SCHO vs. VCSH: The Short-Term Bond Showdown

Both the Vanguard Short-Term Corporate Bond ETF (NASDAQ:VCSH) and Schwab Short-Term U.S. Treasury ETF (NYSEMKT:SCHO) target the short-term fixed-income market, but they take different approaches: VCSH invests in investment-grade corporate bonds, while SCHO focuses on short-term U.S. Treasuries. This comparison examines cost, performance, risk, and portfolio structure to highlight which ETF best aligns with an investor’s priorities.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year weekly returns. The 1-yr return represents total return over the trailing 12 months.

Both funds have low expense ratios, but VCSH provides a higher dividend yield, while SCHO offers less volatility with a considerably lower beta.

Performance & risk comparison

What's inside

Launched 15 years ago, SCHO is designed to track the short-term U.S. Treasury bond market, holding 97 securities. Essentially all of the bonds held are U.S. government bonds, and mature within 1-3 years. Most of them are AA-rated, offering an extremely low chance of debt default.

VCSH, in contrast, holds a concentrated basket of investment-grade corporate bonds that mature between 1-5 years. The holdings primarily consist of bonds rated A or BBB, which have a higher default risk than AA bonds.

What this means for investors

With SCHO having a higher concentration of higher-rated bonds, it will be a less risky investment because it’s tied to bonds that are less likely to default. VCSH, on the other hand, has more lower-rated bonds that have more potential to default, but there’s also more potential for yields to compensate for the increased risk it carries.

When choosing between these two ETFs, it’s more about whether investors prefer a higher-risk/higher-reward approach to the bond market or a safer one. Nonetheless, investors should exercise more patience with bond ETFs, as the bond market arguably experienced its worst year in U.S. history in 2022, and it has been a slow climb back up in prices since then.

Short-term bonds often have higher yields because they’re easier to maintain than long-term bonds, which should help both SCHO and VCSH relative to other bond ETFs, but price gains are still on the lower end and slow. Also, both ETFs pay dividends monthly, which may be a positive for investors who prefer more frequent payouts than the common quarterly frequency among funds.

For more guidance on ETF investing, check out the full guide at this link.

Adé Hennis 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.