Which ETF is best for you?

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

SCHO offers larger assets under management (AUM), higher yields, and lower fees than SMB, while SMB has performed slightly better over the past year and five-year periods. This comparison breaks down their differences in cost, yield, risk, and reserves to help investors weigh which one meets their needs.

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

While both funds are very affordable, SCHO boosts SMB with a low annual expense ratio and significantly higher yield, which can appeal to investors looking for maximum income with minimal cost.

The SCHO tracks the performance of short-term US Treasury bonds. It has 98 securities and has been operating for 15 years.

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

For more guidance on ETF investing, see the full guide at this link.

Both short-term Treasury bonds and municipal bonds have some attractive features 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, have some inherent risks, although defaults are relatively uncommon.

The biggest difference between the two types of investments is how they are taxed. Municipal bonds, such as those held in the SMB 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 are exempt from state and local taxes. For investors with high income taxes, or who live in states with high tax rates, these differences in tax treatment may be important.

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

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SCHO Short-Term Treasuries SMB Municipal Bonds: Which ETF Is Best for You? Originally published by Motley Fool