Who Has the Cheapest Bond ETFs?

 

cheapest bond etfsVanguard has been synonymous with low cost investing. The company offers 12 different passively managed bond ETFs, with fees that range between 0.10% and 0.12% per year.
 

To see a list of high yielding CDs go here.

 
Recently, Charles Schwab has been trying to take business away from Vanguard and iShares (another large ETF provide) by slashing fees on its branded versions of popular stock and bond index ETFs. While Schwab only has four bond ETFs, it has managed to offer significantly lower fees than Vanguard and iShares.  Schwab’s fees range from 0.05% to 0.10%.

Schwab has the cheapest bond ETFs, but its offering lacks variety, and the relatively small size of its ETFs may cause returns that are different than than the index it follows. Also, should these ETFs fail to significantly grow in size, Charles Schwab may raise fees or close them down.

Below we compare Schwab’s offerings to competing bond ETFs from Vanguard and iShares in greater detail. Here are the conclusions:

  • In every case, Schwab’s ETF has a lower expense ratio. By owning a Schwab ETF, you will be able to save around 0.5% or more.
  • In every case, Schwab’s ETFs significantly underperformed the index compared to competing products. This is not surprising considering the relatively small number of positions of some of the Schwab ETF. For example, the Schwab Aggregate Bond Market ETF (SCHZ) only has 917 positions. That compares to 5569 positions in Vangaurd’s Aggregate Bond ETF the BND.  The fund is likely to do a much worse job tracking indexes than its larger competitors that can be diversified among hundreds or thousands of holdings.

 

Here is a head to head comparison of Schwab’s 4 Bond ETFs to their iShares and Vanguard counterparts.

Schwab US Aggregate Bond ETF (SCHZ)

Competes with Vanguard’s Total Bond Market ETF (BND) and the iShares Core Total Bond Market ETF (AGG)

Fees: SCHZ with an annual expense ratio of only 0.05% is cheaper than iShares AGG at 0.08% and Vanguard’s BND at .10%.

Performance: SCHZ, which follows the Barclays Aggregate Bond Index, did not track the performance of the index nearly as well as AGG which follows the same index. SCHZ underperformed the index by 0.39% vs 0.19% for AGG over the past year.

Schwab US TIPS ETF (SCHP)

Competes with iShares TIPS Bond ETF (TIP)

Fees: SCHP has an annual expense ratio of 0.07% versus 0.20% for iShare TIPS.

Performance: SCHP which follows the Barclays US Treasury Inflation Protected Securities did not track the index as well as TIPS which tracks the same index.SCHP underperformed the index by 0.33% versus 0.23% for TIP over the past year.

Schwab Short-Term US Treasury (SCHO)

Competes with Vanguard’s Short-Term Bond ETF (VGSH) and iShares 1-3 Year Treasury ETF (SHY)

Fees: SCHO has an annual expense ratio of 0.8% is cheaper than VGSH at 0.12% and SHY at 0.15%.

Performance: SCHO which follows the Barclays 1 – 3 Year Treasury Bond Index did not track the performance of the index nearly as well as SHY which follows the same index. SCHO underperformed the index by 0.23% vs 0.14% for SHY over the past year.

Schwab Intermediate Term US Treasury ETF (SCHR)

Competes With the Vanguard’s Intermediate Term Government Bond ETF (VGIT)

Fees: SCHR with annual expense ratio of 0.10% is slightly better than VGIT at 0.12%

Performance: SCHR and VGIT follow slightly different indexes. However, VGIT did a better job tracking its index than SCHR did tracking its.

For those that are interested here are the fees on all the Vanguard bond ETFs.

Name Ticker Annual Expense Fee
Extended Duration Treasury EDV 0.12%
Intermediate Term Bond BIV 0.11%
Intermediate Term Corporate Bond VCIT 0.12%
Intermediate Term Government Bonds VGIT 0.12%
Long Term Bond BLV 0.11%
Long Term Corporate Bond VCLT 0.12%
Long Term Government Bond VGLT 0.12%
Mortgage Backed Securities VMBS 0.12%
Short Term Bond BSV 0.11%
Short Term Corporate Bond VCSH 0.12%
Short Term Inflation Protected Securities VTIP 0.10%
Total Bond Market ETF BND 0.10%
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Comments

  1. davidwaring says

    Hi Rom,

    I personally would opt for either Vanguard or iShares offerings over Schwab even if I had to pay a small commission.  

    Hope that helps.

    Best Regards,
    Dave

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