SCHO Short-Term Treasuries vs. SMB Municipal Bonds: Which ETF is Best for You?

Both the Schwab Short-Term US Treasury ETF (NYSEMKT:SCHO) and the VanEck Short Muni ETF (NYSEMKT:SME) They are ultra-short bond funds that target safety and liquidity, but with different focuses: SCHO tracks the short-term U.S. Treasury market, while SMB focuses on short-term tax-exempt municipal bonds.

SCHO features higher assets under management (AUM), higher performance, and lower fees compared to SMB, while SMB has slightly outperformed over the past one-year and five-year periods. This comparison breaks down their differences in cost, performance, risk, and holdings to help investors weigh which may suit their needs.

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

While both funds are extremely affordable, SCHO outperforms SMEs with a lower annual expense ratio and noticeably higher yield, which could appeal to investors looking for maximum income with minimal costs.

SCHO tracks the yield of short-term US Treasuries. It owns 98 securities and has been operating for more than 15 years.

SMB, by contrast, focuses entirely on tax-exempt municipal bonds, with more than 330 holdings. This gives SMBs a municipal credit profile that may offer tax advantages to some investors, but with a different return and risk profile than Treasury-focused SCHO.

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Both short-term Treasuries and municipal bonds have some attractive characteristics for investors, including reliable income, liquidity, and low risk. In fact, Treasury bonds are considered virtually risk-free, as they are backed by the “full faith and credit” of the US government. Municipal bonds, issued by state and local governments, carry some default risk, although defaults are relatively rare.

One of the biggest differentiators between the two types of investments is how they are taxed. Municipal bonds, like those held in the SME ETF, are generally exempt from federal taxes and the alternative minimum tax (AMT). Treasury bonds, on the other hand, are subject to federal income tax but exempt from state and local taxes. For investors with a higher income tax rate, or who live in states with higher tax rates, these differences in tax treatment can be important.

These tax differences are one of the reasons why the yield is lower for SCHO than for SMB, which could make a difference if your investment goal is income generation. But be sure to consider your after-tax earnings before choosing between municipal bonds and Treasury bonds.

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Sarah Sidlow 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.

SCHO Short-Term Treasuries vs. SMB Municipal Bonds: Which ETF is Best for You? was originally published by The Motley Fool