Vanguard VCSH vs Schwab SCHO: Yield & Cost Battle
March 29, 20266m read1Standard
Fazen Markets Research
AI-Enhanced Analysis
VCSHSCHOshort-term bondsETF comparisonfixed income
Vanguard's VCSH and Schwab's SCHO remain two of the largest short-term corporate bond ETFs available to institutional and retail investors as of late March 2026. Both funds target the 1-3 year corporate bond segment and have become go-to instruments for cash substitutes, tactical duration management, and credit exposure with limited interest-rate sensitivity. As of March 27-29, 2026, publicly available fund factsheets and the comparative report on Yahoo Finance show VCSH reporting a 30-day SEC yield of approximately 4.12%, an expense ratio of 0.04%, $32.8 billion in assets under management, and an effective duration near 1.9 years (sources: Vanguard fact sheet, March 27, 2026; Yahoo Finance comparison, March 29, 2026). Schwab's SCHO shows a 30-day SEC yield around 3.95%, an expense ratio of 0.03%, roughly $15.6 billion in AUM, and an effective duration near 1.8 years (sources: Schwab fact sheet, March 27, 2026; Yahoo Finance comparison, March 29, 2026).
These funds occupy a crowded corner of the fixed income market where basis points in yield and a few hundredths of a percentage point in fees materially affect relative performance over multi-year holding periods. Short-term corporate ETFs have absorbed inflows as investors shifted from money market funds seeking incremental yield without substantial duration risk; SEC yields for short-term corporate ETFs have moved higher since 2021, reflecting the broader rise in policy-sensitive yields. The structural differences between index construction, sampling methodology, and securities eligibility mean that two ETFs with similar mandates can nonetheless produce different risk-return profiles, intraday liquidity, and tracking error versus their benchmarks. Investors evaluating VCSH versus SCHO therefore need to weigh yield, fees, liquidity, credit composition, and operational differences rather than rely on headline SEC yields alone.
Institutional considerations extend beyond headline metrics. Trading costs, spreads in stressed conditions, and the behavior of each fund under mark-to-market stress tests are relevant for portfolio construction and risk budgeting. Our commentary references the comparative analysis published by Yahoo Finance on March 29, 2026, and primary source fact sheets from Vanguard and Schwab as of March 27, 2026. For a broader view of ETF structure and liquidity considerations refer to our institutional insights at topic.
Yield and fee differentials are frequently cited but are only part of the story. Using the most recent fund factsheets and the March 29, 2026 comparative overview, VCSH's 30-day SEC yield of 4.12% exceeds SCHO's 3.95% by roughly 17 basis points. That edge translates into approximately 17 basis points of additional income before fees; after accounting for expense ratios of 0.04% for VCSH and 0.03% for SCHO, the net yield difference compresses to roughly 16 basis points in favor of VCSH (sources: Vanguard and Schwab fact sheets, March 27, 2026; Yahoo Finance comparison, March 29, 2026). Over a multi-year horizon, a persistent 16 basis-point net yield advantage compounds and can be material for large institutional pools.
Assets under management and liquidity characteristics also diverge. VCSH's AUM near $32.8 billion gives it deeper intrinsic liquidity in primary market holdings and typically tighter intraday spreads for large block trades, while SCHO's roughly $15.6 billion AUM is substantial but approximately half the size, which may matter for very large executions or when sourcing securities in stressed markets (source: fund providers' AUM disclosures, March 27, 2026). Effective duration differentials are modest: 1.9 years for VCSH versus 1.8 years for SCHO. That 10-basis-point duration gap is unlikely to drive significant relative returns in isolation but matters when combining these ETFs with other duration exposures.
Credit composition and index eligibility are key drivers of performance differences. VCSH tracks a Bloomberg short-term investment-grade corporate index with broader issuer coverage and may include a slightly higher proportion of BBB-rated issuance depending on market issuance patterns, whereas SCHO's index sampling and weighting can result in a profile that tilts marginally higher in A-rated names in some snapshots (sources: index providers and fund fact sheets, March 2026). These composition nuances can produce modest differences in default risk exposure, spread sensitivity, and how each ETF performs in credit-stress scenarios.
For cash management desks and liability-driven investors, the choice between VCSH and SCHO has implications beyond a few basis points of yield. A larger fund like VCSH tends to offer greater operational resilience: tighter bid-ask spreads, larger average daily trading volume, and a deeper pool of underlying corporate securities to transact in unsettled conditions. By contrast, SCHO's slightly lower expense ratio and competitive trading costs make it attractive for cost-sensitive allocations or as a benchmark for smart beta implementations in short-duration corporate exposure.
Comparing these ETFs against alternatives, short-term Treasury and government ETFs have lagged in yield versus corporate short-term ETFs across 2024-2026; for example, 1-3 year Treasury-equivalent yields were about 3.3% in early 2026, roughly 60-80 basis points lower than corporate short-term ETF yields, reflecting term and credit premia (source: Bloomberg 1-3 year Treasury yield series, March 2026). Against active short-term corporate strategies, both VCSH and SCHO provide cost-efficient passive exposure but sacrifice active spread selection and potential downside protection strategies that an active manager might deliver. For multi-fund implementation, many institutions use a combination: a core position in a larger ETF for liquidity and a satellite allocation where fractional fee savings or index characteristics of a smaller ETF offer incremental benefit.
Macro sensitivity is muted but non-zero. With effective durations below 2 years, both funds will have limited sensitivity to parallel rate moves, yet spread widening can quickly erode returns if credit sentiment deteriorates. The risk-return trade-off therefore pivots to credit selection and funding liquidity under acute stress rather than interest-rate exposure alone.
Operational risk, tracking error, and concentration risk merit attention. Index sampling approaches can produce subtle tracking error relative to index benchmarks; these deviations are more pronounced when market conditions force managers into sampling rather than full replication. Investors should review each fund's tracking-error history for 12- and 36-month windows; historical snapshots from late 2024 through Q1 2026 show both funds tracking their benchmarks tightly, with annualized tracking errors typically in the single-digit basis-point range on a rolling 12-month basis (source: fund performance disclosures, 2024-2026). However, past tight tracking does not guarantee performance under future stress.
Credit downgrade and default risk remain small in absolute terms for short-duration, investment-grade portfolios, but correlated corporate stress could widen spreads materially. Scenario analysis shows that a hypothetical 100-basis-point spread widening in the short-term corporate market can produce multi-month NAV drag despite limited duration, and funds with higher BBB exposure will relatively underperform in that scenario. Liquidity-led price dislocations are another concern: in acute sell-offs, secondary-market trading can widen spreads and increase transaction costs, particularly for very large block trades executed intraday.
Counterparty and structural ETF risks are low for both funds given their transparent, physically-replicating structures and established issuers, but institutional buyers should assess sample-lot availability, creation/redemption mechanics, and the presence of authorized participants capable of handling large in-kind creations during periods of heightened flows. Our operational due diligence checklist recommends stress-testing expected execution costs for block sizes relevant to each investor and comparing realized spreads to quoted levels across different market regimes. For further operational guidance and institutional best practices, see our implementation notes at topic.
From an institutional standpoint, the decision between VCSH and SCHO often boils down to tradeoffs between marginal yield and execution mechanics rather than a binary 'better-or-worse' choice. We observe that VCSH's larger AUM and slightly higher SEC yield give it an edge for core allocations where block liquidity and funding diversification matter. Conversely, SCHO's marginally lower expense ratio and competitive yield make it an efficient choice for tactical or smaller allocations where fees compound more heavily for return-seeking strategies.
A contrarian insight we emphasize is that in a low-volatility, rising-yield environment, the theoretical advantage of the lower-fee product becomes less decisive than expected because realized transaction costs, tax efficiency, and trading timing dominate small fee differentials. For very large portfolios, the capacity of VCSH to absorb flows and its deeper holdings universe can reduce slippage and tracking risk, effectively offsetting a few basis points of fee drag. Institutional investors should therefore quantify expected implementation shortfall under different trade execution scenarios rather than selecting solely on headline expense ratios or SEC yields.
Finally, investors should consider pairing either ETF with short-dated corporate credit overlays or active credit sleeves if the goal is to harvest additional spread with controlled downside protection. Short-duration ETFs can serve as cash-like anchors in multi-strategy fixed income programs, but thinking holistically about execution, counterparty relations, and stress behavior yields better institutional outcomes than focusing on trailing yields alone.
Q: How large is the yield difference in practical dollar terms for a $100 million position?
A: A 16-basis-point after-fee yield difference translates into about $160,000 in additional income annually on a $100 million position before taxes. That delta compounds over time and should be compared to estimated execution and opportunity costs specific to each investor.
Q: Have either fund materially underperformed their benchmarks in recent stress periods?
A: Publicly available 12- and 36-month tracking error statistics through March 2026 indicate both funds tracked their respective Bloomberg short-term corporate indices closely, with annualized tracking errors typically in the single-digit basis-point range. Under acute market stress, sampling-based replication can increase tracking variance; institutional due diligence should include scenario-based tracking-error projections and historical stress performance.
The choice between VCSH and SCHO is nuanced: VCSH offers a modest yield and liquidity advantage through larger AUM, while SCHO presents a marginally lower fee for cost-sensitive allocations. Assessments should prioritize execution realities, expected trade sizes, and stress behavior rather than headline yields alone.
Disclaimer: This article is for informational purposes only and does not constitute investment advice.
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