BND vs. SCHZ

BND vs. SCHZ – Which Bond ETF Is Better?

BND and SCHZ are two of the most infamous bond ETFs on the market. They are issued by two giants of the investing world: Vanguard and Charles Schwab. Even though both funds essentially accomplish the same goals, giving investors a broad exposure to the total bond market, they still differ in some key aspects. So which is actually better? BND or SCHZ?

SCHZ has an overall higher return than BND with a compound annual growth rate (CAGR) or 3.33% compared to 3.32%. SCHZ is also less volatile on an annual basis and experienced a lower maximum drawdown over the past decade. In terms of composition, SCHZ is weighed more toward AAA-rated bonds than BND at around 75% compared to 66% for BND.

BND vs. SCHZ – Overview

In this post, we’ll discuss the variations between the BND and SCHZ in structure and effectiveness. They must look at the fund’s composition as well as other risk-related indicators, such as credit quality and distribution of maturities. 

For the final section, we’ll compare the historical performance of both funds across a $10,000 backtest portfolio.

What’s The Difference?

BNDSCHZ
NameVanguard Total Bond Market ETFSchwab U.S. Aggregate Bond ETF
IndexBloomberg Barclays U.S. Aggregate Float Adjusted IndexBloomberg Barclays US Aggregate Bond Index
Expense Ratio0.035%0.04%
IssuerVanguardCharles Schwab
StructureETFETF
Inception Date4/10/20077/14/2011
AUM$56.1B$7.95B
BND vs. SCHZ – Key Differences

Index

The Vanguard Total Bond Market ETF (BND) tracks the Bloomberg Barclays U.S. Aggregate Float Adjusted Index. This index includes only U.S. bonds with an investment-grade credit rating (BBB and above). The float-adjusted index excludes US agency debentures held in the Federal Reserve SOMA account.

The Schwab U.S. Aggregate Bond ETF (SCHZ) tracks the Barclays Capital U.S. Aggregate Bond Index. Thus, both funds track the exact same index and should essentially hold the same stocks. However, SCHZ’s index is not float-adjusted and therefore includes US agency debentures held in the Federal Reserve SOMA account.

Although both indices are basically the same we will see in the fund composition that the float adjustment of BND does affect the allocations of credit ratings throughout the fund.

Expense Ratio

BND has an expense ratio of 0.035%. BND actually has very small fees on the market with an overall cost ratio of 0.28 percent compared to every other ETF. Vanguard recently again reduced the spending ratio from 0.04 percent to 0.035 percent at the beginning of 2020.

SCHZ has an expense ratio of 0.04%. Up until the last fee cut by Vanguard in 2020, both funds were exactly on par at 0.04%. Now, SCHZ is 0.005% more expensive per year than BND. This means that a $10,000 investment in either fund would cost you $0.5 more with SCHZ.

Although this difference is minute we might see the compounded effects of the expense ratio change only play out in the years to come.

Issuer

Vanguard issues BND. Vanguard has been my favorite Wealth Management investment company for a long time. Not only do they deliver excellent investment products at a low cost, but they have also based their entire company on Jack Bogle ‘s philosophy of putting investors first.

Charles Schwab issues SCHZ. Charles Schwab likewise offers well-managed investment products and a more modern investment platform than Vanguard. For most investors picking Vanguard is an idealistic choice. But sticking with Charles Schwab if you already have an account there will not hurt your returns in the long run.

BND vs. SCHZ – Fund Composition

Within this section, we will look at the differences in composition between BND vs. SCHZ. We will be looking specifically at the distribution of credit quality and bond maturity in both funds.

Credit Quality

BND – Credit Quality

BND is made up of AAA, AA, A and BBB investment-grade debt. The fund does not contain any non-investment-grade debt. By far the largest share consists of 67.6 per cent AAA bonds followed by BBB grade bonds of 17.6 per cent and A bonds of 11.4 per cent. The balance of the bonds was from group AA.

This is based on Standard & Poor’s rating criteria, since S&P and Moody’s ratings are not so substantially different.

In terms of threats, BND is set up very well. For over two-thirds of all bonds holding the highest possible risk ranking: AAA.

SCHZ - Credit Quality
SCHZ – Credit Quality

SCHZ is mostly composed of AAA-rated bonds. They make up close to three-quarters of all bond holdings in SCHZ. This is followed by BBB, A and AA-rated bonds in decreasing order of magnitude.

Compared to BND, SCHZ exhibits even higher risk aversion. This is mostly due to the slightly different index both funds follow. Since SCHZ does not track the float-adjusted index US agency debentures held in the Federal Reserve SOMA account are included in SCHZ.

And these debentures boost the fund’s AAA-ratings.

Maturity

The variation in ETF bond maturities may play a major role in reducing interest rate risks. Longer maturity bonds are much more vulnerable to interest rate movements on a price-action basis. Nonetheless, long-term bonds outperform short-term bonds with respect to basic yields.

BND - Fixed Income Maturity
BND – Fixed Income Maturity

BND holds maturing bonds ranging from 1 to 30 + years. But by far the largest portion consists of maturing bonds of 20-30 years. The second-largest portion is made up of bonds with maturity anywhere between 1-10 years.

Of course, since long-term bonds usually give higher returns, it seems prudent to commit a fair amount of your assets to these kinds of bonds.

SCHZ - Fixed Income Maturity
SCHZ – Fixed Income Maturity

SCHZ holds mostly bonds with maturities between 20-30 years. The overall maturity allocation looks very similar to that of BND with some minor differences:

SCHZ is even more heavily weighted toward long-term bonds than BND. 20-30 year bonds make up closer to 35% of the total holdings whereas with BND that ratio is closer to 30%.

Again, the reason for this lies in the differences of the index tracked. US agency debentures held in the Federal Reserve SOMA account are long-term bonds that tilt SCHZ towards the 35% exposure to such.

BND vs. SCHZ – Analysis

MetricBNDSCHZ
Volatility (monthly)0.95%0.92%
Volatility (annualized)3.28%3.18%
Downside Deviation (monthly)0.52%0.49%
Max. Drawdown-4.01%-3.77%
US Market Correlation0.020.06
BND vs. SCHZ – Risk Metrics

Volatility

BND has an annual volatility of 3.28% (0.95% monthly). Compared to most other ETFs this is extremely low, or even the entire stock market! The US stock market as a whole is witnessing annual volatility fluctuations of 4-5 per cent. Thus BND provides a good alternative for investors to balance their portfolio.

SCHZ has an annual volatility of 3.18% (0.92% monthly). This is just slightly lower than BND’s volatility. However, compared to the entire U.S. stock market a 3-4% volatility per year is fairly stable. You won’t see any big up- or downswings in your portfolio value whether you hold BND or SCHZ.

The underlying reason for this difference once again comes down to the difference in makeup. US agency debentures tend to be a lot less volatile than even corporate bonds. And since those are included in SCHZ and not in BND they positively affect volatility.

Drawdown

BND vs. SCHZ - Drawdowns
BND vs. SCHZ – Drawdowns

Since 2012, the above chart shows the drawdowns in value and the difference and overlap between these two funds. The blue line representing BND and the red one SCHZ.

BND experiences drawdowns up to -4.0% throughout the years. The largest drawdown happened in 2017, and there were several other less serious drawdowns in 2015 and 2018/2019. These drawdowns are in line with increases in US interest rates.

SCHZ also experienced drawdowns close to -4.0% during the same period. The only real difference becomes apparent in the time frame from 2014 to 2017 when SCHZ just seemed to recover faster and mitigate price falls.

The above statement is true for the entire period from 2012 until 2020. However, keep in mind that this is a very limited time frame we are looking at. Unfortunately, since SCHZ has not been around for that long we only have limited data available to compare both funds.

BND vs. SCHZ – Performance

Like for all ETF comparisons, I will conclude this one by comparing the funds’ returns over the past five years and backtesting a portfolio of $10,000. The following graphs display the mean return for each time cycle. That includes any reinvestment of revenue payouts.

Annual Returns

BND vs. SCHZ - Annual Returns
BND vs. SCHZ – Annual Returns

Above you’ll see a chart of the annual returns from 2012 to 2020.

For the most part, BND yielded moderate positive returns. The last two years have been beneficial especially for the domestic bond market. There was only one year in the last 6 years that BND yielded a negative return. This was the year of 2018.un

SCHZ sees slightly higher returns in some years. Especially, in 2012, 2013 and 2014 SCHZ seems to overwhelmingly outperform BND. However, the tides turn after 2014. Ever so slightly BND outperforms SCHZ for almost all years since 2015.

As we can see, in the more uncertain economic times between 2016 up until now, BND has an edge. But, this slight edge cannot make up for the losses and lower returns the fund sustained in 2012-2014 compared to SCHZ (yet).

Portfolio Growth

BND vs. SCHZ - Portfolio Growth
BND vs. SCHZ – Portfolio Growth
PortfolioInitial BalanceFinal BalanceCAGR
BND$10,000$13,202 3.32% 
SCHZ$10,000$13,214 3.33% 
BND vs. SCHZ – Portfolio Backtest

The graph below displays a $10,000 backtest portfolio starting in 2012. All gains are reinvested in full, and no further investments have been made.

A $10,000 investment in BND would have resulted in $13,202 by now. This is equal to an average growth rate of 3.32% in compounds. A bond fund will, of course, lag behind the average return on the entire stock market, at about 7.5 percent. On the other hand, you’ll have a more stable source of passive income, with less volatility.

A $10,000 investment in SCHZ would have resulted in $13,214. This is equal to a CAGR of 3.33%. With regard to the final balance, SCHZ outperformed BND by $12 over the given time period. That’s little more than a dollar per year.

Up until now, SCHZ has seen a minute boost in performance compared to BND, however, we cannot conclude from the data we have that the trend will continue. Rather, due to the latest economic development and the reduced expense ratio, we could imagine BND performing at least on par with SCHZ if not better.

Conclusion

Conclusively, BND and SCHZ are two excellent bond ETFs that perform almost identical. It will not affect your portfolio value much in the long, nor your path toward financial freedom, whether you choose BND or SCHZ.

In fact, there is much to be said for simply choosing the fund that is more convenient for you to invest in: so if you’re already with Charles Schwab then go with SCHZ, if you’ve got a Vanguard account pick BND.

If in doubt, I’d always choose the fund with the lower expense ratio (BND) and the company behind the fund that is set up to keep it that way!

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