Prospectus

A legal document offering securities or mutual fund shares for sale. When you invest in a mutual fund, the prospectus will provide valuable information about the specific goals, fees, and practices of the fund. Federal and state securities regulators require that the prospectus include the fund’s investment objectives, policies and restrictions, fees and expenses and how shares can be bought and sold. It should be read carefully prior to investing.

Availability

A description identifying to whom the fund is available for purchase. As an example, some funds are only available to existing shareholders.

Annual Dividend Return

The increase in value of an investment, expressed as a percentage per year. If the annual return is expressed as annual percentage yield, then the number takes into account the effects of compounding interest. If it is expressed as annual percentage rate, then the annual rate will usually not take into account the effect of compounding interest.

NAV (Net Asset Value)

The total value of the assets, including stocks, bonds, and/or other securities, owned by a mutual fund, less all liabilities, divided by the number of outstanding shares. This value does not include any sales charges, such as a load or 12b-1 fee. The NAV is calculated once each day after the close of the market.

Overall Rating (Risk-Adjusted Rating)

Morningstar proprietary ratings reflect historical risk-adjusted performance. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating™ based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in distribution percentages.) The top 10% of the funds in an investment category receive 5 stars, 22.5% receive 4 stars, 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating is a weighted average of the funds’ three-, five-, and 10-year Morningstar rating metrics.

Historical Return

The rate of return for a given mutual fund relative to all other funds within the same category. The designation is illustrated by a horizontal bar graph showing one of five designations from low to high.

Historical Risk

This rating shows the volatility of a given mutual fund relative to all other funds within the same category. The rate of change is calculated for each fund in a given category and then the rates are compared to one another and assigned a designation from low to high. The level of risk is illustrated by a horizontal bar graph showing one of five bars highlighted.

Morningstar Category

Morningstar’s fund categories identify a fund based on the underlying securities in its portfolio. Domestic stock funds are categorized by the manager’s investment methodology and the size of the companies in which the fund invests. International stock funds are defined by region. Bond funds are classified by tax status and time period for the fund’s maturity or duration. Categories are assigned based on the fund’s portfolio statistics and composition over the past three years.

Historical Growth of $10,000

This graph represents the growth of a hypothetical $10,000 investment for the fund, the category average and a comparative index over a multi-year period. Total returns are adjusted for management, administrative and 12b-1 fees and other costs automatically deducted from fund assets. Total returns are not adjusted for sales loads and assume the reinvestment of capital gains and dividends.

Top Ten Holdings

Presented in a list format with corresponding percentages, the Top Ten Holdings represent the 10 underlying securities that comprise the latest list of holdings in a mutual fund as reported by the fund.

Sector Weightings

Presented in a list format with corresponding percentages, the sector weightings represent the percentage of a given fund’s assets that are invested in the ten primary investment sectors as reported by the fund. The sectors are: consumer durables, consumer staples, energy, financials, industry cyclicals, services, retail, technology, health, and utilities.

Credit Rating

This box shows a designated bond rating, such as AA, followed by the percentage of the fund’s total holdings that are comprised of bonds with that credit rating.

Performance

The investment return and principal value of an investment will fluctuate and an investor’s shares, when redeemed, may be worth more or less than their original cost. Past performance does not guarantee future performance. Indices are unmanaged, do not incur fees and cannot be invested in directly by and individual.

Tax Efficiency

Tax efficiency is derived by dividing after-tax (or tax-adjusted) returns by pretax returns for the 3-year period. It excludes additional gains, taxes, or tax losses incurred upon selling a fund. The highest possible score would be 100%, which would apply to a fund that had no taxable distributions (such as many municipal-bond funds). Funds are assigned a score in the diagram based on the following tax efficiency percentage ranges: highest = 90% — 100%; above average = 80% — 89.9%; average = 70% — 79.9%; below average = 60% — 69.9%; lowest = 0% — 59.9%.

Pre-Tax Returns

The Pre-Tax Total Return is the total return that an investor receives from investing in a mutual fund over a specific time period. It does not take into consideration any tax consequences for the investment. To calculate this number, we assume that all distributions paid by the fund are reinvested. This return is net of any fees and expenses paid by the investor.

After-Tax Pre-Liquidation Total Return

Total return received by investing in a mutual fund over a specific time period. This number is calculated assuming the investor pays the maximum marginal federal income tax on every distribution made by the fund during the investment period, and that these distributions are reinvested. The calculation does not take into consideration the tax consequences for capital gains realized on a sale of shares. This return is net of any fees and expenses paid by the investor.

After-Tax Post-Liquidation Total Return

Total return receive by investing in a mutual fund over a specific time period. This number is calculated assuming the investor pays the maximum marginal federal income tax on every distribution made by the fund during the investment period, and that these distributions are reinvested. At the end of the investment period, it is assumed that the investor sells the fund, pays any fee associated with selling the fund, and pays capital gain tax based on the maximum marginal federal income tax rate. This return is net of any fees and expenses paid by the investor.

Tax Cost Ratio

Tax Cost Ratio represents the percentage-point reduction in returns that results from Federal income taxes (before shares in the fund are sold, and assuming the highest Federal tax bracket). Example: if a fund has a 10% pre-tax return, and taxes reduce that return to 9%, then the tax cost ratio is 1.00.

Mean

Investors have varying degrees of risk tolerance, yet they will always seek the maximum rate of return available on their investment. Mean is also commonly referred to as expected return, and is what an investor hopes to maximize for any given measure of risk.

Standard Deviation (%)

A statistical measure of the historical volatility of a mutual fund or portfolio, usually computed using 36 monthly returns. More generally, a measure of the extent to which numbers are spread around their average.

Sharpe Ratio (%)

A risk-adjusted measure developed by William F. Sharpe, calculated using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe ratio, the better the fund’s historical risk-adjusted performance

Beta (vs. S&P 500 Index)

Beta is a statistical measure that shows a fund’s volatility relative to an index over the last 36 months. Equity funds are compared to the Standard & Poor’s 500 Index. Bond funds are compared to the Lehman Brothers Aggregate index. By definition, the beta of the S&P 500 is 1.0. A fund with a beta of 1.10 tends to perform 10% better than the market in up markets and 10% worse in down markets. Usually, higher betas represent riskier investments. For funds that are not broadly diversified, a low beta may only indicate that the fund’s volatility relative to the market is low, not that the fund has low risk.

Alpha

Alpha is a measure of fund performance on a risk-adjusted basis. Alpha compares the risk-adjusted performance of a fund to a benchmark index (such as the S&P 500). The excess return of the fund relative to the return of the benchmark index is a fund’s alpha. A positive alpha means the fund has outperformed the index on a risk-adjusted basis.

Convertibles

Securities which may be exchanged, by the issuer or the holder, for a given amount of a different, related security.

Preferreds (Preferred Stock)

A class of stock that pays dividends at a specified rate and has preference over common stock in the payment of dividends and the liquidation of assets. Preferred stockholders may have different voting rights. Not all securities have preferred stocks.

Performance Quartile within Category

This provides a comparison of the fund’s total annual return performance with other funds in its category. This calculation is based on all funds tracked by Morningstar in the given category. The fund’s performance may fall into four categories: Top 25% (highest), Upper 50% (above average), Lower 50% (below average) and Bottom 25% (lowest). Total returns are adjusted for management, administrative and 12b-1 fees and other costs automatically deducted from fund assets. Total returns are not adjusted for sales loads.

Fund Inception Date

The date a mutual fund commences operation.

Schwab’s Mutual Fund OneSource Select List

The Mutual Fund OneSource Select List is Schwab’s actively-managed list of carefully screened funds selected by the Schwab Center for Investment Research. Funds chosen for the list have been rigorously screened to meet strict performance, risk and cost criteria. The funds are chosen for the list quarterly, performance data is updated monthly.

30-day SEC Yield

The net investment income earned by a mutual fund over a 30-day period. The 30-day SEC Yield is expressed as an annual percentage rate based on the fund’s share price. It is calculated by dividing the net investment income per share for the 30 days ended on the date of calculation by the maximum offering price per share on that date.

Tax Equivalent Yield

A number showing the pretax amount that a taxable bond would have to pay to equal the yield of a tax-free bond. Calculate the Tax Equivalent Yield by subtracting your marginal tax bracket from 100, which gives you the tax bracket reciprocal. Then divide this number by the yield of the tax-free municipal bond. The resulting number is the yield which a taxable bond must pay to give you the same money after all taxes are paid. For the most part, the higher your tax bracket, the more attractive tax-free income becomes.

For example: Let’s say you are in the 33% tax bracket and you are looking at a 7% tax-free bond. First, subtract 33 from 100, producing 67 (your tax bracket reciprocal) then, divide 7% by 67, which gives you a 10.4% yield. Now you know that you would need to find a taxable bond paying 10.4% to give you the same after-tax return as the 7% tax-free bond is offering.

Average Maturity

Maturity is the length of time before a bond issuer must return the principal amount. There are two types of average maturity: Average weighted and Average effective. Average weighted maturity is a weighted average of the maturities of the bonds in a municipal bond fund’s portfolio, compounded by weighing each maturity date (i.e. when the security comes due) by the market value of the security. Average effective maturity, used for taxable fixed income funds, is also a weighted average of all the maturities of bonds in a portfolio. Average effective maturity takes into consideration all mortgage payments, puts and adjustable coupons.

Effective Duration

Effective duration is a measure of a fund’s interest-rate sensitivity. Longer duration indicates a fund that is more sensitive to shifts in interest rates. The relationship between funds with different durations is as follows: A fund with a duration of ten years is expected to be two times as volatile as a fund with a duration of five years.

Annual Turnover

Turnover is a measure of the fund’s trading activity, and loosely represents the portion of a fund’s holdings that have changed over a year. A lower turnover ratio indicates a buy-and-hold strategy.

Morningstar Style Box

The Morningstar Style Box reveals a fund’s investment strategy. For equity funds the vertical axis shows the market capitalization of the stocks owned and the horizontal axis shows investment style (value, blend, growth). For fixed-income funds the vertical axis shows the average credit quality of the bonds owned, and the horizontal axis shows interest rate sensitivity as measured by a bond’s duration (short, intermediate, long).

Manager

The name of the fund manager and date when the manager or team began managing the fund.

Index Funds

Mutual funds that seek to replicate the performance of established securities indices (e.g. Standard & Poor’s 500 Index or Schwab 1000 Index).

Schwab Mutual Fund OneSource service

A service that allows individuals to invest in mutual funds from many well-established fund companies without paying loads, transaction fees or commissions.

Schwab’s Short Term Redemption Fee may be charged on each redemption of funds held for 90 days or less and bought through Schwab’s Mutual Fund OneSource service with no transaction fee.

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

Charles Schwab & Co. Inc. member SIPC, receives remuneration from fund companies participating in the Mutual Fund OneSource service for recordkeeping and shareholder services and other administrative services. Schwab also may receive remuneration from transaction fee fund companies for certain administrative services.

Maximum Sales Load

A sales load is like a commission investors pay when they purchase any type of security from a broker. Although sales loads most frequently are used to compensate outside brokers that distribute fund shares, some funds that do not use outside brokers still charge sales loads.

There are two general types of sales loads-a front-end sales load investors pay when they purchase fund shares and a back-end or deferred sales load investors pay when they redeem their shares.

12b-1 Fees

A fee charged by the mutual fund company to pay for marketing, advertising and distribution services. The 12b-1 distribution fee ranges from 0.25% to 1.0% of the fund’s assets.

Redemption Fee

A charge imposed by the mutual fund if fund shares are sold within a certain period of time. The length of this holding period varies. See fund prospectus for details.

Transaction fees

A fee charged for purchasing certain mutual fund shares. Transaction fees apply for each buy. Transaction fees may apply to certain no-load and low-load funds which do not participate in our Mutual Fund OneSource® service. Such funds are subject to Schwab’s standard transaction fees in addition to any redemption fees imposed by the fund: