Better Short-Term Bond ETF: Schwab's Treasury-Focused SCHO or VanEck's SMB Targeting Municipal Bonds

The Schwab Short-Term U.S. Treasury ETF (NYSEMKT:SCHO) provides lower management fees and a higher yield than the VanEck Short Muni ETF (NYSEMKT:SMB), though the latter may appeal to investors seeking tax-exempt income.

Investors seeking safety in short-duration fixed income often compare the stability of government-backed debt with the potential tax advantages of municipal bonds. While SMB targets the short-term municipal bond market, SCHO tracks U.S. Treasury securities with maturities between one and three years. This analysis examines their costs, yields, and historical risk profiles.

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-year return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The Schwab fund is more affordable, carrying a thin 0.03% expense ratio compared to the 0.07% charged by VanEck. Furthermore, the Schwab fund offers a significantly higher current payout, maintaining a 1.09 percentage point yield advantage over its municipal peer before considering any tax effects.

Performance & risk comparison

What's inside

The Schwab Short-Term U.S. Treasury ETF is a massive fixed income fund that maintains a highly diversified portfolio of 97 holdings. Because it holds government debt, it does not provide an equity sector breakdown, and its largest positions are carefully capped so that no single security exceeds 0.14% of the total assets. The fund was launched in 2010, and has paid $0.93 per share over the trailing 12 months, which on its recent ~$24.11 share price works out to a 3.9% yield.

The VanEck Short Muni ETF holds 335 tax-exempt municipal bonds. Its largest positions include the New York City Transitional Finance Authority at 1.04%, Charlotte-Mecklenburg Hospital Authority at 1.03%, and Indiana Finance Authority at 1.03%. The fund utilizes an ESG screen, was launched in 2008, and has paid $0.48 per share over the trailing 12 months, which on its recent ~$17.23 share price works out to a 2.8% yield.

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Which looks like the better buy

Now is a good time to consider short-term bonds given the uncertainty around what will happen with interest rates this month. Two choices here, the Schwab Short-Term U.S. Treasury ETF (SCHO) and VanEck Short Muni ETF (SMB), provide different ways to help mange interest rate risk.

SCHO offers much lower investment risk than SMB, given its focus on U.S. Treasuries. It's the better choice for those who want maximum safety. The fund provides far greater liquidity as well, since its AUM of $14.1 billion is substantially larger than SMB's $316.7 million. Its higher dividend yield combined with a minimal expense ratio make it a popular and attractive ETF.

SMB's strength over SCO is that its income is generally exempt from federal taxes. Munis carry a taxable-equivalent yield advantage. High income earners can net more absolute value from SMB after accounting for federal taxes. The fund is also comprised of very high-quality bonds with 87% rated A and above. About half the ETF is AA rated. However, given its lower liquidity and dividend yield, deciding to go with SMB depends on whether the tax benefits can outweigh its drawbacks.

Robert Izquierdo 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.