Schwab Short-Term U.S. Treasury ETF (SCHO)

The Schwab Short-Term U.S. Treasury ETF (SCHO) holds bonds issued by the U.S. government that will repay in between one and three years from now. You buy the fund and earn interest every six months. When the bonds mature, the cash comes back and the fund replaces them with new short-term bonds. It is the simplest, safest way to own fixed income.

What you are actually buying

When you buy SCHO, you own a slice of hundreds of U.S. Treasury bonds. These are loans the federal government took out, and they are paid back by tax revenue. The U.S. government has never defaulted on its debts, so these bonds carry zero credit risk. You will get every dollar back plus the interest promised, on time.

The bonds in SCHO have maturity dates between one and three years from now. This matters. A bond maturing in one year loses less value if interest rates go up than a bond maturing in ten years. Short bonds are simple: you get paid soon, so you do not have to wait long for your cash back.

Schwab holds roughly 400 to 500 individual Treasury bonds in SCHO, spread across every bond issued by the government in that one-to-three-year window. You own a proportional piece of each. Every time the government pays interest (usually every six months), you get your share of the payment. It lands in your account as a dividend.

How interest rates affect your money

Short-term Treasuries behave predictably. If interest rates go up, the value of the bonds you already own drops — because new bonds now pay more, your old bonds are worth less. If rates go down, the value goes up. For a one-year bond, a 1% rise in rates cuts the price by roughly 1%. For a three-year bond, it cuts the price by roughly 3%. These moves are real on the day you look at your statement, but they fade away over time. Hold SCHO for three years and any price change from interest rates is erased — you will collect all the interest owed and get your principal back.

This predictability is SCHO’s appeal. You know roughly what you will earn (the current yield), and you know you will get your money back. Stock prices are unpredictable. Corporate bonds carry credit risk. But Treasuries? They work like clockwork.

Income in different rate environments

When interest rates are high, SCHO yields a lot. When rates are low, SCHO yields very little. This is not the fund’s fault — it is how bonds work. During the COVID pandemic, SCHO’s yield was nearly 0% because the government had driven rates to nearly zero. In 2024, SCHO yielded 4% to 5% because the Federal Reserve had raised rates sharply to fight inflation. The yield moves with the market, and that yield is what you collect every year until rates change or bonds mature.

For that reason, SCHO is most attractive when short-term rates are already elevated. Buying when yields are low locks in low income for years. Buying when yields are high locks in high income. Timing that decision is difficult, so most investors simply own SCHO as a core position and accept whatever yield it happens to be paying.

Why short-term instead of longer-dated Treasuries?

You could buy a Schwab fund that holds five-year Treasuries (SCHR) or ten-year Treasuries (SCHTX) instead. Longer bonds typically pay more, because you are lending money for longer and taking on more interest-rate risk. A five-year Treasury might yield 0.5% to 1% more than a one-year Treasury. That seems attractive.

But that extra yield comes with a cost: when rates rise, longer bonds fall harder. If you buy a five-year fund when rates are 4% and rates then rise to 5%, your fund loses 5% of its value. If rates stay at 4%, you keep the extra 0.5% and end up ahead. The trade-off is simple: short-term bonds offer safety and simplicity. Longer bonds offer more income but more price swings. SCHO is for people who want to sleep well at night.

The ultimate use: a cash substitute

SCHO is not a growth investment. It will never double in value. It is a substitute for holding cash in a bank account. Banks currently pay 4% to 5% on savings accounts, which matches what SCHO yields — so the income is competitive. But SCHO is slightly less liquid than a bank account (it takes a day to sell), and it has interest-rate risk (it drops in value if rates rise), while a bank account does not. For that you get a fund that is transparent, has no bank failure risk, and has a rock-bottom management fee.

This is its real purpose: for the portion of your portfolio you are not comfortable putting in stocks, and you do not need instant access to, SCHO is a better home than a money-market fund or a low-yielding savings account.

A foundation for income ladders

Some investors build Treasury ladders: they buy individual Treasury bonds maturing in one, two, three, four, and five years, then as each bond matures they replace it with a new five-year bond, creating a rolling system that delivers steady income and principal every year. SCHO can serve as a simplified version of that — no need to pick individual bonds or manage maturity dates, but you get similar behavior. As bonds in the fund mature, the fund automatically buys new ones to maintain the average maturity.

Comparing SCHO to alternatives

The closest alternatives are Vanguard’s VGSH (very similar, nearly identical fee, same index), iShares’ SHV (also very similar), and the SPDR fund (nearly the same). These funds track slightly different indices (all are short-term Treasury indices, but the indexes have small differences in composition), but returns are nearly identical. Competition is so tight that the lowest fee wins. SCHO’s fee is among the lowest, which is the only reason to prefer it over alternatives — that and if you already bank at Schwab, it integrates seamlessly.

When to hold SCHO

SCHO is appropriate for the safest part of your portfolio. If you have a three-year time horizon and cannot afford to lose money, SCHO works. If you have decades until retirement and can tolerate stock market swings, SCHO is too conservative for your core holdings but still useful as a ballast. Any investor can use a small SCHO position as a stable foundation, then build growth positions in stocks above it. Start here, build up carefully, and you will have a portfolio that works.