Which Short-Term Bond ETF Is the Better Buy: iShares' ISTB or Schwab's SCHO?

Investors choosing between iShares Core 1-5 Year USD Bond ETF (NASDAQ:ISTB) and Schwab Short-Term U.S. Treasury ETF (NYSEMKT:SCHO) are weighing higher yield and credit diversity against rock-bottom costs and federal safety.

Both funds target the shorter end of the yield curve to minimize interest rate risk while generating monthly income. While the iShares fund includes corporate debt and mortgage-backed securities, the Schwab fund sticks strictly to U.S. Treasuries, making it a pure play for conservative investors prioritizing capital preservation over higher potential returns.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The iShares fund is slightly more expensive with a 0.06% expense ratio compared to the 0.03% charged by the Schwab fund. However, the iShares fund offers a more generous payout, providing a 0.41 percentage point advantage in its trailing dividend yield for those seeking more income.

Performance & risk comparison

What's inside

The iShares Core 1-5 Year USD Bond ETF is a fixed-income fund that tracks a broad range of dollar-denominated bonds with maturities between one and five years. It holds 7,427 positions, including U.S. Treasuries, corporate debt, and mortgage-backed securities. The fund was launched in 2012. iShares Core 1-5 Year USD Bond ETF has paid $2.05 per share over the trailing 12 months, which on its recent ~$48.03 share price works out to a 4.3% yield.

The Schwab Short-Term U.S. Treasury ETF focuses exclusively on U.S. Treasury securities with remaining maturities between one and three years. This fixed-income fund is highly diversified with 97 holdings, and no single position exceeds 0.15% of the portfolio. The fund was launched in 2010. Schwab Short-Term U.S. Treasury ETF has paid $0.93 per share over the trailing 12 months, which on its recent ~$24.10 share price works out to a 3.9% yield.

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Which looks like the better buy

Short-term bond funds exist to produce steady income, preserve capital, and stabilize a portfolio when stocks get turbulent. Both ISTB and SCHO do that job, but they draw the line between safety and income in different places, and the current bond market makes that distinction more relevant than usual.

SCHO holds only U.S. Treasury securities, the closest thing to risk-free investing in fixed income. That purity produces shallower drawdowns than ISTB and moves largely independently of the stock market, which is exactly what investors want from a defensive bond allocation.

ISTB holds nearly 7,000 bonds, including some below-investment-grade corporate and emerging market debt. That broader reach drives its higher yield but introduces credit risk that SCHO avoids entirely.

Corporate bond credit spreads are currently near historic lows, meaning investors are receiving relatively little extra compensation for that additional risk right now. SCHO charges half of what ISTB does. For investors who want their short-term bond allocation to act as true ballast, SCHO is the stronger near-term choice. ISTB is the better buy for those prioritizing maximum income from a broadly diversified bond portfolio who are comfortable with modest additional credit risk.

Sara Appino has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.