments to certain other financial intermediaries, such as banks, trust companies, insurance companies, and plan administrators and consultants that sell fund shares or provide services to the funds and their shareholders. These firms may not be
included in this list. You should ask your financial intermediary if it receives such payments.
CSIM also makes payments to Schwab for certain administrative,
professional and support services provided by Schwab, in its capacity as an affiliated financial intermediary and not as distributor and principal underwriter of the funds. These payments reimburse Schwab for its charges, costs and expenses of
providing Schwab personnel to perform marketing and sales activities under the direction of CSIM, such as sales lead generation and sales support, assistance with public relations, marketing and/or advertising activities and presentations,
educational training programs, conferences, and data analytics and support. Payments also are made by CSIM to Schwab for CSIM’s allocated costs of general corporate services provided by Schwab, such as human resources, facilities, project
management support and technology.
Transfer
Agent
DST Asset Manager Solutions, Inc., 2000 Crown
Colony Drive, Quincy, Massachusetts 02169-0953, serves as the funds’ transfer agent. As part of these services, the firm maintains records pertaining to the sale, redemption and transfer of the funds’ shares.
Custodian and Fund Accountant
Brown Brothers Harriman & Co. (BBH), 50 Post Office
Square, Boston, MA, 02110, serves as custodian for the Schwab Target Index Funds.
State Street Bank and Trust Company (State Street), One
Lincoln Street, Boston, MA 02111, also serves as fund accountant for each of the funds.
The custodian is responsible for the daily
safekeeping of securities and cash held by the funds. The fund accountant maintains all books and records related to the funds’ transactions.
35
Independent Registered Public Accounting Firm
The funds’ independent registered public accounting
firm, PricewaterhouseCoopers LLP (PwC), Three Embarcadero Center, San Francisco, California 94111, audits and reports on the annual financial statements of the funds and reviews certain regulatory reports and each fund’s federal income tax
return. PwC also performs other professional, accounting, auditing, tax and advisory services when engaged to do so by the Trust.
Securities Lending Activities
As of the most recent fiscal year-end, the funds had not
entered into a contract with a securities lending agent and were not engaged in securities lending.
PORTFOLIO MANAGERS
Other Accounts.
In addition to the funds, each Portfolio Manager (collectively referred to as the Portfolio Managers) is responsible for the day-to-day management of certain accounts, as listed below. The accounts listed below are not
subject to a performance-based advisory fee. The information below is provided as of March 31, 2019.
|
Registered
Investment Companies
(this amount does not include the funds in this SAI) |
Other Pooled Investment Vehicles | Other Accounts | ||||
| Name | Number of Accounts | Total Assets | Number of Accounts | Total Assets | Number of Accounts | Total Assets |
| Zifan Tang | 22 | $7,321,062,911 | 0 | $0 | 0 | $0 |
| Patrick Kwok | 22 | $7,321,062,911 | 0 | $0 | 0 | $0 |
,
Conflicts of Interest.
The portfolio managers management of other accounts may give rise to potential conflicts of interest in connection with its management of a fund’s investments, on the one hand, and the investments of the other
accounts, on the other. These other accounts include separate accounts and other mutual funds advised by CSIM (collectively, the Other Managed Accounts). The Other Managed Accounts might have similar investment objectives as a fund, track the same
index a fund tracks or otherwise hold, purchase, or sell securities that are eligible to be held, purchased, or sold by a fund. While the portfolio managers management of Other Managed Accounts may give rise to the potential conflicts of interest
listed below, CSIM does not believe that the conflicts, if any, are material or, to the extent any such conflicts are material, CSIM believes it has adopted policies and procedures that are designed to manage those conflicts in an appropriate
way.
Knowledge of the
Timing and Size of Fund Trades
. A potential conflict of interest may arise as a result of the portfolio managers’ day-to-day management of a fund. Because of their position with the funds, the portfolio
managers know the size, timing, and possible market impact of fund trades. It is theoretically possible that the portfolio managers could use this information to the advantage of the Other Managed Accounts they manage and to the possible detriment
of the funds. However, CSIM has adopted policies and procedures reasonably designed to allocate investment opportunities on a fair and equitable basis over time. Moreover, with respect to index funds, which seek to track their respective indexes,
much of this information is publicly available. When it is determined to be in the best interest of both accounts, the portfolio managers may aggregate trade orders for the Other Managed Accounts, excluding separate accounts, with those of the
funds. All aggregated orders are subject to CSIM’s aggregation and allocation policy and procedures, which provide, among other things, that (i) a portfolio manager will not aggregate orders unless he or she believes such aggregation is
consistent with his or her duty to seek best execution; (ii) no account will be favored over any other account; (iii) each account that participates in an aggregated order will participate at the average security price with all transaction costs
shared on a pro-rata basis; and (iv) if the aggregated order cannot be executed in full, the partial execution is allocated pro-rata among the participating accounts in accordance with the size of each account’s order.
Investment
Opportunities
.
A potential conflict of interest may arise as a result of each portfolio manager’s management of a fund and Other Managed Accounts which, in theory, may allow them to allocate investment
opportunities in a way that favors the Other Managed Accounts over a fund, which conflict of interest may be exacerbated to the extent that CSIM or the portfolio managers receives, or expects to receive, greater compensation from their management of
the Other Managed Accounts than the funds. Notwithstanding this theoretical conflict of interest, it is CSIM’s policy to manage each account based on its investment objectives and related restrictions and, as discussed above, CSIM has adopted
policies and procedures reasonably designed to allocate investment opportunities on a fair and equitable basis over time and in a manner consistent with each account’s investment objectives and related restrictions. For example, while the
portfolio managers may buy for an Other Managed Account securities that differ in identity or quantity from securities bought for a fund or refrain from purchasing securities for an Other Managed Account that they are otherwise buying for a fund in
an effort to outperform its specific benchmark, such an approach might not be suitable for a fund given its investment objectives and related restrictions.
Fund of Funds
Information Barrier
. The portfolio manager for any Schwab fund that invests in other Schwab or Laudus Funds (Underlying Affiliated Funds) must make investment decisions without taking into consideration, or
being in possession of, material non-public information about the Underlying Affiliated Funds. Despite the portfolio managers intention to not receive material, non-public information, CSIM has established procedures to prevent portfolio managers
from having access to and trading on material, non-public information regarding Underlying Affiliated Funds. Under these procedures, the adviser monitors Schwab fund of funds’ trading activity in Underlying Affiliated Funds, escalates breaches
of information barriers and develops enhancements to information barriers as necessary. In the event that the portfolio
36
managers come into possession of material,
non-public information about an Underlying Affiliated Fund, the portfolio managers ability to initiate transactions in that Underlying Affiliated Fund could potentially be restricted as a result of the portfolio manager’s possession of such
information. The trading restriction could have an adverse effect on the ability of a fund managed by the portfolio managers to participate in any potential gains or avoid any potential losses in the restricted Underlying Affiliated Fund. In some
instances, these trading restrictions could continue in effect for a substantial period of time.
Compensation.
During the most
recent fiscal year, each portfolio manager’s compensation consisted of a fixed annual (base) salary and a discretionary bonus. The base salary is determined considering compensation payable for a similar position across the investment
management industry and an evaluation of the individual portfolio manager’s overall performance such as the portfolio manager’s contribution to the investment process, good corporate citizenship, risk management and mitigation, and
functioning as an active contributor to the firm’s success. The discretionary bonus is determined in accordance with the CSIM Equity and Fixed Income Portfolio Manager Incentive Plan (the Plan) as follows:
There are two independent funding components for the
Plan:
| • | 75% of the funding is based on equal weighting of Investment Fund Performance and Risk Management and Mitigation |
| • | 25% of the funding is based on Corporate results |
Investment Fund Performance and Risk Management and Mitigation
(75% weight)
Investment Fund
Performance:
At the close of the year, each
fund’s performance will be determined by its 1-year, 1- and 2-year, or 1- and 3-year percentile standing (based on pre-tax return before expenses) within its designated benchmark, peer group, or category, depending on the strategy of the fund
(i.e., whether the fund is passively or actively managed) using standard statistical methods approved by CSIM senior management. Investment Fund Performance measurements may be changed or modified at the discretion of the CSIM President and CSIM
Chief Operating Officer. As each participant may manage and/or support a number of funds, there may be several funds considered in arriving at the incentive compensation funding.
Risk Management and
Mitigation:
Risk Management and Mitigation will
be rated by CSIM’s Chief Investment Officer, CSIM’s Head of Investment Risk, CSIM’s Chief Legal Officer, CSIM’s Chief Compliance Officer and CSIM’s Head of Operations Risk (or individuals with comparable
responsibilities). Factors they will consider will include, but are not limited to:
| • | Balancing safety of fund principal with appropriate limits that provide investment flexibility given existing market conditions |
| • | Making timely sell recommendations to avoid significant deterioration of value resulting from the weakening condition of the issuer |
| • | Escalating operating events and errors for prompt resolution |
| • | Identifying largest risks and actively discussing with management |
| • | Accurately validating fund information disseminated to the public (e.g., Annual and Semiannual reports, fund fact sheets, fund prospectus) |
| • | Executing transactions timely and without material trade errors that result in losses to the funds |
| • | Ensuring ongoing compliance with prospectus and investment policy guidelines |
| • | Minimizing fund compliance exceptions |
| • | Actively following up and resolving compliance exceptions |
Corporate Performance (25% weight)
The Corporate Bonus Plan is an annual bonus plan that provides
discretionary awards based on the financial performance of CSC during the annual performance period. Quarterly advances may be paid for the first three quarters. Allocations are discretionary and aligned with CSC and individual performance. Funding
for the Plan is determined at the conclusion of the calendar year. Funding will be capped at 200% of target.
At year-end, the full-year funding for both components of the
Plan will be pooled together. The total pool is allocated to Plan participants by CSIM senior management based on their assessment of a variety of performance factors.
Factors considered in CSIM senior management’s
allocation process will include objective and subjective factors that will take into consideration total performance and will include, but are not limited to:
| • | Fund performance relative to performance measure |
| • | Risk management and mitigation |
37
| • | Individual performance against key objectives |
| • | Contribution to overall group results |
| • | Functioning as an active contributor to the firm’s success |
| • | Team work |
| • | Collaboration between Analysts and portfolio managers |
| • | Regulatory/Compliance management |
The portfolio managers’ compensation is not based on the
value of the assets held in a fund’s portfolio.
Ownership of Fund Shares.
The
following table shows the dollar amount range of the portfolio managers’ “beneficial ownership” of shares of the funds they managed as of March 31, 2019. Dollar amount ranges disclosed are established by the SEC. “Beneficial
ownership” is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as amended (the 1934 Act).
| Portfolio Manager | Fund | Dollar Range of Fund Shares |
| Zifan Tang | Schwab Target 2010 Index Fund | N/A |
| Schwab Target 2015 Index Fund | N/A | |
| Schwab Target 2020 Index Fund | N/A | |
| Schwab Target 2025 Index Fund | N/A | |
| Schwab Target 2030 Index Fund | N/A | |
| Schwab Target 2035 Index Fund | N/A | |
| Schwab Target 2040 Index Fund | N/A | |
| Schwab Target 2045 Index Fund | N/A | |
| Schwab Target 2050 Index Fund | N/A | |
| Schwab Target 2055 Index Fund | N/A | |
| Schwab Target 2060 Index Fund | N/A | |
| Patrick Kwok | Schwab Target 2010 Index Fund | N/A |
| Schwab Target 2015 Index Fund | N/A | |
| Schwab Target 2020 Index Fund | N/A | |
| Schwab Target 2025 Index Fund | N/A | |
| Schwab Target 2030 Index Fund | N/A | |
| Schwab Target 2035 Index Fund | N/A | |
| Schwab Target 2040 Index Fund | N/A | |
| Schwab Target 2045 Index Fund | N/A | |
| Schwab Target 2050 Index Fund | $10,001-$50,000 | |
| Schwab Target 2055 Index Fund | N/A | |
| Schwab Target 2060 Index Fund | N/A |
Brokerage Allocation
And Other Practices
Portfolio Turnover
For reporting purposes, a fund’s portfolio turnover rate
is calculated by dividing the value of purchases or sales of portfolio securities for the fiscal year, whichever is less, by the monthly average value of portfolio securities the fund owned during the fiscal year. When making the calculation, all
securities whose maturities at the time of acquisition were one year or less (short-term securities) are excluded.
A 100% portfolio turnover rate would occur, for example, if
all portfolio securities (aside from short-term securities) were sold and either repurchased or replaced once during the fiscal year.
Typically, funds with high turnover (such as 100% or more)
tend to generate higher capital gains and transaction costs, such as brokerage commissions.
Variations in turnover rate may be due to a fluctuating volume
of shareholder purchase and redemption orders, market conditions, and/or changes in the investment adviser’s investment outlook.
38
The portfolio turnover rate for each of the
funds for the past two fiscal years, as applicable, is as follows.
| 1 | Less than 0.5% |
Portfolio
Transactions
The investment adviser makes decisions with
respect to the purchase and sale of portfolio securities on behalf of the funds. The investment adviser is responsible for implementing these decisions, including the negotiation of commissions and the allocation of principal business and portfolio
brokerage. A fund generally does not incur any commissions or sales charges when it invests in underlying Schwab Funds or Laudus Funds, but it may incur such costs if it invests directly in other types of securities or in unaffiliated funds.
Purchases and sales of securities on a stock exchange or certain riskless principal transactions placed on NASDAQ are typically effected through brokers who charge a commission for their services. Purchases and sales of fixed-income securities may
be transacted with the issuer, the issuer’s underwriter or a dealer. The funds do not usually pay brokerage commissions on purchases and sales of fixed-income securities, although the price of the securities generally includes compensation, in
the form of a spread or a mark-up or mark-down, which is not disclosed separately. The prices the funds pay to underwriters of newly-issued securities usually include a commission paid by the issuer to the underwriter. Transactions placed through
dealers who are serving as primary market makers reflect the spread between the bid and asked prices. The money market securities in which the funds may invest are traded primarily in the over-the-counter market on a net basis and do not normally
involve either brokerage commissions or transfer taxes. It is expected that the cost of executing portfolio securities transactions of the funds will primarily consist of dealer spreads and brokerage commissions.
The investment adviser seeks to obtain the best execution for
the funds’ portfolio transactions. The investment adviser may take a number of factors into account in selecting brokers or dealers to execute these transactions. Such factors may include, without limitation, the following: execution price;
brokerage commission or dealer spread; size or type of the transaction; nature or character of the markets; clearance or settlement capability; reputation; financial strength and stability of the broker or dealer; efficiency of execution and error
resolution; block trading capabilities; willingness to execute related or unrelated difficult transactions in the future; order of call; ability to facilitate short selling; provision of additional brokerage or research services or products; whether
a broker guarantees that a fund will receive, on aggregate, prices at least as favorable as the closing prices on a given day when adherence to “market-on-close” pricing aligns with fund objectives; or whether a broker guarantees that a
fund will receive the volume-weighted average price (VWAP) for a security for a given trading day (or portion thereof) when the investment adviser or the sub-advisers believe that VWAP execution is in a fund’s best interest. In addition, the
investment adviser may have incentive sharing arrangements with certain unaffiliated brokers who guarantee market-on-close pricing: on a day when such a broker executes transactions at prices better, on aggregate, than market-on-close prices, that
broker may receive, in addition to his or her standard commission, a portion of the net difference between the actual execution prices and corresponding market-on-close prices for that day.
The investment adviser may cause a fund to pay a higher
commission than otherwise obtainable from other brokers or dealers in return for brokerage or research services or products if the investment adviser believes that such commission is reasonable in relation to the services provided. In addition to
agency transactions, the investment adviser may receive brokerage and research services or products in connection with certain riskless principal transactions, in accordance with applicable SEC and other regulatory guidelines. In both instances,
these services or products may include: company financial data and economic data (e.g., unemployment, inflation rates and GDP figures), stock quotes, last sale prices and trading volumes, research reports analyzing the performance of a particular
company or stock, narrowly distributed trade magazines or technical journals covering specific industries, products, or issuers, seminars or conferences registration fees which provide substantive content relating to eligible research, quantitative
analytical software and software that provides analyses of securities portfolios, trading strategies and pre/post trade analytics, discussions with research analysts or meetings with corporate executives which provide a means of obtaining oral
advice on securities, markets or particular issuers, short-term custody related to effecting particular transactions and clearance and settlement of those trades, lines between the broker-dealer and order management systems operated by a third party
vendor, dedicated lines between the broker-dealer and the investment adviser’s order management system, dedicated lines providing direct dial-up service between the investment adviser and the trading desk at the broker-dealer, message services
used to transmit orders to broker-dealers for execution, electronic communication of allocation instructions between institutions and broker-dealers, comparison services required by the
39
SEC or another regulator (e.g., use of electronic confirmation and
affirmation of institutional trades), exchange of messages among broker-dealers, custodians, and institutions related to a trade, post-trade matching of trade information, routing settlement instructions to custodian banks and broker-dealers’
clearing agents, software that provides algorithmic trading strategies, and trading software operated by a broker-dealer to route orders to market centers or direct market access systems. The investment adviser may use research services furnished by
brokers or dealers in servicing all client accounts, and not all services may necessarily be used in connection with the account that paid commissions or spreads to the broker or dealer providing such services.
The investment adviser may receive a service from a broker or
dealer that has both a “research” and a “non-research” use. When this occurs, the investment adviser will make a good faith allocation, under all the circumstances, between the research and non-research uses of the service.
The percentage of the service that is used for research purposes may be paid for with client commissions or spreads, while the investment adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes.
In making this good faith allocation, the investment adviser faces a potential conflict of interest, but the investment adviser and sub-advisers believe that the costs of such services may be appropriately allocated to their anticipated research and
non-research uses.
The investment adviser may purchase
for the funds, new issues of securities in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the investment adviser with research services, in
accordance with applicable rules and regulations permitting these types of arrangements. Generally, the seller will provide research “credits” in these situations at a rate that is higher than that which is available for typical
secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e) of the 1934 Act.
The investment adviser may place orders directly with
electronic communications networks or other alternative trading systems. Placing orders with electronic communications networks or other alternative trading systems may enable funds to trade directly with other institutional holders. At times, this
may allow funds to trade larger blocks than would be possible trading through a single market maker.
The investment adviser and sub-advisers may aggregate
securities sales or purchases among two or more funds. The investment adviser and sub-advisers will not aggregate transactions unless it believes such aggregation is consistent with its duty to seek best execution for each affected fund and is
consistent with the terms of the investment advisory agreement for such fund. In any single transaction in which purchases and/or sales of securities of any issuer for the account of a fund are aggregated with other accounts managed by the
investment adviser, the actual prices applicable to the transaction will be averaged among the accounts for which the transaction is effected, including the account of the fund.
In determining when and to what extent to use Schwab or any
other affiliated broker-dealer as its broker for executing orders for the funds on securities exchanges, the investment adviser follows procedures, adopted by the funds’ Board, that are designed to ensure that affiliated brokerage commissions
(if relevant) are reasonable and fair in comparison to unaffiliated brokerage commissions for comparable transactions. The Board reviews the procedures annually and approves and reviews transactions involving affiliated brokers quarterly.
Brokerage Commissions
During the last three fiscal years, the
funds paid no brokerage commissions.
Regular
Broker-Dealers
During the fiscal year, the funds held
securities issued by their respective “regular broker-dealers” (as defined in Rule 10b-1 under the 1940 Act), indicated below as of March 31, 2019.
| Fund | Regular Broker-Dealer | Value of Holdings |
| Schwab Target 2010 Index Fund | None | N/A |
| Schwab Target 2015 Index Fund | None | N/A |
| Schwab Target 2020 Index Fund | None | N/A |
| Schwab Target 2025 Index Fund | None | N/A |
| Schwab Target 2030 Index Fund | None | N/A |
| Schwab Target 2035 Index Fund | None | N/A |
| Schwab Target 2040 Index Fund | None | N/A |
| Schwab Target 2045 Index Fund | None | N/A |
| Schwab Target 2050 Index Fund | None | N/A |
| Schwab Target 2055 Index Fund | None | N/A |
| Schwab Target 2060 Index Fund | None | N/A |
40
Proxy Voting
The Board has delegated the
responsibility for voting proxies to CSIM. The trustees have adopted CSIM’s Proxy Voting Policy and Procedures with respect to proxies voted on behalf of the various Schwab Funds portfolios. A description of CSIM’s Proxy Voting Policy
and Procedures is included in Appendix — Proxy Voting Policy and Procedures.
The Trust is required to disclose annually a fund’s
complete proxy voting record on Form N-PX. A fund’s proxy voting record for the most recent 12-month period ended June 30th is available by visiting the Schwab Funds’ website at
www.schwabfunds.com/schwabfunds_prospectus
. A fund’s Form N-PX will also be available on the SEC’s website at
www.sec.gov
.
Portfolio Holdings Disclosure
For this section only, the following disclosure relates to The
Charles Schwab Family of Funds, Schwab Investments, Schwab Annuity Portfolios, Schwab Capital Trust, Schwab Strategic Trust and Laudus Trust (collectively, the Trusts) and each series thereunder (each a fund and collectively, the funds).
The Trusts’ Board has approved policies and procedures
that govern the timing and circumstances regarding the disclosure of fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the
funds’ portfolio securities is in the best interests of fund shareholders, and include procedures to address conflicts between the interests of the funds’ shareholders, on the one hand, and those of the funds’ investment adviser,
subadviser (if applicable), principal underwriter or any affiliated person of a fund, its investment adviser, subadviser or principal underwriter, on the other. Pursuant to such procedures, the Board has authorized one of the President, Chief
Operating Officer or Chief Financial Officer of the Trusts (in consultation with a fund’s subadviser, if applicable) to authorize the release of the funds’ portfolio holdings prior to regular public disclosure (as outlined in the
prospectus and below) or regular public filings, as necessary, in conformity with the foregoing principles.
The Board exercises on-going oversight of the disclosure of
fund portfolio holdings by overseeing the implementation and enforcement of the funds’ policies and procedures by the Chief Compliance Officer and by considering reports and recommendations by the Chief Compliance Officer concerning any
material compliance matters. The Board will receive periodic updates, at least annually, regarding entities which were authorized to be provided “early disclosure” of the funds’ portfolio holdings information and will periodically
review any agreements that the Trusts have entered into to selectively disclose portfolio holdings.
Portfolio holdings may be made available on a selective basis
to ratings agencies, certain industry organizations, consultants and other qualified financial professionals when the appropriate officer of the Trusts determines such disclosure meets the requirements noted above and serves a legitimate business
purpose. Agreements entered into with such entities will describe the permitted use of portfolio holdings and provide that, among other customary confidentiality provisions: (i) the portfolio holdings will be kept confidential; (ii) the person will
not trade on the basis of any material non-public information; and (iii) the information will be used only for the purpose described in the agreement.
The funds’ service providers
including, without limitation, the investment adviser, subadvisers (if applicable), the distributor, the custodian, fund accountant, transfer agent, counsel, auditor, proxy voting service provider, pricing information vendors, trade execution
measurement vendors, portfolio management system providers, cloud database providers, securities lending agents, publisher, printer and mailing agent may receive disclosure of portfolio holdings information as frequently as daily in connection with
the services they perform for the funds. CSIM, any subadviser to a fund as disclosed in the most current prospectus, Glass, Lewis & Co., LLC, State Street and/or Brown Brothers Harriman & Co., as service providers to the funds, are currently
receiving this information on a daily basis. Donnelley Financial Solutions, as a service provider to the funds, is currently receiving this information on a quarterly basis. PwC, the Transfer Agent, and the Distributor, as service providers to the
funds, receive this information on an as-needed basis. Service providers are subject to a duty of confidentiality with respect to any portfolio holdings information they receive whether imposed by the confidentiality provisions of the service
providers’ agreements with the Trusts or by the nature of its relationship with the Trusts. Although certain of the service providers are not under formal confidentiality obligations in connection with disclosure of portfolio holdings, a fund
will not continue to conduct business with a service provider who the fund believes is misusing the disclosed information.
To the extent that a fund invests in an ETF, the Trusts will,
when required by the exemptive orders issued by the SEC to ETF sponsors and the procedures adopted by the Board, promptly notify the ETF in writing of any purchase or acquisition of shares of the ETF that causes the fund to hold (i) 5% or more of
such ETF’s total outstanding voting securities, and (ii) 10% or more of such ETF’s total outstanding voting securities. In addition, CSIM will, upon causing a fund to acquire more than 3% of an ETF’s outstanding shares, notify the
ETF of the investment.
The funds’ policies and
procedures prohibit the funds, the funds’ investment adviser or any related party from receiving any compensation or other consideration in connection with the disclosure of portfolio holdings information.
Generally, a complete list of a fund’s
portfolio holdings is published on the fund’s website www.schwabfunds.com on the “Prospectus & Reports” tab under “Portfolio Holdings” generally 60-80 days after a fund’s fiscal quarter-end in-line with
regulatory filings unless a different timing is outlined in the fund’s prospectus.
Specifically for the Schwab ETFs, each Schwab ETF discloses
its portfolio holdings and the percentages the holdings represent of the fund’s net assets at least monthly on the website and as often as each day the fund is open for business. Portfolio holdings information made available in
41
connection with the process of purchasing or redeeming Creation Units for the
Schwab ETFs may be provided to other entities that provided services to the funds in the ordinary course of business after it has been disseminated to the NSCC.
The Schwab Money Funds have an ongoing arrangement to make
available information about the funds’ portfolio holdings and information derived from the funds’ portfolio holdings to iMoneyNet, a rating and ranking organization, which is subject to a confidentiality agreement. Under its arrangement
with the funds, iMoneyNet, among other things, receives information concerning the funds’ net assets, yields, maturities and portfolio compositions on a weekly basis, subject to a one business day lag.
On the website, the funds also may provide, on a monthly or
quarterly basis, information regarding certain attributes of a fund’s portfolio, such as a fund’s top ten holdings, sector weightings, composition, credit quality and duration and maturity, as applicable. This information is generally
updated within 5-25 days after the end of the period. This information on the website is publicly available to all categories of persons.
The funds may disclose non-material information including
commentary and aggregate information about the characteristics of a fund in connection with or relating to a fund or its portfolio securities to any person if such disclosure is for a legitimate business purpose, such disclosure does not effectively
result in the disclosure of the complete portfolio securities of any fund (which can only be disclosed in accordance with the above requirements), and such information does not constitute material non-public information. Such disclosure does not
fall within the portfolio securities disclosure requirements outlined above.
Whether the information constitutes material
non-public information will be made on a good faith determination, which involves an assessment of the particular facts and circumstances. In most cases, commentary or analysis would be immaterial and would not convey any advantage to a recipient in
making a decision concerning a fund. Commentary and analysis include, but are not limited to, the allocation of a fund’s portfolio securities and other investments among various asset classes, sectors, industries, countries or other relevant
category, the characteristics of the stock components and other investments of a fund, the attribution of fund returns by asset class, sector, industry, country or other relevant category, and the volatility characteristics of a fund.
Description Of The TRUST
Each fund is a series of Schwab Capital Trust, an open-end
investment management company organized as a Massachusetts business trust on May 7, 1993. The funds may hold special shareholder meetings, which may cause the funds to incur non-routine expenses. These meetings may be called for purposes such as
electing trustees, changing fundamental policies and amending management contracts. Shareholders are entitled to one vote for each share owned and may vote by proxy or in person. Proxy materials will be mailed to shareholders prior to any meetings,
and will include a voting card and information explaining the matters to be voted upon.
The bylaws of the Trust provide that a majority of shares
entitled to vote shall be a quorum for the transaction of business at a shareholders’ meeting, except that where any provision of law, or of the Declaration of Trust or of the bylaws permits or requires that (1) holders of any series shall
vote as a series, then a majority of the aggregate number of shares of that series entitled to vote shall be necessary to constitute a quorum for the transaction of business by that series, or (2) holders of any class shall vote as a class, then a
majority of the aggregate number of shares of that class entitled to vote shall be necessary to constitute a quorum for the transaction of business by that class. Any lesser number shall be sufficient for adjournments. Any adjourned session or
sessions may be held, within a reasonable time after the date set for the original meeting, without the necessity of further notice. The Declaration of Trust specifically authorizes the Board to terminate the Trust (or any of its funds) by notice to
the shareholders without shareholder approval.
Under
Massachusetts law, shareholders of a Massachusetts business trust could, under certain circumstances, be held personally liable for the Trust’s obligations. The Declaration of Trust, however, disclaims shareholder liability for the
Trust’s acts or obligations and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the Trust or the trustees. In addition, the Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a shareholder owns or owned shares for all losses and expenses of such shareholder or former shareholder if he or she is held personally liable for the obligations of the Trust
solely by reason of being or having been a shareholder. Moreover, the Trust will be covered by insurance, which the trustees consider adequate to cover foreseeable tort claims. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote, because it is limited to circumstances in which a disclaimer is inoperative and the Trust itself is unable to meet its obligations. There is a remote possibility that a fund could become liable for a
misstatement in the prospectus or SAI about another fund.
As more fully described in the Declaration of Trust, the
trustees may each year, or more frequently, distribute to the shareholders of each series accrued income less accrued expenses and any net realized capital gains less accrued expenses. Distributions of each year’s income of each series shall
be distributed pro rata to shareholders in proportion to the number of shares of each series held by each of them. Distributions will be paid in cash or shares or a combination thereof as determined by the trustees. Distributions paid in shares will
be paid at the net asset value as determined in accordance with the bylaws.
Any series of the Trust may reorganize or merge with one or
more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered
into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust,
without the approval of shareholders of any series.
42
Purchase, Redemption, delivery of shareholder documents
and pricing of shares
Purchasing and Redeeming Shares of
the Funds
The funds are open each day that the New York
Stock Exchange (NYSE) is open. The NYSE’s trading session is normally conducted from 9:30 a.m. until 4:00 p.m. Eastern time, Monday through Friday, although some days, such as in advance of and following holidays, the NYSE’s trading
session closes early. The NYSE typically observes the following holidays: New Year’s Day, Martin Luther King Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Although
it is expected that the same holidays will be observed in the future, the NYSE may modify its holiday schedule or hours of operation at any time. Only orders that are received in good order by a fund’s transfer agent no later than the time
specified by the Trust will be executed that day at the fund’s share price calculated that day. On any day that the NYSE closes early, the funds reserve the right to advance the time by which purchase, redemption and exchange orders must be
received by the funds’ transfer agent that day in order to be executed that day at that day’s share price. If the NYSE is closed due to weather or other extenuating circumstances on a day it would typically be open for business, or the
NYSE has an unscheduled early closing on a day it has opened for business, the funds reserve the right to treat such day as a business day and accept purchase, exchange and redemption orders and calculate their share prices as of the normally
scheduled close of regular trading on the NYSE for that day.
The funds have authorized one or more financial
intermediaries, including Schwab, to accept on their behalf purchase, exchange and redemption orders. Such financial intermediaries have also been authorized to designate other intermediaries to accept purchase, exchange and redemption orders on the
funds’ behalf. The funds will be deemed to have received a purchase, exchange or redemption order when an authorized intermediary or, if applicable, an intermediary’s authorized designee, receives such order. Such orders will be priced
at the respective fund’s net asset value per share next determined after such orders are received by an authorized intermediary or the intermediary’s authorized designee.
As long as the funds or Schwab follow reasonable procedures to
confirm that an investor’s telephone or internet order is genuine, they will not be liable for any losses the investor may experience due to unauthorized or fraudulent instructions. These procedures may include requiring a form of personal
identification or other confirmation before acting upon any telephone or internet order, providing written confirmation of telephone or internet orders and tape recording all telephone orders.
Share certificates will not be issued in order to avoid
additional administrative costs, however, share ownership records are maintained by Schwab, other authorized financial intermediaries or, for direct shareholders, by the funds’ transfer agent.
The Trust’s Declaration of Trust provides that shares
may be automatically redeemed if held by a shareholder in an amount less than the minimum required by each fund. Each fund’s minimum initial investments and minimum balance requirements, if any, are set forth in the prospectus. The minimums
may be changed without prior notice.
Each of the funds
has made an election with the SEC to pay in cash all redemptions requested by any shareholder of record limited in amount during any 90-day period to the lesser of $250,000 or 1% of its net assets at the beginning of such period. This election is
irrevocable without the SEC’s prior approval. Redemption requests in excess of these limits may be paid, in whole or in part, in investment securities or in cash, as the Board may deem advisable. Payment will be made wholly in cash unless the
Board believes that economic or market conditions exist that would make such payment a detriment to the best interests of a fund. If redemption proceeds are paid in investment securities, such securities will be valued as set forth in “Pricing
of Shares.” A redeeming shareholder would normally incur transaction costs if he or she were to convert the securities to cash.
Each fund is designed for long-term
investing. Because short-term trading activities can disrupt the smooth management of a fund and increase its expenses, each fund reserves the right, in its sole discretion, to refuse any purchase or exchange order, including any purchase or
exchange order which appears to be associated with short-term trading activities or “market timing.” Because market timing decisions to buy and sell securities typically are based on an individual investor’s market outlook,
including such factors as the perceived strength of the economy or the anticipated direction of interest rates, it is difficult for a fund to determine in advance what purchase or exchange orders may be deemed to be associated with market timing or
short-term trading activities. More information regarding the funds’ policies regarding “market timing” is included in the funds’ prospectus.
In certain circumstances, shares of a fund may be purchased
“in kind” (i.e., in exchange for securities, rather than for cash). The securities tendered as part of an in-kind purchase must be liquid securities that are not restricted as to transfer and have a value that is readily ascertainable as
evidenced by a listing on the American Stock Exchange, the NYSE, or NASDAQ. Securities accepted by a fund will be valued, as set forth in the fund’s prospectus, as of the time of the next determination of net asset value after such acceptance.
The shares of a fund that are issued to the shareholder in exchange for the securities will be determined as of the same time. All dividend, subscription, or other rights that are reflected in the market price of accepted securities at the time of
valuation become the property of a fund and must be delivered to the fund by the investor upon receipt from the issuer. A fund will not accept securities in exchange for its shares unless such securities are, at the time of the exchange, eligible to
be held by the fund and satisfy such other conditions as may be imposed by the fund’s investment adviser.
Exchanging Shares of the Funds
Methods to purchase and redeem shares of a
fund are set forth in the funds’ prospectuses. An exchange order involves the redemption of all or a portion of the shares of one Schwab Fund or the Laudus International MarketMasters Fund, and the simultaneous purchase of shares of
43
another Schwab Fund or the Laudus
International MarketMasters Fund. Exchange orders must meet the minimum investment and any other requirements of the fund or class purchased. Exchange orders may not be executed between shares of Sweep Investments
®
and shares of non-Sweep Investments. Shares of Sweep Investments may be bought and sold automatically pursuant to the terms and conditions of your
Schwab account agreement. In addition, different exchange policies may apply to Schwab Funds or the Laudus International MarketMasters Fund that are bought and sold through third-party intermediaries and the exchange privilege between Schwab Funds
and the Laudus International MarketMasters Fund may not be available through third-party intermediaries.
The funds and Schwab reserve certain rights with regard to
exchanging shares of the funds. These rights include the right to: (i) refuse any purchase or exchange order that may negatively impact a fund’s operations; (ii) refuse orders that appear to be associated with short-term trading activities;
and (iii) materially modify or terminate the exchange privilege upon 60 days’ written notice to shareholders.
Delivery of Shareholder Documents
Typically once a year, an updated prospectus
will be mailed to shareholders describing each fund’s investment strategies, risks and shareholder policies. Twice a year, financial reports will be mailed (or, effective January 1, 2021, a notice will be mailed and financial reports will be
electronically transmitted) to shareholders describing each fund’s performance and investment holdings. To eliminate duplicate mailings of shareholder documents, each household may receive one copy of these documents, under certain conditions.
This practice is commonly called “householding.” If you want to receive multiple copies, you may write or call your fund at the address or telephone number on the front of this SAI. Your instructions will be effective within 30 days of
receipt by a fund or other date as communicated by the financial intermediary.
Pricing of Shares
Each business day, each fund
calculates its share price, net asset value per share or NAV, as of the close of the NYSE (generally 4 p.m. Eastern time). This means that NAVs are calculated using the values of a fund’s portfolio securities as of the close of the NYSE. Such
values are required to be determined in one of two ways: securities for which market quotations are readily available are required to be valued at current market value; and securities for which market quotations are not readily available or that the
investment adviser deems to be unreliable are required to be valued at fair value using procedures approved by the Board. If the NYSE is closed due to weather or other extenuating circumstances on a day it would typically be open for business, or
the NYSE has an unscheduled early closing on a day it has opened for business, the funds reserve the right to treat such day as a business day and accept purchase and redemption orders and calculate their share prices as of the normally scheduled
close of regular trading on the NYSE for that day.
To
the extent the funds invest in foreign securities, shareholders should be aware that because foreign markets are often open on weekends and other days when the funds are closed, the value of some of a fund’s securities may change on days when
it is not possible to buy or sell shares of the fund. The funds use approved pricing sources to provide values for their portfolio securities. Current market values are generally determined by the approved pricing sources as follows: generally
securities traded on stock exchanges, excluding the NASDAQ National Market System, are valued at the last-quoted sales price on the exchange on which such securities are primarily traded (closing values), or, lacking any sales, at the mean between
the bid and ask prices; securities traded in the over-the-counter market are generally valued at an evaluated price using a mid-price as supplied by an approved, independent pricing service. The mid-price is the mean of the bid and ask prices as
calculated by the pricing service. Generally securities listed on the NASDAQ National Market System are valued in accordance with the NASDAQ Official Closing Price. In addition, securities that are primarily traded on foreign exchanges are generally
valued at the official closing price or last sales price on the exchange where the securities are principally traded with these values then translated into U.S. dollars at the current exchange rate. Fixed income securities normally are valued based
on valuations provided by approved pricing sources. Securities may be fair valued pursuant to procedures approved by the funds’ Board of Trustees when a security is de-listed or its trading is halted or suspended; when a security’s
primary pricing source is unable or unwilling to provide a price; when a security’s primary trading marked is closed during regular market hours; when a security’s value is materially affected by events occurring after the close of the
security’s primary trading market. The Board of Trustees regularly reviews fair value determinations made by the funds pursuant to the procedures.
In accordance with the 1940 Act, the underlying funds in which
the Schwab Target Index Funds invest are valued at their respective net asset values as determined by those funds. The underlying funds that are money market funds may value their portfolio securities based on the value or amortized cost method. The
other underlying funds value their portfolio securities based on market quotes if they are readily available.
Taxation
This discussion of federal income tax consequences is based on
the Internal Revenue Code and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a
retroactive effect with respect to the transactions contemplated herein.
Federal Tax Information for the Funds
It is each fund’s policy to qualify for taxation as a
“regulated investment company” (RIC) by meeting the requirements of Subchapter M of the Code. By qualifying as a RIC, each fund expects to eliminate or reduce to a nominal amount the federal income tax to which it is subject. If a fund
does not qualify as a RIC under the Code, it will be subject to federal income tax on its net investment income and any net realized capital
44
gains. In addition, each fund could be required to recognize unrealized
gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a RIC.
Each fund is treated as a separate entity for federal income
tax purposes and is not combined with the Trust’s other funds. Each fund intends to qualify as a RIC so that it will be relieved of federal income tax on that part of its income that is distributed to shareholders. In order to qualify for
treatment as a RIC, a fund must, among other requirements, distribute annually to its shareholders an amount at least equal to the sum of 90% of its investment company taxable income (generally, net investment income plus the excess, if any, of net
short-term capital gain over net long-term capital losses) and 90% of its net tax-exempt income. Among these requirements are the following: (i) at least 90% of a fund’s gross income each taxable year must be derived from dividends, interest,
payments with respect to securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income derived with respect to its business of investing in such stock or securities or currencies and net
income derived from an interest in a qualified publicly traded partnership; (ii) at the close of each quarter of a fund’s taxable year, at least 50% of the value of its total assets must be represented by cash and cash items, U.S. government
securities, securities of other RICs and other securities, with such other securities limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of a fund’s assets and that does not represent more than 10% of the
outstanding voting securities of such issuer; and (iii) at the close of each quarter of a fund’s taxable year, not more than 25% of the value of its assets may be invested in securities (other than U.S. government securities or the securities
of other RICs) of any one issuer or of two or more issuers and which are engaged in the same, similar, or related trades or businesses if the fund owns at least 20% of the voting power of such issuers, or the securities of one or more qualified
publicly traded partnerships.
Certain master limited partnerships may
qualify as “qualified publicly traded partnerships” for purposes of the Subchapter M diversification rules described above. To do so, the master limited partnership must satisfy two requirements during the taxable year. First, the
interests of such partnership either must be traded on an established securities market or must be readily tradable on a secondary market (or the substantial equivalent thereof). Second, the partnership must meet the 90% gross income requirements
for the exception from treatment as a corporation with gross income other than income consisting of dividends, interest, payments with respect to securities loans, or gains from the sale or other disposition of stock or securities or foreign
currencies, or other income derived with respect to its business of investing in such stock securities or currencies.
The Internal Revenue Code imposes a non-deductible excise tax
on RICs that do not distribute in a calendar year (regardless of whether they otherwise have a non-calendar taxable year) an amount equal to 98% of their “ordinary income” (as defined in the Internal Revenue Code) for the calendar year
plus 98.2% of their net capital gain for the one-year period ending on October 31 of such calendar year, plus any undistributed amounts from prior years. The non-deductible excise tax is equal to 4% of the deficiency. For the foregoing purposes, a
fund is treated as having distributed any amount on which it is subject to income tax for any taxable year ending in such calendar year. A fund may in certain circumstances be required to liquidate fund investments to make sufficient distributions
to avoid federal excise tax liability at a time when the investment adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of a fund to satisfy the requirements for qualification
as a RIC.
If a fund fails to qualify as a RIC for any
taxable year, it will be taxable at regular corporate rates. In such an event, all distributions (including capital gains distributions) will be taxable as ordinary dividends to the extent of the fund’s current and accumulated earnings and
profits, subject to the dividends-received deduction for corporate shareholders and the lower tax rates applicable to qualified dividend income distributed to individuals. The Board reserves the right not to maintain the qualification of a fund as a
regulated investment company if it determines such course of action to be beneficial to shareholders.
Although each fund intends to distribute substantially all of
its net investment income and its capital gains for each taxable year, each fund will be subject to federal income tax to the extent any such income or gains are not distributed. If a fund’s distributions exceed its taxable income and capital
gains realized during a taxable year, all or a portion of the distributions made in the taxable year may be recharacterized as a return of capital to shareholders. A return of capital distribution generally will not be taxable but will reduce the
shareholder’s cost basis and result in a higher capital gain or lower capital loss when those shares on which the distribution was received are sold. To the extent that a return of capital distribution exceeds a shareholder’s adjusted
basis, the distribution will be treated as gain from the sale of shares.
A fund’s transactions in futures contracts, forward
contracts, foreign currency exchange transactions, options and certain other investment and hedging activities may be restricted by the Code and are subject to special tax rules. In a given case, these rules may accelerate income to a fund, defer
its losses, cause adjustments in the holding periods of a fund’s assets, convert short-term capital losses into long-term capital losses or otherwise affect the character of a fund’s income. These rules could therefore affect the amount,
timing and character of distributions to shareholders. Each fund will endeavor to make any available elections pertaining to these transactions in a manner believed to be in the best interest of a fund and its shareholders.
Each fund is required for federal income tax purposes to
mark-to-market and recognize as income for each taxable year its net unrealized gains and losses on certain futures contracts as of the end of the year as well as those actually realized during the year. Gain or loss from futures and options
contracts on broad-based indexes required to be marked to market will be 60% long-term and 40% short-term capital gain or loss. Application of this rule may alter the timing and character of distributions to shareholders. Each fund may be required
to defer the recognition of losses on futures contracts, options contracts and swaps to the extent of any unrecognized gains on offsetting positions held by the fund. It is anticipated that any net gain realized from the closing out of futures or
options contracts will be considered gain from the sale of securities and
45
therefore will be qualifying income for purposes of the 90% requirement
described above. Each fund distributes to shareholders at least annually any net capital gains which have been recognized for federal income tax purposes, including unrealized gains at the end of the fund’s fiscal year on futures or options
transactions. Such distributions are combined with distributions of capital gains realized on the fund’s other investments and shareholders are advised on the nature of the distributions.
With respect to investments in zero coupon or other securities
which are sold at original issue discount and thus do not make periodic cash interest payments, a fund will be required to include as part of its current income the imputed interest on such obligations even though the fund has not received any
corresponding interest payments on such obligations during that period. Because each fund distributes all of its net investment income to its shareholders, a fund may have to sell fund securities to distribute such imputed income which may occur at
a time when the adviser would not have chosen to sell such securities and which may result in taxable gain or loss.
Federal Income Tax Information for Shareholders
The discussion of federal income taxation presented below
supplements the discussion in each fund’s prospectus and only summarizes some of the important federal tax considerations generally affecting shareholders of the funds. Accordingly, prospective investors (particularly those not residing or
domiciled in the United States) should consult their own tax advisors regarding the consequences of investing in the funds. Any dividends declared by a fund in October, November or December and paid the following January are treated, for tax
purposes, as if they were received by shareholders on December 31 of the year in which they were declared. In general, distributions by a fund of investment company taxable income (including net short-term capital gains), if any, whether received in
cash or additional shares, will be taxable to you as ordinary income. A portion of these distributions may be treated as qualified dividend income (eligible for the reduced rates to individuals as described below) to the extent that a fund receives
qualified dividend income. Qualified dividend income is, in general, dividend income from taxable domestic corporations and certain foreign corporations (e.g., foreign corporations incorporated in a possession of the United States or in certain
countries with a comprehensive tax treaty with the United States, or the stock of which is readily tradable on an established securities market in the United States). A dividend will not be treated as qualified dividend income to the extent that (i)
the shareholder has not held the shares of the fund on which the dividend was paid for more than 60 days during the 121-day period that begins on the date that is 60 days before the date on which the shares of the fund become ex-dividend with
respect to such dividend (and the fund must also satisfy those holding period requirements with respect to the securities it holds that paid the dividends distributed to the shareholder), (ii) the shareholder is under an obligation (whether pursuant
to a short sale or otherwise) to make related payments with respect to substantially similar or related property, or (iii) the shareholder elects to treat such dividend as investment income under section 163(d)(4)(B) of the Internal Revenue Code.
Dividends received by each fund from a REIT or another RIC may be treated as qualified dividend income only to the extent the dividend distributions are attributable to qualified dividend income received by such REIT or RIC. It is expected that
dividends received by a fund from a REIT and distributed to a shareholder generally will be taxable to the shareholder as ordinary income.
Distributions from net capital gains (if any) that are
reported as capital gain dividends are taxable as long-term capital gains without regard to the length of time the shareholder has held shares of a fund. However, if you receive a capital gain dividend with respect to fund shares held for six months
or less, any loss on the sale or exchange of those shares shall, to the extent of the capital gain dividend, be treated as a long-term capital loss.
The maximum individual rate applicable to “qualified
dividend income” and long-term capital gains is generally either 15% or 20%, depending on whether the taxpayer’s income exceeds certain threshold amounts.
Under the Regulated Investment Company Modernization Act of
2010, net capital losses incurred by a fund in the taxable years after the effective enactment date, December 22, 2010, will not expire. However, such losses must be utilized prior to the losses incurred in the year preceding enactment. As a result
of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Post-enactment capital losses arise in fiscal years beginning after the enactment date exclude any elective post-October capital losses deferred
during the period from November 1 to the end of a fund’s fiscal year. In addition, post-enactment capital losses that are carried forward will retain their character as either short-term or long-term losses rather than short-term as under
previous law.
An additional 3.8% Medicare tax is imposed
on certain net investment income (including ordinary dividends and capital gains distributions received from a fund and net gains from redemptions or other taxable dispositions of fund shares) of U.S. individuals, estates and trusts to the extent
that such person’s “modified adjusted gross income” (in the case of an individual) or “adjusted gross income” (in the case of an estate or trust) exceeds a threshold amount.
A fund will inform you of the amount of your ordinary income
dividends and capital gains distributions, if any, at the time they are paid and will advise you of their tax status for federal income tax purposes, including what portion of the distributions will be qualified dividend income, shortly after the
close of each calendar year. For corporate investors in a fund, dividend distributions the fund reports to be from dividends received from qualifying domestic corporations will be eligible for the 50% corporate dividends-received deduction to the
extent they would qualify if the fund were a regular corporation. Distributions by a fund also may be subject to state, local and foreign taxes, and their treatment under applicable tax laws may differ from the federal income tax treatment.
In general, a sale of shares results in capital gain or loss,
and for individual shareholders, is taxable at a federal rate dependent upon the length of time the shares were held. A redemption of a shareholder’s fund shares is normally treated as a sale for tax purposes. Fund shares held for a
46
period of one year or less at the time of such sale or redemption will, for
tax purposes, generally result in short-term capital gains or losses, and those held for more than one year will generally result in long-term capital gains or losses.
The maximum individual rate applicable to long-term capital
gains is generally either 15% or 20%, depending on whether the individual’s income exceeds certain threshold amounts.
Gain or loss on the sale or redemption of shares in a fund is
measured by the difference between the amount received and the adjusted tax basis of the shares. Shareholders should keep records of investments made (including shares acquired through reinvestment of dividends and distribution) so they can compute
the tax basis of their shares.
A loss realized on a sale
or exchange of shares of a fund may be disallowed if other substantially identical shares are acquired (whether through the automatic reinvestment of dividends or otherwise) within a sixty-one (61) day period beginning thirty (30) days before and
ending thirty (30) days after the date that the shares are disposed of. In such a case, the basis of the shares acquired must be adjusted to reflect the disallowed loss. Any loss upon the sale or exchange of shares held for six (6) months or less is
treated as long-term capital loss to the extent of any capital gain dividends received by the shareholders.
At the beginning of every year, each fund will provide
shareholders with a tax reporting statement containing information detailing the estimated tax status of any distributions that the fund paid during the previous calendar year.
Each fund will be required in certain cases to withhold at the
applicable withholding rate and remit to the U.S. Treasury the withheld amount of taxable dividends and redemption proceeds paid to any shareholder who (1) fails to provide a correct taxpayer identification number certified under penalty of perjury;
(2) is subject to withholding by the Internal Revenue Service for failure to properly report all payments of interest or dividends; (3) fails to provide a certified statement that he or she is not subject to “backup withholding;” or (4)
fails to provide a certified statement that he or she is a U.S. person (including a U.S. resident alien). Backup withholding is not an additional tax and any amounts withheld may be credited against the shareholder’s ultimate U.S. tax
liability.
Foreign shareholders (i.e., nonresident
alien individuals and foreign corporations, partnerships, trusts and estates) are generally subject to U.S. withholding tax at the rate of 30% (or a lower tax treaty rate) on distributions derived from net investment income and short-term capital
gains; provided, however, that U.S. source interest related dividends and short-term capital gain dividends generally are not subject to U.S. withholding taxes if a fund elects to make reports with respect to such dividends. Distributions to foreign
shareholders of such short-term capital gains and long-term capital gains, and any gains from the sale or other disposition of shares of a fund, generally are not subject to U.S. taxation, unless the recipient is an individual who either (1) meets
the Code’s definition of “resident alien” or (2) is physically present in the U.S. for 183 days or more per year. Foreign shareholders may also be subject to U.S. estate taxes with respect to shares in a fund. Different tax
consequences may result if the foreign shareholder is engaged in a trade or business within the United States. In addition, the tax consequences to a foreign shareholder entitled to claim the benefits of a tax treaty may be different than those
described above. Notwithstanding the foregoing, a portion of the income, if any, derived by a fund from investments in REITs that hold residual interests in real estate mortgage investment conduits (REMICs) may be classified as “excess
inclusion income.” With respect of foreign shareholders, no exemption or reduction in withholding tax will apply to such excess inclusion income.
The funds are required to withhold U.S. tax (at a 30% rate) on
payments of dividends made to certain non-U.S. entities that fail to comply with extensive reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Shareholders may be
requested to provide additional information to the funds to enable the funds to determine whether withholding is required.
Certain tax-exempt shareholders, including qualified pension
plans, individual retirement accounts, salary deferral arrangements, 401(k)s, and other tax-exempt entities, generally are exempt from federal income taxation except with respect to their unrelated business taxable income (UBTI). Under current law,
each fund generally serves to block UBTI from being realized by their tax-exempt shareholders. However, notwithstanding the foregoing, a tax-exempt shareholder could realize UBTI by virtue of its investment in the fund where, for example, (i) a fund
invests in REITs that hold residual interests in REMICs, thereby causing the fund to derive “excess inclusion income,” or (ii) shares in a fund constitute debt-financed property in the hands of the tax-exempt shareholder within the
meaning of section 514(b) of the Code. Charitable remainder trusts are subject to special rules and should consult their tax advisors. In addition, tax may be imposed on a fund on the portion of any excess inclusion income allocable to any
shareholders that are classified as “disqualified organizations.” There are no restrictions preventing a fund from holding investments in REITs that hold residual interests in REMICs, and a fund may do so. The Internal Revenue Service
has issued recent guidance with respect to these issues and prospective shareholders, especially charitable remainder trusts, are strongly encouraged to consult with their tax advisors regarding these issues.
For taxable years beginning after 2017 and
before 2026, non-corporate taxpayers generally may deduct 20% of “qualified business income” derived either directly or through partnerships or S corporations. For this purpose, “qualified business income” generally includes
ordinary REIT dividends and income derived from MLP investments. Proposed regulations which may be relied upon pending the issuance of final regulations permit the funds and the underlying funds to pass through to shareholders the character of
ordinary REIT dividends so as to allow non-corporate shareholders to claim this deduction. There currently is no mechanism for a fund or an underlying fund to pass through to non-corporate shareholders (whether investing directly or indirectly
through a fund) the character of income derived from MLP investments. It is
47
uncertain whether future legislation or
other guidance will enable the funds and any underlying funds to pass through to non-corporate shareholders the ability to claim this deduction with respect to income derived from MLP investments.
The funds can have income, gains or losses from any
distributions or redemptions in the underlying funds. The funds cannot use gains distributed by one underlying fund to offset losses in another underlying fund. Redemptions of shares in an underlying fund, including those resulting from allocation
changes, could also cause additional distributable gains to shareholders, a portion of which may be short-term capital gains distributable as ordinary income. Further, a portion of any losses on underlying fund share redemptions may be deferred
under the “wash sale” rules. As a result of these factors, the funds’ “fund of funds” structure could affect the amount, timing and character of distributions to shareholders.
Income that a Schwab Target Index Fund receives from sources
within various foreign countries may be subject to foreign income taxes withheld at the source. If any of these funds has more than 50% of its assets invested in foreign securities at the end of its taxable year, it may elect to “pass
through” to its shareholders the ability to take either the foreign tax credit or the deduction for foreign taxes. Pursuant to this election, U.S. shareholders must include in gross income, even though not actually received, their respective
pro rata share of foreign taxes, and may either deduct their pro rata share of foreign taxes (but not for alternative minimum tax purposes) or credit the tax against U.S. income taxes, subject to certain limitations described in Code sections 901
and 904. A shareholder who does not itemize deductions may not claim a deduction for foreign taxes. It is expected that the Schwab Target Index Funds will not have more than 50% of their assets invested in foreign securities at the close of their
taxable years, and therefore will not be permitted to make this election. Each shareholder’s respective pro rata share of foreign taxes a Schwab Target Index Fund pays will, therefore, be netted against its share of the Schwab Target Index
Fund’s gross income. To the extent, however, a Schwab Target Index Fund invests in an underlying mutual fund that elects to pass through foreign taxes, the Schwab Target Index Fund will be able to pass through the taxes paid by the underlying
mutual fund in a given year, provided that at least 50% of the value of the Schwab Target Index Fund’s total assets is invested in underlying mutual funds at the end of each quarter of such taxable year.
The funds may invest in non-U.S.
corporations, which could be treated as a passive foreign investment company (PFIC) or become a PFIC under the Code. This could result in adverse tax consequences upon the disposition of, or the receipt of “excess distributions” with
respect to, such equity investments. To the extent any of these funds do invest in PFICs, they may elect to treat the PFIC as a “qualified electing fund” or mark-to-market its investments in PFICs annually. In either case, these funds
may be required to distribute amounts in excess of realized income and gains. To the extent these funds do invest in foreign securities which are determined to be PFIC securities and are required to pay a tax on such investments, a credit for this
tax would not be allowed to be passed through to the funds’ shareholders. Therefore, the payment of this tax would reduce a fund’s economic return from its PFIC shares, and excess distributions received with respect to such shares are
treated as ordinary income rather than capital gains.
Section 988 of the Code contains special tax rules applicable
to certain foreign currency transactions and instruments that may affect the amount, timing and character of income, gain or loss recognized by a fund. Under these rules, foreign exchange gain or loss realized by a fund with respect to foreign
currencies and certain futures and options thereon, foreign currency-denominated debt instruments, foreign currency forward contracts, and foreign currency-denominated payables and receivables will generally be treated as ordinary income or loss,
although in some cases elections may be available that would alter this treatment. Foreign currency losses could result in distributions of ordinary income being reclassified as a return of capital for tax purposes.
Under U.S. Treasury regulations, if a shareholder recognizes a
loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the Internal Revenue Service a disclosure statement on Form 8886. Direct shareholders of portfolio securities
are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as a fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most
or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Shareholders should consult their tax advisors to determine the
applicability of these regulations in light of their individual circumstances.
Shareholders are urged to consult their tax advisors as to the
state and local tax rules affecting investments in a fund.
48
Appendix – Principal Holders Of Securities
As of June 30, 2019, the following persons
or entities owned, of record or beneficially, 5% or more of the outstanding voting securities of the listed funds (a shareholder’s or an entity’s address will be listed once at the first mention and not repeated for future
entries):
| Fund | Name and Address | Percentage of Ownership |
| Schwab Target 2010 Index Fund |
Charles
Schwab & Co., Inc.
FBO Customers Attn: Schwab Funds Team N 211 Main Street San Francisco, CA 94105-1905 |
66.87% |
|
Wells
Fargo Bank
FBO Various Retirement Plans 1525 West WT Harris Blvd. Charlotte, NC 28288-1076 |
23.18% | |
|
William
Briscoe
C/O Charles Schwab & Co., Inc. 9800 Schwab Way (DENR2-3-505) Lone Tree, CO 80124 |
5.07% 1 | |
| Schwab Target 2015 Index Fund |
Charles
Schwab & Co., Inc.
FBO Customers Attn: Schwab Funds Team N |
53.46% |
|
Wells
Fargo Bank
FBO Various Retirement Plans |
34.89% | |
|
Charles
Schwab Bank
Omnibus Account Enhanced Revenue SDE 211 Main Street San Francisco, CA 94105-1905 |
12.35% 1 | |
| Schwab Target 2020 Index Fund |
Charles
Schwab & Co., Inc.
FBO Customers Attn: Schwab Funds Team N |
76.61% |
|
Wells
Fargo Bank
FBO Various Retirement Plans |
6.32% | |
|
Standard
Insurance Company
1100 SW 6 th Avenue Portland, OR 97204-1093 |
5.70% | |
|
Charles
Schwab Bank
Omnibus Account Enhanced Revenue SDE |
12.01% 1 | |
|
The
Charles Schwab Trust Co
Omnibus Account Non-Enhanced REV, SDE, HSA 211 Main Street San Francisco, CA 94105-1905 |
9.04% 1 | |
| Schwab Target 2025 Index Fund |
Charles
Schwab & Co., Inc.
FBO Customers Attn: Schwab Funds Team N |
81.08% |
| Standard Insurance Company | 6.13% | |
|
Wells
Fargo Bank
FBO Various Retirement Plans |
5.01% | |
|
Charles
Schwab Bank
Omnibus Account Enhanced Revenue SDE |
10.21% 1 | |
| Schwab Target 2030 Index Fund |
Charles
Schwab & Co., Inc.
FBO Customers Attn: Schwab Funds Team N |
83.45% |
|
The
Charles Schwab Trust Co
Omnibus Account Non-Enhanced REV, SDE, HSA |
13.39% 1 | |
|
Charles
Schwab Bank
Omnibus Account Enhanced Revenue SDE |
13.06% 1 |
| Fund | Name and Address | Percentage of Ownership |
| Schwab Target 2035 Index Fund |
Charles
Schwab & Co., Inc.
FBO Customers Attn: Schwab Funds Team N |
76.99% |
|
Wells
Fargo Bank
FBO Various Retirement Plans |
7.49% | |
|
Charles
Schwab Bank
Omnibus Account Enhanced Revenue SDE |
10.52% 1 | |
| Schwab Target 2040 Index Fund |
Charles
Schwab & Co., Inc.
FBO Customers Attn: Schwab Funds Team N |
85.19% |
|
The
Charles Schwab Trust Co
Omnibus Account Non-Enhanced REV, SDE, HSA |
15.48% 1 | |
|
Charles
Schwab Bank
Omnibus Account Enhanced Revenue SDE |
10.04% 1 | |
| Schwab Target 2045 Index Fund |
Charles
Schwab & Co., Inc.
FBO Customers Attn: Schwab Funds Team N |
78.82% |
|
Wells
Fargo Bank
FBO Various Retirement Plans |
5.91% | |
|
Charles
Schwab Bank
Omnibus Account Enhanced Revenue SDE |
12.22% 1 | |
| Schwab Target 2050 Index Fund |
Charles
Schwab & Co., Inc.
FBO Customers Attn: Schwab Funds Team N |
85.59% |
|
The
Charles Schwab Trust Co
Omnibus Account Non-Enhanced REV, SDE, HSA |
16.03% 1 | |
|
Charles
Schwab Bank
Omnibus Account Enhanced Revenue SDE |
7.69% 1 | |
| Schwab Target 2055 Index Fund |
Charles
Schwab & Co., Inc.
FBO Customers Attn: Schwab Funds Team N |
81.12% |
|
Great-West
Trust Company LLC
FBO Employee Benefits Clients 401k 8515 E Orchard Road 2T2 Greenwood Village, CO 80111-5002 |
6.77% | |
|
Charles
Schwab Bank
Omnibus Account Enhanced Revenue SDE |
6.49% 1 | |
| Schwab Target 2060 Index Fund |
Charles
Schwab & Co., Inc.
FBO Customers Attn: Schwab Funds Team N |
91.31% |
|
The
Charles Schwab Trust Co
Omnibus Account Non-Enhanced REV, SDE, HSA |
19.57% 1 |
| 1 | These shares are held within the Charles Schwab & Co., Inc. account listed elsewhere in the table. |
Charles Schwab Investment
Management, Inc.
The Charles Schwab Family of Funds
Schwab Investments
The Charles Schwab Family of Funds
Schwab Investments
Schwab Capital Trust
Schwab Annuity Portfolios
Laudus Trust
Laudus Trust
Schwab Strategic Trust
PROXY VOTING POLICY AND
PROCEDURES
AS OF MARCH, 2019
AS OF MARCH, 2019
| I. | INTRODUCTION |
Charles Schwab Investment
Management, Inc. (“CSIM”), as an investment adviser, is generally responsible for voting proxies with respect to the securities held in accounts of investment companies and other clients for which it provides discretionary investment
management services. CSIM’s Proxy Committee exercises and documents CSIM’s responsibility with regard to voting of client proxies (the “Proxy Committee”). The Proxy Committee is composed of CSIM personnel, including
representatives from the Fund Administration, Portfolio Management, and Investment Risk and Oversight departments, with input from other relevant departments. The Proxy Committee reviews these policies periodically. The policies stated in these
Proxy Voting Policy and Procedures (the “Proxy Policies”) pertain to all of CSIM’s clients.
The Boards of Trustees (the
“Board”) of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, and Schwab Annuity Portfolios (“Schwab Funds”), Laudus Trust (“Laudus Funds”) and Schwab Strategic Trust (“Schwab
ETFs”; collectively with the Schwab Funds and Laudus Funds, the “Funds”) have delegated the responsibility for voting proxies to CSIM through their respective investment advisory agreements. The Board has adopted these Proxy
Policies with respect to proxies voted on behalf of the various series of the Schwab Funds, Laudus Funds, and Schwab ETFs. CSIM will present amendments to the Board for approval. However, there may be circumstances where the Proxy Committee deems it
advisable to amend these Proxy Policies between regular Schwab Funds, Laudus Funds and Schwab ETFs Board meetings. In such cases, the Board will be asked to ratify any changes at its next regular meeting.
To assist CSIM in its responsibility for
voting proxies and the overall proxy voting process, CSIM has retained Glass, Lewis & Co., LLC (“Glass Lewis”) as an expert in the proxy voting and corporate governance area. The services provided by Glass Lewis include in-depth
research, global issuer analysis, and voting recommendations as well as vote execution, reporting and record keeping. CSIM has also retained Institutional Shareholder Services Inc. to conduct research on certain topics and may retain additional
experts in the proxy voting and corporate governance area in the future.
The Proxy Committee has the ultimate
responsibility for making the determination of how to vote the shares to seek to maximize the value of that particular holding.
| II. | PHILOSOPHY |
As a leading asset
manager, it is CSIM’s responsibility to use its proxy votes to encourage transparency and corporate governance structures that it believes protect or promote shareholder value.
Just as the investors in CSIM’s equity
funds generally have a long-term investment horizon, CSIM takes a long-term, measured approach to investment stewardship. CSIM’s client-first philosophy drives all of its efforts, including its approach to decision making. In the investment
stewardship context, that unfolds through CSIM’s efforts to appropriately manage risk by encouraging transparency and focusing on those corporate governance structures that will help protect or promote shareholder value.
In general, CSIM believes corporate
directors, as the elected representatives of all shareholders, are best positioned to oversee the management of their companies. Accordingly, CSIM typically supports a board of directors’ and management’s recommendations on proxy
matters. However, CSIM does not follow these recommendations when it believes doing so would not be in the best interests of shareholders.
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| III. | PROXY VOTING GUIDELINES |
CSIM
invests on behalf of its clients in companies domiciled all over the world. Since corporate governance standards and best practices differ by country and jurisdiction, the market context is taken into account in the analysis of proposals.
Furthermore, there are instances where CSIM may determine that voting is not in the best interests of its clients (typically due to costs or to trading restrictions) and will refrain from submitting votes.
The Proxy Committee receives and reviews
Glass Lewis’ proxy voting policies and procedures (“Glass Lewis’ Proxy Policies”) and evaluates them in light of the long-term best interests of shareholders. CSIM generally utilizes Glass Lewis’ Proxy Policies (which
are posted on the Funds’ website) except in instances where Glass Lewis’ Proxy Policies do not align with CSIM’s proxy voting philosophy, in which case CSIM creates a custom voting policy to reflect its views on a given
topic.
The following is a
summary of key guidelines which are grouped according to types of proposals usually presented to shareholders in proxy statements.
| A. | DIRECTORS AND AUDITORS |
| i. | Directors |
As a starting point, CSIM expects the
board to be composed of a majority of independent directors and to be responsive to shareholders. CSIM also expects directors that serve on a company’s nominating, compensation or audit committee to be independent.
Factors that may result in a vote against
one or more directors:
| • | The board is not majority independent |
| • | The board does not have any female directors and has not provided a reasonable explanation for its lack of gender diversity |
| • | Non-independent directors serve on the nominating, compensation or audit committees |
| • | Director recently failed to attend at least 75% of meetings or serves on an excessive number of publically traded company boards |
| • | Directors approved executive compensation schemes that appear misaligned with shareholders’ interests |
| • | Director recently acted in a manner inconsistent with these Proxy Policies or failed to be responsive to concerns of a majority of shareholders |
| ii. | Auditors |
CSIM typically supports the ratification
of auditors unless CSIM believes that the auditors’ independence may have been compromised.
Factors that may result in a vote against
the ratification of auditors:
| • | Audit-related fees are less than half of the total fees paid by the company to the audit firm |
| • | A recent material restatement of annual financial statements |
| • | A pattern of inaccurate audits or other behavior that may call into question an auditor’s effectiveness |
| B. | BOARD MATTERS |
| i. | Classified Boards |
CSIM generally defers to
management’s recommendation for classified board proposals unless CSIM has particular concerns regarding the board’s accountability or responsiveness to shareholders.
Factors that may result in a vote
supporting a shareholder proposal to de-classify a board:
| • | The company did not implement a shareholder proposal that was passed by shareholders at two previous shareholder meetings |
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| • | The company nominated directors for election that did not receive a majority of shareholder support at the previous shareholder meeting |
| • | The company had material financial statement restatements |
| • | The company’s board adopted a Shareholder Rights Plan (a defensive tactic used by a company’s board to fight a hostile takeover, commonly referred to as a Poison Pill) during the past year and did not submit it to shareholders for approval |
| ii. | Majority Voting |
CSIM generally supports majority voting
proposals when they call for plurality voting standards in contested elections.
| iii. | Cumulative Voting |
CSIM typically supports the concept of
voting rights being proportional to shareholders’ economic stake in the company. Therefore, CSIM will generally not support cumulative voting proposals unless the company has a controlling shareholder or shareholder group and has plurality
voting standards.
| iv. | Proxy Access |
CSIM typically does not support proxy
access proposals unless CSIM has particular concerns regarding the board’s accountability or responsiveness to shareholders.
Factors that may result in a vote
supporting proxy access:
| • | The company did not implement a shareholder proposal that was passed by shareholders at two previous shareholder meetings |
| • | The company nominated directors for election that did not receive a majority of shareholder support at the previous shareholder meeting |
| • | The company had material financial statement restatements |
| • | The company’s board adopted a Shareholder Rights Plan during the past year and did not submit it to shareholders for approval |
| v. | Independent Chair |
CSIM believes that the board is typically
best positioned to determine its leadership structure. Therefore, CSIM will typically not support proposals requiring an independent chair unless CSIM has concerns regarding the board’s accountability or responsiveness to shareholders.
Factors that may result in a vote
supporting a shareholder proposal requiring an independent chair:
| • | The company did not implement a shareholder proposal that was passed by shareholders at two previous shareholder meetings |
| • | The company nominated directors for election that did not receive a majority of shareholder support at the previous shareholder meeting |
| • | The company had material financial statement restatements |
| • | The company’s board adopted a Shareholder Rights Plan during the past year and did not submit it to shareholders for approval |
| C. | COMPENSATION |
| i. | Advisory Vote on Executive Compensation and Frequency |
CSIM generally supports advisory votes on
executive compensation (which are proposed by management and are known as “Say-On-Pay”) when the compensation scheme appears aligned with shareholder economic interests and lacks problematic features.
3
Factors that may result
in a vote against a company’s Say-On-Pay proposal:
| • | Executive compensation is out of line with industry peers considering the company’s performance over time |
| • | Executive compensation plan includes significant guaranteed bonuses or has a low amount of compensation at risk |
| • | Executive compensation plan offers excessive perquisites, tax-gross up provisions, or golden parachutes |
CSIM typically supports annual advisory
votes on executive compensation.
| ii. | Equity Compensation Plans |
CSIM generally supports stock-based
compensation plans when they do not overly dilute shareholders by providing participants with excessive awards and lack problematic features.
Factors that may result in a vote against
Equity Compensation Plans:
| • | Plan’s total potential dilution appears excessive |
| • | Plan’s burn rate appears excessive compared to industry peers |
| • | Plan allows for the re-pricing of options without shareholder approval |
| • | Plan has an evergreen feature |
| iii. | Employee Stock Purchase Plans |
CSIM supports the concept of broad
employee participation in a company’s equity. Therefore, CSIM typically supports employee stock purchase plans when the shares can be purchased at 85% or more of the shares’ market value.
| iv. | Re-price/Exchange Option Plans |
CSIM generally only supports
management’s proposals to re-price options when the plan excludes senior management and directors, does not excessively dilute shareholders, and the company has not significantly underperformed its industry peers over time.
| D. | ANTI-TAKEOVER |
| i. | Shareholder Rights Plans |
Shareholder Rights Plans constrain a
potential acquirer’s ability to buy shares in a company above a certain threshold without the approval of the company’s board of directors. While such a plan may help a company in achieving a higher bid, it may also entrench the
incumbent management and board. CSIM believes that shareholders should have the right to approve a Shareholder Rights Plan within a year of its adoption. CSIM generally votes against such plans if they do not have safeguards to protect shareholder
interests.
Factors that may result
in a vote against a Shareholder Rights Plan proposal:
| • | Plan does not expire in a relatively short time horizon |
| • | Plan does not have a well-crafted permitted bid or qualified offer feature that mandates shareholder votes in certain situations |
| • | Plan automatically renews without shareholder approval |
| • | Company’s corporate governance profile |
| ii. | Right to Call Special Meeting |
CSIM generally votes
against shareholder proposals asking for shareholders to be given the right to call a special meeting unless the threshold to call a special meeting is 25% or more of shares outstanding to avoid wasting corporate resources.
4
| iii. | Right to Act by Written Consent |
CSIM generally votes
against shareholder proposals asking for shareholders to be given the right to act by written consent if the company already offers shareholders the right to call special meetings. CSIM expects appropriate mechanisms for implementation.
| iv. | Supermajority Voting |
CSIM generally supports the concept of
simple majority standards to pass proposals.
| E. | CAPITAL STRUCTURE, MERGERS AND ACQUISITIONS |
| i. | Increase in Authorized Common Shares |
CSIM typically supports proposals to
increase the authorized shares unless the company does not sufficiently justify the need for the use of the proposed shares.
| ii. | Preferred Shares |
CSIM generally supports proposals to
create a class of preferred shares with specific voting, dividend, conversion and other rights.
| iii. | Mergers and Acquisitions |
CSIM generally supports transactions that
appear to maximize shareholder value. In assessing the proposals, CSIM considers the proposed transaction’s strategic rationale, the offer premium, the board’s oversight of the sales process, and other pertinent factors.
| F. | ENVIRONMENTAL AND SOCIAL PROPOSALS |
| Environmental and social shareholder proposals typically request companies to either change their business practices or enhance their disclosures. CSIM believes that, in most instances, the board is best positioned to determine a company’s strategy and manage its operations, and generally does not support shareholder proposals seeking a change in business practices. CSIM generally evaluates shareholder proposals seeking additional disclosures on relevant environmental and social issues based on a company’s current level of reporting, peer disclosures and the existence of controversies or litigation related to the issue. |
| i. | Political Contribution Proposals |
CSIM expects the board of directors to
have an oversight process for political contributions and lobbying proposals. CSIM generally votes against political contribution shareholder proposals unless there is no evidence of board oversight.
| IV. | ADMINISTRATION |
| A. | CONFLICTS OF INTERESTS |
| With respect to proxies of an underlying affiliated Fund, the Proxy Committee will vote such proxies in the same proportion as the vote of all other shareholders of such Fund (i.e., “echo vote”), unless otherwise required by law. When required by law or applicable exemptive order, the Proxy Committee will also “echo vote” proxies of an unaffiliated mutual fund or exchange traded fund (“ETF”). For example, certain exemptive orders issued to the Funds by the Securities and Exchange Commission and Section 12(d)(1)(F) of the Investment Company Act of 1940, as amended, require the Funds, under certain circumstances, to “echo vote” proxies of registered investment companies that serve as underlying investments of the Funds. | |
| In addition, with respect to holdings of The Charles Schwab Corporation (“CSC”) (ticker symbol: SCHW), the Proxy Committee will vote such proxies in the same proportion as the vote of all other shareholders of CSC (i.e., “echo vote”), unless otherwise required by law. |
5
| Other than proxies that will be “echo voted”, proxy issues that present material conflicts of interest between CSIM, and/or any of its affiliates, and CSIM’s clients will be delegated to Glass Lewis to be voted in accordance with CSIM’s Proxy Voting Guidelines. | |
| B. | FOREIGN SECURITIES/SHAREBLOCKING |
| CSIM has arrangements with Glass Lewis for the execution of proxy votes. However, voting proxies with respect to shares of foreign securities may involve significantly greater effort and corresponding cost than voting proxies with respect to domestic securities, due to the variety of regulatory schemes and corporate practices in foreign countries with respect to proxy voting. Problems voting foreign proxies may include the following: |
| • | proxy statements and ballots written in a foreign language; |
| • | untimely and/or inadequate notice of shareholder meetings; |
| • | restrictions of foreigner’s ability to exercise votes; |
| • | requirements to vote proxies in person; |
| • | requirements to provide local agents with power of attorney to facilitate CSIM’s voting instructions. |
In consideration of
the foregoing issues, Glass Lewis uses its best efforts to vote foreign proxies. As part of its ongoing oversight, the Proxy Committee will monitor the voting of foreign proxies to determine whether all reasonable steps are taken to vote foreign
proxies. If the Proxy Committee determines that the cost associated with the attempt to vote outweighs the potential benefits clients may derive from voting, the Proxy Committee may decide not to attempt to vote. In addition, certain foreign
countries impose restrictions on the sale of securities for a period of time before and/or after the shareholder meeting. To avoid these trading restrictions, the Proxy Committee instructs Glass Lewis not to vote such foreign proxies
(shareblocking).
| C. | SECURITIES LENDING |
Certain of the Funds
enter into securities lending arrangements with lending agents to generate additional revenue for their portfolios. In securities lending arrangements, any voting rights that accompany the loaned securities generally pass to the borrower of the
securities, but the lender retains the right to recall a security and may then exercise the security’s voting rights. In order to vote the proxies of securities out on loan, the securities must be recalled prior to the established record date.
CSIM will use its best efforts to recall a Fund’s securities on loan and vote such securities’ proxies in certain circumstances including if (a) the proxy relates to a special meeting of shareholders of the issuer (as opposed to the
issuer’s annual meeting of shareholders), or (b) the Fund owns more than 5% of the outstanding shares of the issuer.
| D. | SUB-ADVISORY RELATIONSHIPS |
| Where CSIM has delegated day-to-day investment management responsibilities to an investment sub-adviser, CSIM may (but generally does not) delegate proxy voting responsibility to such investment sub-adviser. Each sub-adviser to whom proxy voting responsibility has been delegated will be required to review all proxy solicitation material and to exercise the voting rights associated with the securities it has been allocated in the best interest of each investment company and its shareholders, or other client. Prior to delegating the proxy voting responsibility, CSIM will review each sub-adviser’s proxy voting policy to determine whether it believes that each sub-adviser’s proxy voting policy is generally consistent with the maximization of the value of CSIM’s clients’ investments by protecting the long-term best interest of shareholders. | |
| E. | REPORTING AND RECORD RETENTION |
| CSIM will maintain, or cause Glass Lewis to maintain, records that identify the manner in which proxies have been voted (or not voted) on behalf of CSIM clients. CSIM will comply with all applicable rules and regulations regarding disclosure of its or its clients’ proxy voting records and procedures. |
| CSIM will retain all proxy voting materials and supporting documentation as required under the Investment Advisers Act of 1940, as amended. |
6
Table of Contents
Schwab Capital Trust
PEA No. 196
PEA No. 196
Part C: Other Information
| ITEM 28. | EXHIBITS. |
| (a) | Amended and Restated Agreement and Declaration of Trust, dated November 29, 2005, is incorporated herein by reference to Exhibit (a) of Post-Effective Amendment No. 81 to Registrant’s Registration Statement on Form N-1A (File No. 811-07704), electronically filed with the SEC on April 28, 2006 (hereinafter referred to as PEA No. 81). |
| (b) | Amended and Restated Bylaws of the Registrant, adopted as of November 16, 2004, are incorporated herein by reference to Exhibit (b) of Post-Effective Amendment No. 70 to Registrant’s Registration Statement on Form N-1A (File No. 811-07704), electronically filed with the SEC on February 11, 2005 (hereinafter referred to as PEA No. 70). |
| (c)(i) | Article III, Section 5, Article V, Article VI, Article VIII, Section 4 and Article IX, Sections 1, 5 and 7 of the Amended and Restated Agreement and Declaration of Trust, dated November 29, 2005, referenced in Exhibit (a) above, are incorporated herein by reference to Exhibit (a) of PEA No. 81. |
| (c)(ii) | Articles 9 and 11 of the Amended and Restated Bylaws of the Registrant, adopted as of November 16, 2004, referenced in Exhibit (b) above, are incorporated herein by reference to Exhibit (b) of PEA No. 70. |
| (d)(i) | Investment Advisory and Administration Agreement between Registrant and Charles Schwab Investment Management, Inc. (the Investment Adviser or CSIM), dated June 15, 1994, is incorporated herein by reference to Exhibit 5(a) of Post-Effective Amendment No. 21 to Registrant’s Registration Statement on Form N-1A (File No. 811-07704), electronically filed with the SEC on December 17, 1997. |
| (d)(i)(a) | Amended Schedules A and B to the Investment Advisory and Administration Agreement between Registrant and CSIM, dated June 1, 2017, is incorporated herein by reference to Exhibit (d)(i)(a) of Post-Effective Amendment No. 175 to Registrant’s Registration Statement on Form N-1A (File No. 811-07704), electronically filed with the SEC on June 16, 2017 (hereinafter referred to as PEA No. 175). |
| (d)(i)(b) | Amended and Restated Advisory Agreement between Registrant and CSIM, dated June 6, 2017, is incorporated herein by reference to Exhibit (d)(i)(b) of PEA No. 175. |
| (d)(ii) | Administration Agreement between Registrant and CSIM, dated August 18, 2016, is incorporated herein by reference to Exhibit (d)(xxi) of PEA No. 160. |
| (d)(iii) | Amended and Restated Investment Advisory and Administration Agreement between Registrant and CSIM, dated March 1, 2017, is incorporated herein by reference to Exhibit (d)(xxiv) of Post-Effective Amendment No. 166 to Registrant’s Registration Statement on Form N-1A (File No. 811-07704), electronically filed with the SEC on April 20, 2017. |
| (d)(iv) | Schedule A to the Amended and Restated Investment Advisory and Administration Agreement between Registrant and CSIM, dated December 1, 2017, are incorporated herein by reference to Exhibit (d)(iv) of Post-Effective Amendment No. 180 to Registrant’s Registration Statement on Form N-1A (File No. 811-07704), electronically filed with the SEC on December 1, 2017 (PEA 180). |
| (d)(iv)(a) | Schedule B to the Amended and Restated Investment Advisory and Administration Agreement between Registrant and CSIM, dated December 20, 2018, is incorporated herein by reference to Exhibit (d)(iv)(a) of Post-Effective Amendment No. 190 to Registrant’s Registration Statement on Form N-1A (File No. 811-07704), electronically filed with the SEC on February 28, 2019 (hereinafter referred to as PEA No. 190). |
| (d)(v) | Investment Sub-Advisory Agreement between the Investment Adviser and Harris Associates LP (Harris Associates), dated January 11, 2002, is incorporated herein by reference to Exhibit (d)(v) of Post-Effective Amendment No. 192 to the Registrant’s Registration Statement on Form N-1A electronically filed with the SEC on April 26, 2019 (referred to herein as “PEA No. 192”). |
| (d)(v)(a) | Amendment, dated March 26, 2003, to Investment Sub-Advisory Agreement between the Investment Adviser and Harris Associates is incorporated herein by reference to Exhibit (d)(xxii) of Post-Effective Amendment No. 60 to Registrant’s Registration Statement on Form N-1A (File No. 811-07704), electronically filed with the SEC on February 26, 2004 (hereinafter referred to as PEA No. 60). |
| (d)(v)(b) | Amendment, dated December 2, 2004, to Investment Sub-Advisory Agreement between the Investment Adviser and Harris Associates is incorporated herein by reference to Exhibit (d)(xvii) of Post-Effective Amendment No. 106 to Registrant’s Registration Statement on Form N-1A (File No. 811-07704), electronically filed with the SEC on February 25, 2011 (hereinafter referred to as PEA No. 106). |
| (d)(v)(c) | Amendment to Schedule A, dated February 1, 2006, to Investment Sub-Advisory Agreement between the Investment Adviser and Harris Associates is incorporated herein by reference to Exhibit (d)(v)(a) of PEA No. 190. |
| (d)(v)(d) | Amendment to Schedule B, dated February 27, 2019, to Investment Sub-Advisory Agreement between the Investment Adviser and Harris Associates is incorporated herein by reference to Exhibit (d)(v)(d) of PEA No. 192. |
| (d)(vi) | Investment Sub-Advisory Agreement between the Investment Adviser and William Blair & Company, L.L.C. (William Blair), dated January 31, 2002, is incorporated herein by reference to Exhibit (d)(vi) of PEA No. 192. |
| (d)(vi)(a) | Amendment, dated March 26, 2003, to Investment Sub-Advisory Agreement between the Investment Adviser and William Blair is incorporated herein by reference to Exhibit (d)(xxix) of PEA No. 60. |
| ITEM 28. | EXHIBITS. |
| (d)(vi)(b) | Amendments, dated December 2, 2004 and April 18, 2005, to Investment Sub-Advisory Agreement between the Investment Adviser and William Blair are incorporated herein by reference, respectively, to Exhibit (d)(xx) and Exhibit (d)(xxi) of PEA No. 106. |
| (d)(vi)(c) | Amendment to Schedule B, dated September 27, 2018, to Investment Sub-Advisory Agreement between the Investment Adviser and William Blair is incorporated herein by reference to Exhibit (d)(vi)(a) of PEA No. 190. |
| (d)(vii) | Investment Sub-Advisory Agreement between the Investment Adviser and Mondrian Investment Partners Limited (Mondrian), dated July 12, 2011, is incorporated herein by reference to Exhibit (d)(vi)(b) of PEA No. 190. |
| (d)(vii)(a) | Amendment to Schedule B, dated February 27, 2019, to Investment Sub-Advisory Agreement between the Investment Adviser and Mondrian is incorporated herein by reference to Exhibit (d)(vii)(a) of PEA No. 192. |
| (d)(viii) | Investment Sub-Advisory Agreement between the Investment Adviser and American Century Investment Management, Inc. (American Century), dated June 3, 2010, is incorporated herein by reference to Exhibit (d)(x) of PEA No. 106. |
| (d)(viii)(a) | Amendment, dated July 16, 2010, to Investment Sub-Advisory Agreement between the Investment Adviser and American Century is incorporated herein by reference to Exhibit (d)(xvi) of PEA No. 106. |
| (d)(viii)(b) | Amendment to Schedule B, dated September 27, 2018, to Investment Sub-Advisory Agreement between Registrant, the Investment Adviser and American Century is incorporated herein by reference to Exhibit (d)(viii) of PEA No. 190. |
| (d)(ix) | Investment Sub-Advisory Agreement between the Investment Adviser and Mellon Capital Management Corporation (n/k/a Mellon Investments Corporation), dated January 20, 2012, is incorporated herein by reference to Exhibit (d)(x) of Post-Effective Amendment No. 112 to Registrant’s Registration Statement on Form N-1A (File No. 811-07704), electronically filed with the SEC on February 28, 2012. |
| (d)(x) | Expense Limitation Agreement by and between Registrant, the Investment Adviser and Charles Schwab & Co., Inc. (Schwab), dated July 1, 2009, is incorporated herein by reference to Exhibit (d)(xxi) of Post-Effective Amendment No. 100 to Registrant’s Registration Statement on Form N-1A (File No. 811-07704), electronically filed with the SEC on December 10, 2009 (hereinafter referred to as PEA No. 100). |
| (d)(x)(a) | Schedule A, dated June 1, 2017, to the Expense Limitation Agreement by and between Registrant, the Investment Adviser and Schwab, is incorporated herein by reference to Exhibit (d)(xiii)(a) of Post-Effective Amendment No. 173 to the Registrant’s Registration Statement on Form N-1A (File No. 811-07704), electronically filed with the SEC on June 1, 2017. |
| (d)(x)(b) | Expense Limitation Agreement among Registrant, the Investment Adviser and Schwab, dated August 18, 2016, is incorporated herein by reference to Exhibit (d)(xxii) of PEA No. 160. |
| (e)(i) | Second Amended and Restated Distribution Agreement between Registrant and Schwab, dated December 11, 2015, is incorporated herein by reference to Exhibit (e) of Post-Effective Amendment No. 151 to Registrant’s Registration Statement on Form N-1A (File No. 811-07704), electronically filed with the SEC on February 24, 2016 (hereinafter referred to as PEA No. 151). |
| (e)(i)(a) | Amended Schedule A to the Second Amended and Restated Distribution Agreement between Registrant and Schwab, dated December 1, 2017, is incorporated herein by reference to Exhibit (e)(i)(a) of PEA 180. |
| (f) | Inapplicable. |
| (g)(i) | Custodian Agreement between Registrant and Brown Brothers Harriman & Co. (Brown Brothers), dated April 1, 2007, is incorporated herein by reference to Exhibit (g)(i) of Post-Effective Amendment No. 123 to Registrant’s Registration Statement Form N-1A (File No. 811-07704), electronically filed with the SEC on January 13, 2013. |
| (g)(i)(a) | Amended Schedule 1, dated August 18, 2016, to the Custodian Services Agreement between Registrant and Brown Brothers is incorporated herein by reference to Exhibit (g)(ii) of PEA No. 160. |
| (g)(ii) | Amended and Restated Master Custodian Agreement between Registrant and State Street Bank and Trust Company (State Street), dated October 17, 2005, is incorporated herein by reference to Exhibit (g)(ix) of Post-Effective Amendment No. 79 to Registrant’s Registration Statement on Form N-1A (File No. 811-07704), electronically filed with the SEC on February 27, 2006 (hereinafter referred to as PEA No. 79). |
| (g)(ii)(a) | Amended Schedule A to the Amended and Restated Master Custodian Agreement between Registrant and State Street, dated December 1, 2017, is incorporated herein by reference to Exhibit (g)(ii)(a) of PEA 180. |
| (h)(i) | License Agreement between Registrant and Standard & Poor’s is incorporated herein by reference to Exhibit (h) of Post-Effective Amendment No. 32 to Registrant’s Registration Statement on Form N-1A (File No. 811-07704), electronically filed with the SEC on February 26, 1999. |
| (h)(ii) | Transfer Agency and Service Agreement between Registrant and Boston Financial Data Services, Inc. (BFDS) (n/k/a DST Asset Manager Solutions, Inc.), dated July 1, 2009, is incorporated herein by reference to Exhibit (h)(ii) of PEA No. 100. |
| (h)(ii)(a) | Amended Schedule A to the Transfer Agency and Service Agreement between Registrant and BFDS (n/k/a DST Asset Manager Solutions, Inc.), dated December 1, 2017, is incorporated herein by reference to Exhibit (h)(ii)(a) of PEA 180. |
| (h)(iii) | Amended and Restated Shareholder Servicing Plan, dated December 11, 2015, is incorporated herein by reference to Exhibit (h)(iv) of PEA No. 151. |
| (h)(iii)(a) | Schedule A, dated February 28, 2019, to the Amended and Restated Shareholder Servicing Plan, is incorporated herein by reference to Exhibit (h)(iii)(a) of PEA No. 190. |
| ITEM 28. | EXHIBITS. |
| (h)(iv) | Master Fund Accounting and Services Agreement between Registrant and State Street, dated October 1, 2005, is incorporated herein by reference to Exhibit (g)(i) of PEA No. 79. |
| (h)(iv)(a) | Amended Appendix A to the Master Fund Accounting and Services Agreement between Registrant and State Street Bank, modified March 11, 2019, is incorporated herein by reference to Exhibit (h)(iv)(a) of PEA No. 192. |
| (i) | Opinion and Consent of Counsel is filed herein as Exhibit (i). |
| (j)(i) | Consent of PricewaterhouseCoopers LLP is filed herein as Exhibit (j)(i). |
| (j)(ii) | Power of Attorney executed by Walter W. Bettinger, II, dated January 1, 2016, is incorporated herein by reference to Exhibit (j)(ii) of PEA No. 151. |
| (j)(iii) | Power of Attorney executed by Jonathan de St. Paer, dated April 1, 2019, is incorporated herein by reference to Exhibit (j)(iii) of PEA No. 192. |
| (j)(iv) | Power of Attorney executed by Joseph R. Martinetto, dated January 1, 2016, is incorporated herein by reference to Exhibit (j)(iv) of PEA No. 151. |
| (j)(v) | Power of Attorney executed by Robert W. Burns, dated January 1, 2016, is incorporated herein by reference to Exhibit (j)(v) of PEA No. 151. |
| (j)(vi) | Power of Attorney executed by John F. Cogan, dated January 1, 2016, is incorporated herein by reference to Exhibit (j)(vi) of PEA No. 151. |
| (j)(vii) | Power of Attorney executed by Stephen T. Kochis, dated January 1, 2016, is incorporated herein by reference to Exhibit (j)(vii) of PEA No. 151. |
| (j)(viii) | Power of Attorney executed by David L. Mahoney, dated January 1, 2016, is incorporated herein by reference to Exhibit (j)(viii) of PEA No. 151. |
| (j)(ix) | Power of Attorney executed by Kiran M. Patel, dated January 1, 2016, is incorporated herein by reference to Exhibit (j)(ix) of PEA No. 151. |
| (j)(x) | Power of Attorney executed by Kimberly S. Patmore, dated January 1, 2016, is incorporated herein by reference to Exhibit (j)(x) of PEA No. 151. |
| (j)(xi) | Power of Attorney executed by Nancy F. Heller, dated June 1, 2018, is incorporated herein by reference to Exhibit (j)(xi) of PEA No. 186. |
| (j)(xii) | Power of Attorney executed by Gerald B. Smith, dated January 1, 2016, is incorporated herein by reference to Exhibit (j)(xii) of PEA No. 151. |
| (j)(xiii) | Power of Attorney executed by Jane P. Moncreiff, dated January 28, 2019, is incorporated herein by reference to Exhibit (j)(xiii) of PEA No. 190. |
| (j)(xiv) | Power of Attorney executed by Mark D. Fischer, dated January 1, 2016, is incorporated herein by reference to Exhibit (j)(xiv) of PEA No. 151. |
| (k) | Inapplicable. |
| (l) | Inapplicable. |
| (m) | Inapplicable. |
| (n) | Inapplicable. |
| (o) | Inapplicable. |
| (p)(i) | Registrant, the Investment Adviser and Schwab Joint Code of Ethics, dated February 26, 2019, is incorporated herein by reference to Exhibit (p)(i) of PEA No. 192. |
| (p)(ii) | American Century Code of Ethics, dated March 29, 2019, is filed herein as Exhibit (p)(ii). |
| (p)(iii) | Harris Associates Code of Ethics, dated March 31, 2017, is incorporated herein by reference to Exhibit (p)(iii) of PEA No. 182. |
| (p)(iv) | William Blair Code of Ethics, dated July 31, 2018, is incorporated herein by reference to Exhibit (p)(iv) of PEA No. 190. |
| (p)(v) | Mondrian Code of Ethics, dated January 1, 2018, is incorporated herein by reference to Exhibit (p)(v) of PEA No. 182. |
| (p)(vi) | Mellon Investments Corporation Code of Ethics, dated June 1, 2019, is filed herein as Exhibit (p)(vi). |
| Item 29. | Persons Controlled By Or Under Common Control With Registrant. |
The Board of Trustees of the Registrant is identical to the
boards of trustees of The Charles Schwab Family of Funds, Schwab Investments, Schwab Strategic Trust, Schwab Annuity Portfolios, and Laudus Trust. Each such trust has Charles Schwab Investment Management, Inc. as its investment adviser. In addition,
the officers of the Registrant are also identical to those of each such other trust, with the exception of the Chief Legal Officer and Secretary/Clerk. As a result, the above-named trusts may be deemed to be under common control with the
Registrant.
Nonetheless, the Registrant takes the position that it is not under common
control with such other trusts because the power residing in the respective trusts’ boards and officers arises as a result of an official position with each such trust.
| Item 30. | Indemnification. |
Article VIII of Registrant’s
Amended and Restated Agreement and Declaration of Trust (Exhibit (a) hereto, which is incorporated by reference) provides in effect that Registrant will indemnify its officers and trustees against all liabilities and expenses, including but not
limited to amounts paid in satisfaction of judgments, in compromise, or as fines and penalties, and counsel fees reasonably incurred by any such officer or trustee in connection with the defense or disposition of any action, suit, or other
proceeding. However, in accordance with Sections 17(h) and 17(i) of the 1940 Act and its own terms, said Amended and Restated Agreement and Declaration of Trust does not protect any person against any liability to Registrant or its shareholders to
which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. In any event, Registrant will comply with 1940 Act Releases
Nos. 7221 and 11330 respecting the permissible boundaries of indemnification by an investment company of its officers and trustees.
Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended (the 1933 Act), may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a trustee, officer or controlling person of Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue.
| Item 31. | Business And Other Connections Of Investment Adviser. |
Registrant’s investment adviser, Charles Schwab
Investment Management, Inc., a Delaware corporation, organized in October 1989 to serve as investment manager to Registrant, also serves as the investment manager to The Charles Schwab Family of Funds, Schwab Investments, Schwab Annuity Portfolios,
Schwab Strategic Trust, and Laudus Trust, each an open-end management investment company. The principal place of business of the Investment Adviser is 211 Main Street, San Francisco, California 94105. The only business in which the Investment
Adviser engages is that of investment adviser and administrator to Registrant, The Charles Schwab Family of Funds, Schwab Investments, Schwab Annuity Portfolios and Schwab Strategic Trust, investment adviser of Laudus Trust and any other investment
companies that Schwab may sponsor in the future, and an investment adviser to certain non-investment company clients.
The business, profession, vocation or employment of a
substantial nature in which each director and/or senior or executive officer of the Investment Adviser is or has been engaged during the past two fiscal years is listed below. The name of any company for which any director and/or senior or executive
officer of the Investment Adviser serves as director, officer, employee, partner or trustee is also listed below.
| Name and Position with Adviser | Name of Other Company | Capacity |
| Walter W. Bettinger, II, Director | The Charles Schwab Corporation | Director, President and Chief Executive Officer |
| Charles Schwab & Co., Inc. | Director, President and Chief Executive Officer | |
| Schwab Holdings, Inc. | Director, President and Chief Executive Officer | |
| Schwab International Holdings, Inc. | President and Chief Executive Officer | |
| Charles Schwab Bank | Director | |
| Charles Schwab Premier Bank | Director | |
| Schwab (SIS) Holdings, Inc. I | President and Chief Executive Officer | |
| Schwab Funds | Chairman and Trustee | |
| Laudus Funds | Chairman and Trustee | |
| Schwab ETFs | Chairman and Trustee |
| Name and Position with Adviser | Name of Other Company | Capacity |
| George Pereira, Senior Vice President, Chief Financial Officer and Chief Operating Officer | Schwab Funds | Senior Vice President and Chief Operating Officer |
| Laudus Funds | Senior Vice President and Chief Operating Officer | |
| Schwab ETFs | Senior Vice President and Chief Operating Officer | |
| Charles Schwab Worldwide Funds, plc | Director | |
| Charles Schwab Asset Management (Ireland) Limited | Director |
| Item 32. | Principal Underwriters. |
(a) Schwab acts as
principal underwriter and distributor of Registrant’s shares. Schwab also acts as principal underwriter for The Charles Schwab Family of Funds, Schwab Investments, and Schwab Annuity Portfolios and may act as such for any other investment
company which Schwab may sponsor in the future.
(b) Information with respect to
Schwab’s directors and officers is as follows:
| Name | Position and Offices with the Underwriter | Position and Offices with the Registrant |
| Walter W. Bettinger II | President, Chief Executive Officer and Director | Chairman and Trustee |
| Steven H. Anderson | Executive Vice President, Retirement Plan Services | None |
| Catherine M. Casey | Executive Vice President, Human Resources | None |
| Jason C. Clague | Executive Vice President, Operational Services | None |
| Bernard J. Clark | Executive Vice President, Advisor Services | None |
| Jonathan M. Craig | Senior Executive Vice President | None |
| Peter B. Crawford | Executive Vice President, Chief Financial Officer and Director | None |
| Neesha K. Hathi | Executive Vice President and Chief Digital Officer | None |
| Timothy C. Heier | Executive Vice President and Chief Technology Officer | None |
| Dennis W. Howard | Executive Vice President and Chief Information Officer | None |
| Lisa Kidd Hunt | Executive Vice President, International Services and Business Initiatives | None |
| Mitch Mantua | Executive Vice President, Internal Audit | None |
| Joseph R. Martinetto | Senior Executive Vice President, Chief Operating Officer and Director | Trustee |
| Nigel J. Murtagh | Executive Vice President, Corporate Risk | None |
| Richard A. Wurster | Executive Vice President, Schwab Asset Management Solutions | None |
The principal business
address of all directors and officers of Schwab is 211 Main Street, San Francisco, California 94105.
(c) None.
| Item 33. | Location Of Accounts And Records. |
All accounts, books and
other documents required to be maintained pursuant to Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of: Registrant and Registrant’s investment adviser and administrator, Charles Schwab Investment
Management, Inc., 211 Main Street, San Francisco, California 94105; Registrant’s principal underwriter, Charles Schwab & Co., Inc., 211 Main Street, San Francisco, California 94105; Registrant’s custodian for the Schwab International
Index Fund and the Schwab Small-Cap Index Fund, Brown Brothers Harriman & Co., 50 Post Office Square, Boston, Massachusetts 02110, Registrant’s custodian for the balance of the funds and fund accountant, State Street Bank and Trust
Company, One Lincoln Street, Boston, Massachusetts 02111; Registrant’s transfer agent, Boston
Financial Data Services, Inc. (n/k/a DST Asset Manager Solutions, Inc.), 2000
Crown Colony Drive, Quincy, Massachusetts 02169; and Registrant’s sub-advisors: American Century Investment Management, Inc., 4500 Main Street, Kansas City, MO 64111; Mellon Investments Corporation, BNY Mellon Center, One Boston Place, Boston,
MA 02108; Harris Associates L.P., 111 S. Wacker Drive, Suite 4600, Chicago, IL 60606; Mondrian Investment Partners Limited, Fifth Floor, 10 Gresham Street, London EC2V 7JD; William Blair Investment Management, LLC, 222 West Adams St., Chicago, IL
60606.
| Item 34. | Management Services. |
None.
| Item 35. | Undertakings. |
Not applicable.
Table of Contents
SIGNATURES
Pursuant to the requirements of the
Securities Act of 1933, as amended (the “1933 Act”), and the Investment Company Act of 1940, as amended, Registrant certifies that it meets all of the requirements for the effectiveness of this Post-Effective Amendment No. 196 to
Registrant’s Registration Statement on Form N-1A pursuant to Rule 485(b) under the 1933 Act and has duly caused this Post-Effective Amendment No. 196 to be signed on its behalf by the undersigned, thereto duly authorized, in the City of
Washington in the District of Columbia, on the 26th day of July, 2019.
| SCHWAB CAPITAL TRUST |
| Registrant |
| Jonathan de St. Paer* |
| Jonathan de St. Paer, President and Chief Executive Officer |
Pursuant to the requirements of the 1933
Act, this Post-Effective Amendment No. 196 to Registrant’s Registration Statement on Form N-1A has been signed below by the following persons in the capacities indicated this 26th day of July, 2019.
| Signature | Title | |
|
Walter
W. Bettinger II*
Walter W. Bettinger II |
Chairman and Trustee | |
|
Jonathan
de St. Paer*
Jonathan de St. Paer |
Trustee, President and Chief Executive Officer | |
|
Joseph
R. Martinetto*
Joseph R. Martinetto |
Trustee | |
|
Robert
W. Burns*
Robert W. Burns |
Trustee | |
|
John
F. Cogan*
John F. Cogan |
Trustee | |
|
Nancy
F. Heller*
Nancy F. Heller |
Trustee | |
|
Stephen
Timothy Kochis*
Stephen Timothy Kochis |
Trustee | |
|
David
L. Mahoney*
David L. Mahoney |
Trustee | |
|
Jane
P. Moncreiff*
Jane P. Moncreiff |
Trustee | |
|
Kiran
M. Patel*
Kiran M. Patel |
Trustee | |
|
Kimberly
S. Patmore*
Kimberly S. Patmore |
Trustee | |
|
Gerald
B. Smith*
Gerald B. Smith |
Trustee | |
|
Mark
D. Fischer*
Mark D. Fischer |
Treasurer and Chief Financial Officer |
Table of Contents
EXHIBIT INDEX
| Exhibit (i) | Opinion and Consent of Counsel |
| Exhibit (j)(i) | Consent of PricewaterhouseCoopers LLP |
| Exhibit (p)(ii) | American Century Code of Ethics dated March 29, 2019 |
| Exhibit (p)(vi) | Mellon Investments Corporation Code of Ethics dated June 1, 2019 |
