Choosing Your Short-Term Bond ETF: SCHO vs. VCSH

When evaluating short-term bond ETF options, two names consistently dominate the conversation: Vanguard’s Short-Term Corporate Bond ETF (NASDAQ:VCSH) and Schwab’s Short-Term U.S. Treasury ETF (NYSEMKT:SCHO). While both target the same market segment—fixed-income investments maturing within 1-5 years—they pursue fundamentally different strategies. Understanding these distinctions is crucial for investors deciding which ETF aligns with their risk tolerance and income objectives.

The Core Difference: Treasury vs. Corporate Bonds

SCHO takes a focused approach by investing exclusively in U.S. government Treasury securities that mature within 1-3 years. With 97 holdings primarily rated AA or higher, this fund emphasizes capital preservation and minimal default risk. Nearly all positions are government-backed obligations, making them among the safest fixed-income instruments available.

VCSH operates differently, holding a concentrated portfolio of investment-grade corporate bonds with 1-5 year maturities. These positions typically carry A or BBB ratings—a notch or two below SCHO’s typical quality tier. This difference matters significantly: while BBB-rated bonds carry meaningfully higher default risk than their AA-rated counterparts, they also offer enhanced yield potential to compensate investors for assuming that additional risk.

Cost & Dividend Comparison

Both funds maintain identical expense ratios of 0.03%, making fees essentially a non-factor in your selection process. However, the income picture tells a different story. As of January 25, 2026, VCSH delivered a one-year return of 2.19% compared to SCHO’s 0.83%—a meaningful performance gap driven primarily by corporate bond yields versus Treasury yields.

On dividend yield, VCSH again pulls ahead with a 4.34% yield versus SCHO’s 4.06%. For income-focused investors, this 28 basis point advantage compounds meaningfully over extended periods. Notably, both funds distribute dividends monthly rather than quarterly, providing 12 annual payouts instead of the standard four—a feature particularly attractive to those who appreciate frequent income recognition.

Risk Profile and Performance Track Record

Here’s where SCHO demonstrates its defensive positioning. With a beta of just 0.05 compared to VCSH’s 0.43, Schwab’s Treasury-focused fund exhibits substantially lower price volatility relative to broader market movements. Over the five-year period, SCHO experienced a maximum drawdown of only -5.71% while VCSH’s peaked at -9.50%.

When measuring capital appreciation over five years, both delivered modest returns—a $1,000 investment grew to approximately $960 in VCSH and $948 in SCHO. These subdued numbers reflect the reality of the bond market’s struggle following 2022, which represented one of its most challenging years in U.S. history. The recovery has proven gradual, but short-term bonds generally benefit from higher yields precisely because they’re easier to manage than their longer-duration counterparts.

Making Your Short-Term Bond ETF Pick

Selecting between these two short-term bond ETF options ultimately hinges on your investment philosophy. SCHO suits investors prioritizing safety and capital stability, particularly those uncomfortable with any meaningful credit risk. The ultra-low volatility and minimal default probability make it ideal for conservative portfolios or investors nearing major financial milestones.

VCSH appeals to those comfortable accepting elevated default risk in exchange for enhanced income generation. The higher dividend yield and stronger one-year performance reflect the additional compensation the market provides for holding corporate rather than government obligations. This approach works well for investors with longer time horizons who can tolerate occasional price weakness.

A practical consideration: both short-term bond ETF options share meaningful advantages over long-duration bond funds. The monthly distribution schedule, reasonable current yields, and reduced interest-rate sensitivity provide structural benefits worth appreciating. Whether you prioritize maximum safety through Treasury exposure or income maximization through corporate holdings, you’re starting from a strong foundation rather than forcing a difficult compromise.

The choice ultimately reflects your circumstances—not a deficiency in either short-term bond ETF alternative.