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Prospectus | December 22,
2025
Schwab®
ETFs
Schwab®
Fixed-Income ETFs
| | Schwab® High Yield Bond ETF | | |
SCYB |
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Schwab®
Mortgage-Backed Securities ETF |
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SMBS |
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Principal U.S. Listing Exchange: NYSE Arca, Inc.
As with all exchange-traded funds, the
Securities and Exchange Commission (SEC) has not approved these securities or
passed on whether the information in this prospectus is adequate and accurate.
Anyone who indicates otherwise is committing a federal crime.
Schwab
Fixed-Income ETFs
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Fund Summaries |
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Ticker Symbol: |
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The fund’s goal is to track as closely as
possible, before fees and expenses, the total return of an index that measures
the performance of U.S. dollar denominated below investment grade corporate
debt.
This table describes the
fees and expenses you may pay if you buy, hold and sell shares of the
fund. You may pay other fees, such
as brokerage commissions and other fees to financial intermediaries, which are
not reflected in the table and Example below.
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This example is intended to help you compare the
cost of investing in the fund with the cost of investing in other funds. The
example assumes that you invest $10,000 in the fund for the time periods
indicated and then sell all of your shares at the end of those time periods. The
example also assumes that your investment has a 5% return each year and that the
fund’s operating expenses remain the same. Your actual costs may be higher or
lower.
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The fund pays transaction costs, such as
commissions, when it buys and sells securities (or “turns over” its portfolio).
A higher portfolio turnover may indicate higher transaction costs and may result
in higher taxes when fund shares are held in a taxable account. These costs,
which are not reflected in the annual fund operating expenses or in the example,
affect the fund’s performance. During the most recent fiscal year, the fund’s
portfolio turnover rate was 24 % of the average value of its
portfolio.
To pursue its goal, the fund
generally invests in securities that are included in the ICE BofA US Cash Pay
High Yield Constrained Index†. ICE BofA US Cash Pay High Yield Constrained
Index tracks the performance of U.S. dollar denominated below investment grade
corporate debt (junk bonds), currently in a coupon paying period, that is
publicly issued in the U.S. domestic market. Qualifying securities must have a
below investment grade rating (based on an average of Moody’s, S&P and
Fitch), at least 18 months to final maturity at the time of issuance, at least
one year remaining term to final maturity as of the rebalancing date, a fixed
coupon schedule and a minimum amount outstanding of $250 million. In addition,
qualifying securities must have risk exposure to countries that are members of
the FX-G10, Western Europe or territories of the U.S. and Western Europe. The
FX-G10 includes all Euro members, the U.S., Japan, the United Kingdom, Canada,
Australia, New Zealand, Switzerland, Norway and Sweden. Securities included in
the index, are, among others, Rule 144A securities (both with and without
registration rights), callable perpetual securities (at least one year from the
first call date), and fixed-to-floating rate securities (callable within the
fixed rate period and are at least one year from the last call prior to the date
the bond transitions from a fixed to a floating rate security). The index
excludes certain types of securities, including, among others, contingent
capital securities, other hybrid capital securities, securities trading without
accrued interest, deferred interest bonds, original issue zero coupon bonds,
pay-in-kind bonds, and taxable and tax-exempt U.S. municipal securities. The
securities in the index are updated on the last business day of each
month.
It is the fund’s policy that under normal
circumstances it will invest at least 80% of its net assets (including, for this
purpose, any borrowings for investment purposes) in below investment grade bonds
(based on an average of Moody’s, S&P and Fitch).
Under normal circumstances, the fund may invest
up to 20% of its net assets in securities not included in its index. The
principal types of these investments include those that the investment adviser
believes will help the fund track the index, such as investments in (a)
securities that are not represented in the index but the investment adviser
anticipates will be added to the index; (b) high-quality liquid investments,
such as securities issued by the U.S. government, its agencies or
instrumentalities, including obligations that are not guaranteed by the U.S.
Treasury, and obligations that are issued by private issuers; (c) other
investment companies; and (d)
†
“ICE®” is a registered trademark of ICE Data
Indices, LLC or its affiliates and “BofA®” is a registered trademark of Bank of America
Corporation licensed by Bank of America Corporation and its affiliates (“BofA”)
and may not be used without BofA’s prior written approval. These trademarks have
been licensed, along with the ICE BofA US Cash Pay High Yield Constrained Index
(“Index”) for use by Charles Schwab Investment Management, Inc., dba Schwab
Asset Management, in connection with the Schwab High Yield Bond ETF. The Schwab
High Yield Bond ETF is not sponsored, endorsed, sold or promoted by ICE Data
Indices, LLC, its affiliates or its Third Party Suppliers (“ICE Data and its
Suppliers”). ICE Data and its Suppliers make no representations or warranties
regarding the advisability of investing in the Schwab High Yield Bond
ETF.
Schwab High Yield Bond ETF | Fund
Summary1
derivatives, principally futures contracts. The
fund may use futures contracts and other derivatives primarily to help manage
interest rate and credit risk exposure. The fund may also invest in cash and
cash equivalents, including money market funds, and lend its securities to
minimize the difference in performance that naturally exists between an index
fund and its corresponding index.
Because it may not be possible or practical to
purchase all of the securities in the index, the investment adviser will seek to
track the total return of the index by using sampling techniques. Sampling
techniques involve investing in a limited number of index securities that, when
taken together, are expected to perform similarly to the index as a whole. These
techniques are based on a variety of factors, including interest rate and yield
curve risk, maturity exposures, industry, sector and issuer weights, credit
quality, and other risk factors and characteristics. The fund generally expects
that its portfolio will hold less than the total number of securities in the
index, but reserves the right to hold as many securities as it believes
necessary to achieve the fund’s investment objective. The fund may sell
securities that are represented in the index in anticipation of their removal
from the index.
The fund will concentrate its investments (i.e.,
hold more than 25% of its total assets) in a particular industry, group of
industries or sector to approximately the same extent that its index is so
concentrated. For purposes of this limitation, securities of the U.S. government
(including its agencies and instrumentalities), and repurchase agreements
collateralized by U.S. government securities are not considered to be issued by
members of any industry. Similarly, tax-exempt obligations of state or municipal
governments and their political subdivisions are not considered to be issued by
members of any industry.
Principal Risks
Market Risk. Financial markets rise and fall in response to
a variety of factors, sometimes rapidly and unpredictably. Markets may be
impacted by economic, political, regulatory and other conditions, including
economic sanctions, tariffs and other government actions. In addition, the
occurrence of global events, such as war, terrorism, environmental disasters,
natural disasters and epidemics, may also negatively affect the financial
markets. As with any investment whose performance is tied to these markets, the
value of an investment in the fund will fluctuate, which means that an investor
could lose money over short or long periods.
Investment Style
Risk. The fund is an index fund.
Therefore, the fund follows the securities included in the index during upturns
as well as downturns. Because of its indexing strategy, the fund does not take
steps to reduce market exposure or to lessen the effects of a declining market.
In addition, because of the fund’s expenses, the fund’s performance may be below
that of the index. Errors relating to the index may occur from time to time and
may not be identified by the index provider for a period of time. In addition,
market disruptions could cause delays in the index’s rebalancing schedule. Such
errors and/or market disruptions may result in losses for the fund.
Interest Rate
Risk. Interest rates rise and fall
over time. As with any investment whose yield reflects current interest rates,
the fund’s yield will change over time. During periods when interest rates are
low, the fund’s yield (and total return) also may be low. Changes or the
anticipation of changes in interest rates also may affect the fund’s share
price: a rise in interest rates generally causes the fund’s share price to fall.
The longer the fund’s portfolio duration, the more sensitive to interest rate
movements its share price is likely to be. Also, a change in a central bank’s
monetary policy or economic conditions, among other things, may result in a
change in interest rates, which could have sudden and unpredictable effects on
the markets and significantly impact the value of fixed-income securities in
which the fund invests. A sudden or unpredictable rise in interest rates may
cause volatility and the value of fixed-income securities to decline.
Credit Risk. A decline in the credit quality of an issuer,
guarantor or liquidity provider of a portfolio investment or a counterparty
could cause the fund to lose money or underperform. The fund could lose money
if, due to a decline in credit quality, the issuer, guarantor or liquidity
provider of a portfolio investment or a counterparty fails to make, or is
perceived as being unable or unwilling to make, timely principal or interest
payments or otherwise honor its obligations.
High-Yield Risk. High-yield securities and unrated securities of
similar credit quality (junk bonds) are subject to greater levels of credit and
liquidity risks, and may be more volatile than higher-rated securities.
High-yield securities are considered predominately speculative with respect to
the issuer’s continuing ability to make principal and interest payments.
Sampling Index Tracking
Risk. The fund may not fully
replicate the index and may hold securities not included in the index. As a
result, the fund is subject to the risk that the investment adviser’s investment
management strategy, the implementation of which is subject to a number of
constraints, may not produce the intended results. Because the fund utilizes a
sampling approach it may not track the return of the index as well as it would
if the fund purchased all of the securities in the index.
Tracking Error and
Correlation Risk. As an index fund,
the fund seeks to track the performance of the index, although it may not be
successful in doing so. Further, there can be no guarantee that the fund will
achieve a high degree of correlation between the fund’s performance and that of
its index. The correlation between the performance of the fund and that of its
index, positive or negative, is called “tracking error.” Tracking error can be
caused by many factors and it may be significant.
Non-U.S. Issuer
Risk. The fund may invest in
U.S.-registered, dollar-denominated bonds of non-U.S. corporations. The fund’s
investments in bonds of non-U.S. issuers may involve certain risks that are
greater than those associated with investments in securities of U.S. issuers.
These include risks of adverse changes in foreign economic, political,
regulatory and other conditions; the imposition of economic sanctions or other
government restrictions; differing accounting, auditing, financial reporting and
legal standards
2Schwab High Yield Bond
ETF | Fund Summary
and practices; differing securities market
structures; and higher transaction costs. These risks may be heightened in
connection with bonds issued by non-U.S. corporations and entities in emerging
markets.
Privately Issued Securities
Risk. Privately issued securities,
including those purchased pursuant to Rule 144A under the Securities Act of
1933, as amended (the 1933 Act), are generally not traded on established
markets. Privately issued securities carry the risk that the liquidity of these
securities may become impaired, making it more difficult for the fund to sell
these bonds. Delay or difficulty in selling such securities may result in a loss
to the fund.
Portfolio Turnover
Risk. The fund may engage in
frequent trading of its portfolio securities in connection with its tracking of
the index or in response to market conditions. A higher portfolio turnover rate
may result in increased transaction costs, which may lower the fund’s
performance. A higher portfolio turnover rate can also result in an increase in
taxable capital gains distributions to the fund’s shareholders.
Prepayment and Extension
Risk. Certain fixed-income
securities are subject to the risk that the securities may be paid off earlier
or later than expected, especially during periods of falling or rising interest
rates, respectively. Prepayments of obligations could cause the fund to forgo
future interest income on the portion of the security’s principal repaid early
and force the fund to reinvest that money at the lower prevailing interest
rates. Extensions of obligations could cause the fund to exhibit additional
volatility and hold securities paying lower-than-market rates of interest.
Either case could hurt the fund’s performance.
Derivatives Risk. The fund’s use of derivative instruments
involves risks different from, or possibly greater than, the risks associated
with investing directly in securities and other traditional investments. The
fund’s use of derivatives could reduce the fund’s performance, increase its
volatility and cause the fund to lose more than the initial amount invested. In
addition, investments in derivatives may involve leverage, which means a
small percentage of assets invested in derivatives can have a
disproportionately large impact on the fund.
Liquidity Risk. The fund may be unable to sell certain
securities, such as illiquid securities, readily at a favorable time or price,
or the fund may have to sell them at a loss.
Securities Lending
Risk. Securities lending involves
the risk of loss of rights in, or delay in recovery of, the loaned securities if
the borrower fails to return the security loaned or becomes insolvent.
Concentration
Risk. To the extent that the fund’s
or the index’s portfolio is concentrated in the securities of issuers in a
particular market, industry, group of industries, sector or asset class, the
fund may be adversely affected by the performance of those securities, may be
subject to increased price volatility and may be more vulnerable to adverse
economic, market, political or regulatory occurrences affecting that market,
industry, group of industries, sector or asset class.
Market Trading
Risk. Although fund shares are
listed on national securities exchanges, there can be no assurance that an
active trading market for fund shares will develop or be maintained. If an
active market is not maintained, investors may find it difficult to buy or sell
fund shares.
Shares of the Fund May
Trade at Prices Other Than NAV.
Fund shares may be bought and sold in the secondary market at market prices.
Although it is expected that the market price of the shares of the fund will
approximate the fund’s net asset value (NAV), there may be times when the market
price and the NAV vary significantly. An investor may pay more than NAV when
buying shares of the fund in the secondary market, and an investor may receive
less than NAV when selling those shares in the secondary market. The market
price of fund shares may deviate, sometimes significantly, from NAV during
periods of market volatility or market disruption.
For more information on the risks of investing
in the fund, please see the “Fund Details” section in the
prospectus.
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Schwab High Yield Bond ETF | Fund
Summary3
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Since Inception ( |
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Comparative
Indices fees, expenses, or taxes) |
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ICE BofA US Cash Pay High Yield
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Investment Adviser
Charles Schwab Investment Management, Inc., dba
Schwab Asset Management®
Portfolio Managers
Matthew Hastings,
CFA, Managing Director and Head of
Bond Index Strategies, is responsible for the day-to-day co-management of the
fund. He has managed the fund since 2023.
Ryan Hook, CFA, Senior Portfolio Manager, is responsible for
the day-to-day co-management of the fund. He has managed the fund since
2023.
Steven Hung, Senior Portfolio Manager, is responsible for
the day-to-day co-management of the fund. He has managed the fund since
2023.
Olga Kislova,
CFA, Portfolio Manager, is
responsible for the day-to-day co-management of the fund. She has managed the
fund since 2024.
Purchase and Sale of Fund Shares
The fund issues and redeems shares at its NAV
only in large blocks of shares (Creation Units). These transactions are usually
in exchange for a basket of securities included in the index and/or an amount of
cash. As a practical matter, only Authorized Participants purchase or redeem
Creation Units.
Individual shares may only be purchased and sold
in the secondary market (i.e., on a national securities exchange) through a
broker or dealer at market prices. Because fund shares trade at market prices
rather than at NAV, fund shares may trade at a price greater than NAV (premium)
or less than NAV (discount). When buying or selling shares in the secondary
market, you may incur costs attributable to the difference between the highest
price a buyer is willing to pay to purchase shares of the fund (bid) and the
lowest price a seller is willing to accept for shares of the fund (ask) (the
“bid-ask spread”). Recent information regarding the fund’s NAV, market price,
premiums and discounts, and bid-ask spreads is available at www.schwabassetmanagement.com.
Tax Information
Dividends and capital gains distributions
received from the fund will generally be taxable as ordinary income or capital
gains, unless you are investing through an IRA, 401(k) or other tax-advantaged
account (in which case you may be taxed later, upon withdrawal of your
investment from such account).
Payments to Financial Intermediaries
If you purchase shares of the fund through a
broker-dealer or other financial intermediary (such as a bank), the adviser and
its related companies may pay the intermediary for the sale of fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your
salesperson to recommend the fund over another investment. Ask your salesperson
or visit your financial intermediary’s website for more information.
4Schwab High Yield Bond
ETF | Fund Summary
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Ticker Symbol: |
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The fund’s goal is to track as closely as
possible, before fees and expenses, the total return of an index composed of
investment-grade mortgage-backed securities issued and/or guaranteed by U.S.
government agencies.
This table describes the
fees and expenses you may pay if you buy, hold and sell shares of the
fund. You may pay other fees, such
as brokerage commissions and other fees to financial intermediaries, which are
not reflected in the table and Example below.
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This example is intended to help you compare the
cost of investing in the fund with the cost of investing in other funds. The
example assumes that you invest $10,000 in the fund for the time periods
indicated and then sell all of your shares at the end of those time periods. The
example also assumes that your investment has a 5% return each year and that the
fund’s operating expenses remain the same. Your actual costs may be higher or
lower.
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The fund pays transaction costs, such as
commissions, when it buys and sells securities (or “turns over” its portfolio).
A higher portfolio turnover may indicate higher transaction costs and may result
in higher taxes when fund shares are held in a taxable account. These costs,
which are not reflected in the annual fund operating expenses or in the example,
affect the fund’s performance. From November 19, 2024 (commencement of
operations) to August 31, 2025, the fund’s portfolio turnover rate was
20 % (not annualized) of the average value of its
portfolio.
To pursue its goal, the fund
generally invests in securities that are included in the Bloomberg US MBS Float
Adjusted Total Return Index†. The index tracks fixed-rate agency
mortgage-backed pass-through securities guaranteed by the Government National
Mortgage Association (Ginnie Mae), the Federal National Mortgage Association
(Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac) that
are backed by pools of mortgages. The index is constructed by grouping
individual to-be-announced (TBA) deliverable mortgage-backed securities (MBS)
pools into cohorts based on program, coupon, and vintage. To be included in the
index, pool cohorts must have at least $1 billion currently outstanding and a
weighted average maturity of at least 1 year. The index excludes certain types
of securities, including among other things, TBAs, collateralized mortgage
obligations (CMOs), non-agency (whole loan) collateral, Fannie Mae mega pools,
Freddie Mac giant pools, Freddie Mac super pools, Ginnie Mae platinum pools,
floating-rate adjustable-rate mortgages, and 10-year fixed-rate programs. The
index is market capitalization weighted and the securities in the index are
updated on the last business day of each month.
It is the fund’s policy that under normal
circumstances it will invest at least 90% of its net assets (including, for this
purpose, any borrowings for investment purposes) in securities included in the
index, including TBA transactions. The fund will notify its shareholders at
least 60 days before changing this policy.
Under normal circumstances, the fund may invest
up to 10% of its net assets in securities not included in its index. The
principal types of these investments include those that the investment adviser
believes will help the fund track the index, such as investments in (a)
securities that are not represented in the index but the investment adviser
anticipates will be added to the index; (b) high-quality liquid investments,
such as securities issued by the U.S. government, its agencies or
instrumentalities, including obligations that are not guaranteed by the U.S.
Treasury, and obligations that are issued by private issuers; (c) other
investment companies; and (d) derivatives, principally futures contracts. The
fund may use futures contracts and other derivatives primarily to help manage
interest rate and credit risk exposure. The fund may also invest in cash and
cash equivalents, including money market funds, and lend its securities to
minimize the difference in performance that naturally exists between an index
fund and its corresponding index.
Because it is not possible or practical to
purchase all of the securities in the index, the fund’s investment adviser will
seek to
†
Bloomberg® and Bloomberg US MBS Float Adjusted Total
Return Index are service marks of Bloomberg Finance L.P. and its affiliates,
including Bloomberg Index Services Limited (BISL), the administrator of the
indices (collectively, “Bloomberg”). Bloomberg is not affiliated with Charles
Schwab Investment Management, Inc., dba Schwab Asset Management, and Bloomberg
does not approve, endorse, review, or recommend Schwab Mortgage-Backed
Securities ETF. Bloomberg does not guarantee the timeliness, accurateness, or
completeness of any data or information relating to Schwab Mortgage-Backed
Securities ETF.
Schwab Mortgage-Backed Securities ETF | Fund
Summary5
track the total return of the index by using
sampling techniques. Sampling techniques involve investing in a limited number
of index securities that, when taken together, are expected to perform similarly
to the index as a whole. These techniques are based on a variety of factors,
including interest rate and yield curve risk, maturity exposures, industry,
sector and issuer weights, credit quality, and other risk factors and
characteristics. The fund expects that its portfolio will hold less than the
total number of securities in the index, but reserves the right to hold as many
securities as it believes necessary to achieve the fund’s investment objective.
The fund may sell securities that are represented in the index in anticipation
of their removal from the index. The fund generally expects that its weighted
average duration will closely correspond to the weighted average duration of the
index, which as of August 31, 2025, was 5.48 years.
Most transactions in fixed-rate MBS occur
through standardized contracts for future delivery in which the exact mortgage
pools to be delivered are not specified until a few days prior to settlement,
and are often referred to as TBA transactions. In a TBA transaction, the buyer
and seller agree upon general trade parameters such as agency, settlement date,
par amount and price. The actual pools delivered generally are determined two
days prior to settlement date; however, it is not anticipated that the fund will
receive the pools, but will instead participate in rolling TBA transactions. The
fund anticipates that it may enter into such contracts on a regular basis. This
may result in a significantly higher portfolio turnover for the fund than a
typical index fund. The fund, pending settlement of such contracts, will invest
its assets in high-quality liquid short-term instruments, including U.S.
Treasury securities and shares of money market mutual funds. The fund will
assume its pro rata share of the fees and expenses of any money market fund that
it may invest in, in addition to the fund’s own fees and expenses.
The fund will concentrate its investments (i.e.,
hold more than 25% of its total assets) in a particular industry, group of
industries or sector to approximately the same extent that its index is so
concentrated. For purposes of this limitation, securities of the U.S. government
(including its agencies and instrumentalities), and repurchase agreements
collateralized by U.S. government securities are not considered to be issued by
members of any industry.
Principal Risks
Market Risk. Financial markets rise and fall in response to
a variety of factors, sometimes rapidly and unpredictably. Markets may be
impacted by economic, political, regulatory and other conditions, including
economic sanctions, tariffs and other government actions. In addition, the
occurrence of global events, such as war, terrorism, environmental disasters,
natural disasters and epidemics, may also negatively affect the financial
markets. As with any investment whose performance is tied to these markets, the
value of an investment in the fund will fluctuate, which means that an investor
could lose money over short or long periods.
Investment Style
Risk. The fund is an index fund.
Therefore, the fund follows the securities included in the index during upturns
as
well as downturns. Because of its indexing
strategy, the fund does not take steps to reduce market exposure or to lessen
the effects of a declining market. In addition, because of the fund’s expenses,
the fund’s performance may be below that of the index. Errors relating to the
index may occur from time to time and may not be identified by the index
provider for a period of time. In addition, market disruptions could cause
delays in the index’s rebalancing schedule. Such errors and/or market
disruptions may result in losses for the fund.
Mortgage-Backed and Mortgage
Pass-Through Securities Risk.
Mortgage-backed securities tend to increase in value less than other debt
securities when interest rates decline, but are subject to similar or greater
risk of decline in market value during periods of rising interest rates. Certain
of the mortgage-backed securities in which the fund may invest are issued or
guaranteed by agencies or instrumentalities of the U.S. government but are not
backed by the full faith and credit of the U.S. government. There can be no
assurance that the U.S. government would provide financial support to its
agencies or instrumentalities where it was not obligated to do so which can
cause the fund to lose money or underperform. The risks of investing in
mortgage-backed securities include, among others, interest rate risk, credit
risk, prepayment risk and extension risk. Transactions in mortgage pass-through
securities often occur through TBA transactions. The fund could lose money or
underperform if a TBA counterparty defaults or goes bankrupt.
Interest Rate
Risk. Interest rates rise and fall
over time. As with any investment whose yield reflects current interest rates,
the fund’s yield will change over time. During periods when interest rates are
low, the fund’s yield (and total return) also may be low. Changes or the
anticipation of changes in interest rates also may affect the fund’s share
price: a rise in interest rates generally causes the fund’s share price to fall.
The longer the fund’s portfolio duration, the more sensitive to interest rate
movements its share price is likely to be. Also, a change in a central bank’s
monetary policy or economic conditions, among other things, may result in a
change in interest rates, which could have sudden and unpredictable effects on
the markets and significantly impact the value of fixed-income securities in
which the fund invests. A sudden or unpredictable rise in interest rates may
cause volatility and the value of fixed-income securities to decline.
Credit Risk. A decline in the credit quality of an issuer,
guarantor or liquidity provider of a portfolio investment or a counterparty
could cause the fund to lose money or underperform. The fund could lose money
if, due to a decline in credit quality, the issuer, guarantor or liquidity
provider of a portfolio investment or a counterparty fails to make, or is
perceived as being unable or unwilling to make, timely principal or interest
payments or otherwise honor its obligations.
Prepayment and Extension
Risk. Certain fixed-income
securities are subject to the risk that the securities may be paid off earlier
or later than expected, especially during periods of falling or rising interest
rates, respectively. Prepayments of obligations could cause the fund to forgo
future interest income on the portion of the security’s principal repaid early
and force the fund to reinvest that
6Schwab Mortgage-Backed
Securities ETF | Fund
Summary
money at the lower prevailing interest rates.
Extensions of obligations could cause the fund to exhibit additional volatility
and hold securities paying lower-than-market rates of interest. Either case
could hurt the fund’s performance.
Sampling Index Tracking
Risk. The fund may not fully
replicate the index and may hold securities not included in the index. As a
result, the fund is subject to the risk that the investment adviser’s investment
management strategy, the implementation of which is subject to a number of
constraints, may not produce the intended results. Because the fund utilizes a
sampling approach it may not track the return of the index as well as it would
if the fund purchased all of the securities in the index.
Tracking Error and
Correlation Risk. As an index fund,
the fund seeks to track the performance of the index, although it may not be
successful in doing so. Further, there can be no guarantee that the fund will
achieve a high degree of correlation between the fund’s performance and that of
its index. The correlation between the performance of the fund and that of its
index, positive or negative, is called “tracking error.” Tracking error can be
caused by many factors and it may be significant.
Portfolio Turnover
Risk. The fund may engage in
frequent trading of its portfolio securities in connection with its tracking of
the index or in response to market conditions. A higher portfolio turnover rate
may result in increased transaction costs, which may lower the fund’s
performance. A higher portfolio turnover rate can also result in an increase in
taxable capital gains distributions to the fund’s shareholders.
Derivatives Risk. The fund’s use of derivative instruments
involves risks different from, or possibly greater than, the risks associated
with investing directly in securities and other traditional investments. The
fund’s use of derivatives could reduce the fund’s performance, increase its
volatility and cause the fund to lose more than the initial amount invested. In
addition, investments in derivatives may involve leverage, which means a
small percentage of assets invested in derivatives can have a
disproportionately large impact on the fund.
Liquidity Risk. The fund may be unable to sell certain
securities, such as illiquid securities, readily at a favorable time or price,
or the fund may have to sell them at a loss.
Securities Lending
Risk. Securities lending involves
the risk of loss of rights in, or delay in recovery of, the loaned securities if
the borrower fails to return the security loaned or becomes insolvent.
Concentration
Risk. To the extent that the fund’s
or the index’s portfolio is concentrated in the securities of issuers in a
particular market, industry, group of industries, sector or asset class, the
fund may be adversely affected by the performance of those securities, may be
subject to increased price volatility and may be more vulnerable to adverse
economic, market, political or regulatory occurrences affecting that market,
industry, group of industries, sector or asset class.
Market Trading
Risk. Although fund shares are
listed on national securities exchanges, there can be no assurance that an
active trading market for fund shares will develop or be maintained. If an
active market is not maintained, investors may find it difficult to buy or sell
fund shares.
Shares of the Fund May
Trade at Prices Other Than NAV.
Fund shares may be bought and sold in the secondary market at market prices.
Although it is expected that the market price of the shares of the fund will
approximate the fund’s net asset value (NAV), there may be times when the market
price and the NAV vary significantly. An investor may pay more than NAV when
buying shares of the fund in the secondary market, and an investor may receive
less than NAV when selling those shares in the secondary market. The market
price of fund shares may deviate, sometimes significantly, from NAV during
periods of market volatility or market disruption.
For more information on the risks of investing
in the fund, please see the “Fund Details” section in the
prospectus.
Investment Adviser
Charles Schwab Investment Management, Inc., dba
Schwab Asset Management®
Portfolio Managers
Matthew Hastings,
CFA, Managing Director and Head of
Bond Index Strategies, is responsible for the day-to-day co-management of the
fund. He has managed the fund since 2024.
Mark McKissick,
CFA, Senior Portfolio Manager, is
responsible for the day-to-day co-management of the fund. He has managed the
fund since 2024.
Alfonso Portillo,
Jr., Senior Portfolio Manager, is
responsible for the day-to-day co-management of the fund. He has managed the
fund since 2024.
Purchase and Sale of Fund Shares
The fund issues and redeems shares at its NAV
only in large blocks of shares (Creation Units). These transactions are usually
in exchange for a basket of securities and/or an amount of cash. As a practical
matter, only Authorized Participants purchase or redeem Creation Units.
Individual shares may only be purchased and sold
in the secondary market (i.e., on a national securities exchange) through a
broker or dealer at market prices. Because fund shares trade at market prices
rather than at NAV, fund shares may trade at a price greater
Schwab Mortgage-Backed Securities ETF | Fund
Summary7
than NAV (premium) or less than NAV (discount).
When buying or selling shares in the secondary market, you may incur costs
attributable to the difference between the highest price a buyer is willing to
pay to purchase shares of the fund (bid) and the lowest price a seller is
willing to accept for shares of the fund (ask) (the “bid-ask spread”). Recent
information regarding the fund’s NAV, market price, premiums and discounts, and
bid-ask spreads is available at www.schwabassetmanagement.com.
Tax Information
Dividends and capital gains distributions
received from the fund will generally be taxable as ordinary income or capital
gains, unless you are investing through an IRA, 401(k) or other tax-advantaged
account (in which case you may be taxed later, upon withdrawal of your
investment from such account).
Payments to Financial Intermediaries
If you purchase shares of the fund through a
broker-dealer or other financial intermediary (such as a bank), the adviser and
its related companies may pay the intermediary for the sale of fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your
salesperson to recommend the fund over another investment. Ask your salesperson
or visit your financial intermediary’s website for more information.
8Schwab Mortgage-Backed
Securities ETF | Fund
Summary
About
the Funds
The funds described in this prospectus are
advised by Charles Schwab Investment Management, Inc., dba Schwab Asset
Management (the investment adviser). Each fund is an “exchange-traded fund”
(ETF). ETFs are funds that trade like other publicly-traded securities. The
funds in this prospectus are index funds and are designed to track the total
return of an index. Because the composition of an index tends to be
comparatively stable, most index funds historically have shown low portfolio
turnover compared to actively managed funds.
This strategy distinguishes an index fund from
an “actively managed” fund. Instead of choosing investments for the fund based
on portfolio management’s judgment, an index is used to determine which
securities the fund should own.
Unlike shares of a mutual fund, shares of the
funds are listed on a national securities exchange and trade at market prices
that change throughout the day. The market price for each of the fund’s shares
may be different from its net asset value per share (NAV). The funds have their
own CUSIP numbers and trade on the NYSE Arca, Inc. under the following
tickers:
| | Schwab High Yield Bond ETF | | | SCYB | |
| |
Schwab Mortgage-Backed Securities
ETF |
| | SMBS | |
The funds issue and redeem shares at their NAV
only in large blocks of shares (Creation Units). These transactions are usually
in exchange for a basket of securities and/or an amount of cash. As a practical
matter, only institutional investors who have entered into an authorized
participant agreement (Authorized Participants) purchase or redeem Creation
Units.
A Note to Retail Investors
Shares can be purchased directly from the funds
only in exchange for a basket of securities and/or an amount of cash that is
expected to be worth a minimum of a million dollars or more. Most individual
investors, therefore, will not be able to purchase shares directly from the
funds. Instead, these investors will purchase shares in the secondary market
through a brokerage account or with the assistance of a broker. Thus, some of
the information contained in this prospectus – such as information about
purchasing and redeeming shares from the funds and references to transaction
fees imposed on purchases and redemptions – is not relevant to most individual
investors. Shares purchased or sold through a brokerage account or with the
assistance of a broker may be subject to brokerage commissions and
charges.
The funds’ performance will fluctuate over time
and, as with all investments, future performance may differ from past
performance.
Schwab Fixed-Income ETFs | About the
Funds9
Fund Details
There can be no assurance that the funds will
achieve their objectives. Except as explicitly described otherwise, the
investment objectives, strategies and policies of each fund may be changed
without shareholder approval.
The principal investment strategies and the main
risks associated with investing in each fund are summarized in the fund
summaries at the front of this prospectus. This section takes a more detailed
look at some of the types of securities, the associated risks, and the various
investment strategies that may be used in the day-to-day portfolio management of
the funds, as described below. In addition to the particular types of securities
and strategies that are described in this prospectus, each fund may use
strategies that are not described herein in support of its overall investment
goal. These additional strategies and the risks associated with them are
described in the “Investment Objectives, Strategies, Risks and Limitations”
section in the Statement of Additional Information (SAI).
Each fund reserves the right to substitute a
different index for the index it currently tracks if the current index is
discontinued, if the agreement with the sponsor of its current index is
terminated or for any other reason determined in good faith by the fund’s Board
of Trustees. In any such instance, the substitute index would represent the same
market segment as the current index.
Investment
Objectives and More About Principal Risks
Schwab High Yield Bond ETF
Investment Objective
The fund’s goal is to track as closely as
possible, before fees and expenses, the total return of an index that measures
the performance of U.S. dollar denominated below investment grade corporate
debt. The fund’s investment objective is not fundamental and therefore may be
changed by the fund’s Board of Trustees without shareholder approval.
More Information About Principal Investment
Risks
The fund is subject to risks, any of which could
cause an investor to lose money.
Market Risk. Financial markets rise and fall in response to
a variety of factors, sometimes rapidly and unpredictably. Markets may be
impacted by economic, political, regulatory and other conditions, including
economic sanctions, tariffs, and other government actions. In addition, the
occurrence of global events, such as war, terrorism, environmental disasters,
natural disasters and epidemics, may also negatively affect the financial
markets. These events could reduce consumer demand or economic output; result in
market closures, changes in interest rates, inflation/deflation, travel
restrictions or quarantines; and significantly adversely impact the economy.
Governmental and quasi-governmental authorities and regulators throughout the
world have in the past often responded to serious economic disruptions with a
variety of significant fiscal and monetary policy changes which could have an
unexpected impact on financial markets and the fund’s investments. As with any
investment whose performance is tied to these markets, the value of an
investment in the fund will fluctuate, which means that an investor could lose
money over short or long periods.
Index-Related
Risk. The index provider does not
provide any warranty as to the timeliness, accuracy or completeness of any data
relating to the index. Errors relating to the index, including index data,
computations and/or construction, may occur from time to time and may not be
identified by the index provider for a period of time or at all. Losses
resulting from index errors may be borne by the fund and its shareholders. In
addition, there can be no guarantee that the index will operate as intended
during volatile market conditions or over the course of a full market
cycle.
In addition, market disruptions could cause
delays in the index’s rebalancing schedule which may result in the index and, in
turn, the fund experiencing returns different than those that would have been
achieved under a normal rebalancing schedule.
Interest Rate
Risk. Interest rates rise and fall
over time. As with any investment whose yield reflects current interest rates,
the fund’s yield will change over time. During periods when interest rates are
low or there are negative interest rates, the fund’s yield (and total return)
also may be low or the fund may be unable to maintain positive returns. Changes
or the anticipation of changes in interest rates also may affect the fund’s
share price: a rise in interest rates generally causes the fund’s share price to
fall. This risk is greater when the fund holds fixed-income securities with
longer maturities. The longer the fund’s portfolio duration, the more sensitive
to interest rate movements its share price is likely to be. For example, a fund
with a longer portfolio duration is more likely to experience a decrease in its
share price as interest rates rise. Duration is an estimate of a security’s (or
portfolio of securities) sensitivity to changes in prevailing interest rates
that is based on certain factors that may prove to be incorrect. It is therefore
not an exact measurement and may not be able to reliably predict a particular
security’s price sensitivity to changes in interest rates.
10Schwab Fixed-Income
ETFs | Fund Details
Economic conditions and other factors, including
a central bank’s monetary policy, may result in changes in interest rates, which
could have sudden and unpredictable effects on the markets and significantly
impact the value of fixed-income securities in which the fund invests. Rising
interest rates may decrease liquidity in the fixed-income securities markets,
making it more difficult for the fund to sell its fixed-income securities
holdings at a time when the investment adviser might wish to sell such
securities. In addition, decreased market liquidity also may make it more
difficult to value some or all of the fund’s fixed-income securities holdings.
Certain countries have experienced negative interest rates on certain
fixed-income securities. Negative or very low interest rates could magnify the
risks associated with changes in interest rates. In general, changing interest
rates, including rates that fall below zero, could have unpredictable effects on
markets and may expose fixed-income and related markets to heightened
volatility. Inflation-protected securities may react differently to interest
rate changes than other types of fixed-income securities and tend to react to
changes in “real” interest rates.
Credit Risk. A decline in the credit quality of an issuer,
guarantor or liquidity provider of a portfolio investment or a counterparty
could cause the fund to lose money or underperform. The fund could lose money
if, due to a decline in credit quality, the issuer, guarantor or liquidity
provider of a portfolio investment or a counterparty fails to make, or is
perceived as being unable or unwilling to make, timely principal or interest
payments or otherwise honor its obligations. The credit quality of the fund’s
portfolio holdings can change rapidly in certain market environments and any
default on the part of a single portfolio investment could cause the fund’s
share price or yield to fall. Certain U.S. government securities that the fund
invests in are not backed by the full faith and credit of the U.S. government,
which means they are neither issued nor guaranteed by the U.S. Treasury. There
can be no assurance that the U.S. government will provide financial support to
securities of its agencies and instrumentalities if it is not obligated to do so
under law. Also, any government guarantees on securities the fund owns do not
extend to the shares of the fund itself.
High-Yield Risk. Funds that invest in high-yield securities and
unrated securities of similar credit quality (junk bonds) may be subject to
greater levels of credit and liquidity risk than funds that do not invest in
such securities. These securities are considered predominately speculative with
respect to the issuer’s continuing ability to make principal and interest
payments. High-yield securities may be more volatile than higher-rated
securities. An economic downturn or period of rising interest rates could
adversely affect the market for these securities and reduce the fund’s ability
to sell these securities (liquidity risk). If the issuer of a security is in
default with respect to interest or principal payments, the fund may lose its
entire investment. Because of the risks involved in investing in high-yield
securities, an investment in a fund that invests in such securities should be
considered speculative.
Tracking Error and
Correlation Risk. As an index fund,
the fund seeks to track the performance of the index, although it may not be
successful in doing so. The divergence between the performance of the fund and
the index, positive or negative, is called “tracking error.” Tracking error can
be caused by many factors and it may be significant. For example, the fund may
not invest in certain securities in the index, match the securities’ weighting
to the index, or the fund may invest in securities not in the index, due to
regulatory, operational, custodial or liquidity constraints; corporate
transactions; asset valuations; transaction costs and timing; tax
considerations; and index rebalancing, which may result in tracking error. The
fund may attempt to offset the effects of not being invested in certain index
securities by making substitute investments, but these efforts may not be
successful. In certain circumstances, the fund may value individual securities
based on fair value prices developed using methods approved by the fund’s Board
of Trustees. To the extent the fund calculates its NAV based on fair value
prices, the fund’s performance may diverge from that of its index. In addition,
cash flows into and out of the fund, timing variances, operating expenses and
trading costs all affect the ability of the fund to match the performance of the
index, because the index does not have to manage cash flows and does not incur
any costs. Lastly, differences between the fund’s portfolio and the index
resulting from legal restrictions (such as diversification requirements) that
apply to the fund but not to the index impact correlation between the
performance of the fund and that of its index.
Non-U.S. Issuer
Risk. The fund may invest in
U.S.-registered, dollar-denominated bonds of non-U.S. corporations, governments,
agencies and supra-national entities. Investments in bonds of non-U.S. issuers
involve certain risks that are more significant than those associated with
investments in securities of U.S. issuers. These include risks of adverse
changes in foreign economic, political, regulatory and other conditions; the
imposition of economic sanctions or other government restrictions; differing
accounting, auditing, financial reporting and legal standards and practices;
differing securities market structures; and higher transaction costs. In certain
countries, non-U.S. issuers may be subject to less governmental regulation than
U.S. issuers and legal remedies available to investors may be more limited than
those available with respect to investments in the United States. The securities
of some foreign companies may be less liquid and at times more volatile than
securities of comparable U.S. companies. Moreover, individual foreign economies
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position, and the prices of
foreign bonds and the U.S. bonds have, at times, moved in opposite directions.
Changes to the financial condition or credit rating of a non-U.S. issuer may
also adversely affect the value of the non-U.S. issuer’s securities held by the
fund. These risks may be heightened in connection with bonds issued by non-U.S.
corporations and entities in emerging markets.
Privately Issued Securities
Risk. The fund may invest in
privately issued securities, including those that are normally purchased
pursuant to Rule 144A under the 1933 Act. Privately issued securities are
securities that have not been registered under the 1933 Act and as a result may
be subject to legal restrictions on resale. Privately issued securities,
including those purchased pursuant to Rule 144A under the 1933 Act, are
generally not traded on established markets. Privately issued securities carry
the risk that the liquidity of these securities may become impaired, making it
more difficult for the fund to sell these bonds. Delay or difficulty in selling
such securities may result in a loss to the fund.
Schwab Fixed-Income
ETFs | Fund Details11
Portfolio Turnover
Risk. The fund may engage in
frequent trading of its portfolio securities in connection with its tracking of
the index or in response to market conditions. A portfolio turnover rate of
200%, for example, is equivalent to the fund buying and selling all of its
securities two times during the course of the year. A high portfolio turnover
rate (such as 100% or more) could result in high brokerage costs. A high
portfolio turnover rate also can result in an increase in taxable capital gains
distributions to the fund’s shareholders.
Prepayment and Extension
Risk. Certain fixed-income
securities are subject to the risk that the securities may be paid off earlier
or later than expected, especially during periods of falling or rising interest
rates, respectively. Rising interest rates tend to extend the duration of
certain fixed-income securities, making them more sensitive to changes in
interest rates. As a result, in a period of rising interest rates, the fund
could exhibit additional volatility and hold securities paying lower-than-market
rates of interest. This is known as extension risk. When interest rates decline,
borrowers may pay off their fixed-income securities sooner than expected. This
can reduce the fund’s returns because the fund will have to reinvest that money
at the lower prevailing interest rates. In addition, prepayments and subsequent
reinvestments increase the fund’s portfolio turnover rate. This is known as
prepayment risk. Either situation could hurt the fund’s performance.
Derivatives Risk. The fund may invest in derivative instruments.
The principal types of derivatives used by the fund are futures contracts. A
futures contract is an agreement to buy or sell a financial instrument at a
specific price on a specific day. The fund’s use of derivative instruments
involves risks different from, or possibly greater than, the risks associated
with investing directly in securities and other traditional investments. Certain
of these risks, such as market risk, credit risk, liquidity risk, leverage risk
and operational risk, are discussed elsewhere in this prospectus. The fund’s use
of derivatives is also subject to lack of availability risk, valuation risk,
correlation risk and tax risk. Lack of availability risk is the risk that
suitable derivative transactions may not be available in all circumstances for
risk management or other purposes. Valuation risk is the risk that a particular
derivative may be valued incorrectly. Correlation risk is the risk that changes
in the value of the derivative may not correlate perfectly with the underlying
asset, rate or index. Tax risk is the risk that the use of derivatives may cause
the fund to realize higher amounts of short-term capital gains. The fund’s use
of derivatives could reduce the fund’s performance, increase the fund’s
volatility, and cause the fund to lose more than the initial amount invested.
The fund’s use of derivatives also could create a risk of counterparty default
under certain transactions, risks that the fund would need to liquidate
portfolio positions when it may not be advantageous to do so in order to meet
margin and payment obligations, and legal risks relating to insufficient
documentation, insufficient capacity or authority of a counterparty, or legality
or enforceability of a contract. Furthermore, the use of derivatives subject to
regulation by the Commodity Futures Trading Commission (CFTC) could cause the
fund to become a commodity pool, which would require the fund to comply with
certain CFTC rules.
Liquidity Risk. Liquidity risk exists when particular
investments may be difficult to purchase, sell or value, especially during
stressed market conditions. The market for certain investments may become
illiquid due to specific adverse changes in the conditions of a particular
issuer or under adverse market or economic conditions independent of the issuer.
In addition, limited dealer inventories of certain securities could potentially
lead to decreased liquidity. In such cases, the fund, due to limitations on
investments in illiquid securities and the difficulty in readily purchasing and
selling such securities at favorable times or prices, may decline in value,
experience lower returns and/or be unable to achieve its desired level of
exposure to a certain issuer or sector. Further, transactions in illiquid
securities may entail transaction costs that are higher than those for
transactions in liquid securities.
Leverage Risk. Certain fund transactions, such as derivatives
transactions, may give rise to a form of leverage and may expose the fund to
greater risk. Leverage tends to magnify the effect of any decrease or increase
in the value of the fund’s portfolio securities which means even a small amount
of leverage can have a disproportionately large impact on the fund. The use of
leverage may cause the fund to liquidate portfolio positions when it would not
be advantageous to do so in order to satisfy its obligations.
Securities Lending
Risk. The fund may lend its
portfolio securities to brokers, dealers, and other financial institutions
provided a number of conditions are satisfied, including that the loan is fully
collateralized. When the fund lends portfolio securities, its investment
performance will continue to reflect changes in the value of the securities
loaned, and the fund will also receive a fee or interest on the collateral.
Securities lending involves the risk of loss of rights in, or delay in recovery
of, the loaned securities if the borrower fails to return the security loaned or
becomes insolvent. The fund will also bear the risk of any decline in value of
securities acquired with cash collateral. The fund may pay lending fees to a
party arranging the loan.
Market Trading
Risk. Although fund shares are
listed on national securities exchanges, there can be no assurance that an
active trading market for fund shares will develop or be maintained. If an
active market is not maintained, investors may find it difficult to buy or sell
fund shares. Trading of shares of the fund on a national securities exchange may
be halted if exchange officials deem such action appropriate, if the fund is
delisted, or if the activation of marketwide “circuit breakers” halts stock
trading generally. If the fund’s shares are delisted, the fund may seek to list
its shares on another market, merge with another ETF, or redeem its shares at
NAV.
Shares of the Fund May
Trade at Prices Other Than NAV. As
with all ETFs, fund shares may be bought and sold in the secondary market at
market prices. Although it is expected that the market price of the shares of
the fund will approximate the fund’s NAV, there may be times when the market
price and the NAV vary significantly. Thus, an investor may pay more than NAV
when buying shares of the fund in the secondary market, and an investor may
receive less than NAV when selling those shares in the secondary market. The
investment adviser cannot predict whether shares will trade above (premium),
below (discount) or at NAV. The fund may have a limited number of financial
institutions
12Schwab Fixed-Income
ETFs | Fund Details
that may act as “Authorized Participants” or
market makers. Only Authorized Participants who have entered into agreements
with the fund’s distributor may engage in creation or redemption transactions
directly with the fund (as discussed in the “Creation and Redemption” section
below). If those Authorized Participants exit the business or are unable to
process creation and/or redemption orders (including in situations where
Authorized Participants have limited or diminished access to capital required to
post collateral), and no other Authorized Participant is able to step forward to
create and/or redeem, fund shares may trade at a premium or discount to NAV like
closed-end fund shares (and may even face delisting). Similar effects may result
if market makers exit the business or are unable to continue making markets in
the fund’s shares. Risks associated with having a limited number of Authorized
Participants may be heightened for ETFs that invest in securities issued by
non-U.S. issuers or other instruments that have lower trading volumes. More
generally, market makers are not obligated to make a market in the fund’s
shares, and Authorized Participants are not obligated to submit purchase or
redemption orders for Creation Units. Further, while the creation/redemption
feature is designed to make it likely that shares normally will trade close to
the value of the fund’s holdings, disruptions to creations and/or redemptions,
including disruptions at market makers, Authorized Participants or market
participants, or during periods of significant market volatility, may result in
market prices that differ significantly from the value of the fund’s holdings.
In addition, transactions by large shareholders may account for a
large percentage of trading volume on the fund’s primary listing exchange
and may, therefore, have a material effect on the market price of the fund’s
shares.
The market price of fund shares during the
trading day, like the price of any exchange-traded security, may be impacted by
a “bid/ask” spread. The bid/ask spread is the difference between what investors
are willing to pay for fund shares (the “bid” price) and the price at which
investors are willing to sell fund shares (the “ask” price). The spread may vary
over time and is based on many factors including supply and demand for the
underlying securities held by the fund, supply and demand for shares of the fund
itself, and the historical and current magnitude of price fluctuation of the
fund’s asset class. The spread is generally narrower if the fund has higher
trading volume and wider if the fund has lower trading volume (which may be the
case for funds that are newly launched or small in size). Bid/ask spreads may
also be wider during times of higher market volatility. At those times, fund
shares are most likely to be traded at a discount to NAV, and the discount is
likely to be greatest when the price of shares is falling fastest, which may be
the time that investors most want to sell shares.
There are various methods by which investors can
purchase and sell shares of the fund and various types of orders that may be
placed. Investors should consult their financial intermediary before purchasing
or selling shares of the fund.
Money Market
Fund Risk. An investment by
the fund in an underlying money market fund has risks. The fund may invest in
underlying money market funds that seek to maintain a stable $1.00 NAV. Although
an underlying money market fund seeks to maintain a stable $1.00 NAV, it is
possible to lose money by investing in such a money market fund. In addition,
money market funds are not designed to offer capital appreciation. In exchange
for their emphasis on stability and liquidity, money market investments may
offer lower long-term performance than stock or bond investments. Certain
underlying money market funds may impose a fee upon the sale of shares under
certain circumstances.
Schwab Mortgage-Backed Securities ETF
Investment Objective
The fund’s goal is to track as closely as
possible, before fees and expenses, the total return of an index composed of
investment-grade mortgage-backed securities issued and/or guaranteed by U.S.
government agencies. The fund’s investment objective is not fundamental and
therefore may be changed by the fund’s Board of Trustees without shareholder
approval.
More Information About Principal Investment
Risks
The fund is subject to risks, any of which could
cause an investor to lose money.
Market Risk. Financial markets rise and fall in response to
a variety of factors, sometimes rapidly and unpredictably. Markets may be
impacted by economic, political, regulatory and other conditions, including
economic sanctions, tariffs, and other government actions. In addition, the
occurrence of global events, such as war, terrorism, environmental disasters,
natural disasters and epidemics, may also negatively affect the financial
markets. These events could reduce consumer demand or economic output; result in
market closures, changes in interest rates, inflation/deflation, travel
restrictions or quarantines; and significantly adversely impact the economy.
Governmental and quasi-governmental authorities and regulators throughout the
world have in the past often responded to serious economic disruptions with a
variety of significant fiscal and monetary policy changes which could have an
unexpected impact on financial markets and the fund’s investments. As with any
investment whose performance is tied to these markets, the value of an
investment in the fund will fluctuate, which means that an investor could lose
money over short or long periods.
Investment Style
Risk. The fund is an index fund.
Therefore, the fund follows the securities included in the index during upturns
as well as downturns. Because of its indexing strategy, the fund does not take
steps to reduce market exposure or to lessen the effects of a declining market,
even though these stocks may go in and out of favor based on market and economic
conditions. The index does not weigh securities on the basis of investor
protection, limitations or differences in the quality of financial reporting or
other oversight mechanisms. Therefore, the fund will follow the securities in
the index without consideration of these factors. In addition, because of the
fund’s expenses, the fund’s performance may be below that of the index.
Schwab Fixed-Income
ETFs | Fund Details13
At times the segment of the markets represented
by the index may underperform other market segments. A
significant percentage of the index may be composed of securities in a
single industry or sector of the economy. If the fund is focused in an industry
or sector, it may present more risks than if it were broadly diversified over
numerous industries and sectors of the economy.
Index-Related
Risk. The index provider does not
provide any warranty as to the timeliness, accuracy or completeness of any data
relating to the index. Errors relating to the index, including index data,
computations and/or construction, may occur from time to time and may not be
identified by the index provider for a period of time or at all. Losses
resulting from index errors may be borne by the fund and its shareholders. In
addition, there can be no guarantee that the index will operate as intended
during volatile market conditions or over the course of a full market
cycle.
In addition, market disruptions could cause
delays in the index’s rebalancing schedule which may result in the index and, in
turn, the fund experiencing returns different than those that would have been
achieved under a normal rebalancing schedule.
Mortgage-Backed and Mortgage
Pass-Through Securities Risk.
Mortgage-backed securities tend to increase in value less than other debt
securities when interest rates decline, but are subject to similar or greater
risk of decline in market value during periods of rising interest rates. Because
of prepayment and extension risk, mortgage-backed securities react differently
to changes in interest rates than other debt securities. Small movements in
interest rates – both increases and decreases – may quickly and significantly
affect the value of certain mortgage-backed securities. In addition, certain of
the mortgage-backed securities in which the fund may invest are issued or
guaranteed by agencies or instrumentalities of the U.S. government but are not
backed by the full faith and credit of the U.S. government and there can be no
assurance that the U.S. government would provide financial support to its
agencies or instrumentalities where it was not obligated to do so which can
cause the fund to lose money or underperform. The risks of investing in
mortgage-backed securities include, among others, interest rate risk, credit
risk, prepayment risk and extension risk, as well as risks associated with the
nature of the underlying mortgage assets and the servicing of those assets.
These securities are subject to the risk of default on the underlying mortgages,
and such risk is heightened during periods of economic downturn. Transactions in
mortgage pass-through securities often occur through TBA transactions. If a TBA
counterparty defaults or goes bankrupt the fund may experience adverse market
action, expenses, or delays in connection with the purchase or sale of the pools
of mortgage pass-through securities specified in a TBA transaction which can
cause the fund to lose money or underperform.
Interest Rate
Risk. Interest rates rise and fall
over time. As with any investment whose yield reflects current interest rates,
the fund’s yield will change over time. During periods when interest rates are
low or there are negative interest rates, the fund’s yield (and total return)
also may be low or the fund may be unable to maintain positive returns. Changes
or the anticipation of changes in interest rates also may affect the fund’s
share price: a rise in interest rates generally causes the fund’s share price to
fall. This risk is greater when the fund holds fixed-income securities with
longer maturities. The longer the fund’s portfolio duration, the more sensitive
to interest rate movements its share price is likely to be. For example, a fund
with a longer portfolio duration is more likely to experience a decrease in its
share price as interest rates rise. Duration is an estimate of a security’s (or
portfolio of securities) sensitivity to changes in prevailing interest rates
that is based on certain factors that may prove to be incorrect. It is therefore
not an exact measurement and may not be able to reliably predict a particular
security’s price sensitivity to changes in interest rates.
Economic conditions and other factors, including
a central bank’s monetary policy, may result in changes in interest rates, which
could have sudden and unpredictable effects on the markets and significantly
impact the value of fixed-income securities in which the fund invests. Rising
interest rates may decrease liquidity in the fixed-income securities markets,
making it more difficult for the fund to sell its fixed-income securities
holdings at a time when the investment adviser might wish to sell such
securities. In addition, decreased market liquidity also may make it more
difficult to value some or all of the fund’s fixed-income securities holdings.
Certain countries have experienced negative interest rates on certain
fixed-income securities. Negative or very low interest rates could magnify the
risks associated with changes in interest rates. In general, changing interest
rates, including rates that fall below zero, could have unpredictable effects on
markets and may expose fixed-income and related markets to heightened
volatility. Inflation-protected securities may react differently to interest
rate changes than other types of fixed-income securities and tend to react to
changes in “real” interest rates.
Credit Risk. A decline in the credit quality of an issuer,
guarantor or liquidity provider of a portfolio investment or a counterparty
could cause the fund to lose money or underperform. The fund could lose money
if, due to a decline in credit quality, the issuer, guarantor or liquidity
provider of a portfolio investment or a counterparty fails to make, or is
perceived as being unable or unwilling to make, timely principal or interest
payments or otherwise honor its obligations. The credit quality of the fund’s
portfolio holdings can change rapidly in certain market environments and any
default on the part of a single portfolio investment could cause the fund’s
share price or yield to fall. Certain U.S. government securities that the fund
invests in are not backed by the full faith and credit of the U.S. government,
which means they are neither issued nor guaranteed by the U.S. Treasury. There
can be no assurance that the U.S. government will provide financial support to
securities of its agencies and instrumentalities if it is not obligated to do so
under law. Also, any government guarantees on securities the fund owns do not
extend to the shares of the fund itself.
Prepayment and Extension
Risk. Certain fixed-income
securities are subject to the risk that the securities may be paid off earlier
or later than expected, especially during periods of falling or rising interest
rates, respectively. Rising interest rates tend to extend the duration of
certain fixed-income securities, making them more sensitive to changes in
interest rates. As a result, in a period of rising interest rates,
14Schwab Fixed-Income
ETFs | Fund Details
the fund could exhibit additional volatility and
hold securities paying lower-than-market rates of interest. This is known as
extension risk. When interest rates decline, borrowers may pay off their
fixed-income securities sooner than expected. This can reduce the fund’s returns
because the fund will have to reinvest that money at the lower prevailing
interest rates. In addition, prepayments and subsequent reinvestments increase
the fund’s portfolio turnover rate. This is known as prepayment risk. Either
situation could hurt the fund’s performance.
Tracking Error and
Correlation Risk. As an index fund,
the fund seeks to track the performance of the index, although it may not be
successful in doing so. The divergence between the performance of the fund and
the index, positive or negative, is called “tracking error.” Tracking error can
be caused by many factors and it may be significant. For example, the fund may
not invest in certain securities in the index, match the securities’ weighting
to the index, or the fund may invest in securities not in the index, due to
regulatory, operational, custodial or liquidity constraints; corporate
transactions; asset valuations; transaction costs and timing; tax
considerations; and index rebalancing, which may result in tracking error. The
fund may attempt to offset the effects of not being invested in certain index
securities by making substitute investments, but these efforts may not be
successful. In certain circumstances, the fund may value individual securities
based on fair value prices developed using methods approved by the fund’s Board
of Trustees. To the extent the fund calculates its NAV based on fair value
prices, the fund’s performance may diverge from that of its index. In addition,
cash flows into and out of the fund, timing variances, operating expenses and
trading costs all affect the ability of the fund to match the performance of the
index, because the index does not have to manage cash flows and does not incur
any costs. Lastly, differences between the fund’s portfolio and the index
resulting from legal restrictions (such as diversification requirements) that
apply to the fund but not to the index impact correlation between the
performance of the fund and that of its index.
Portfolio Turnover
Risk. The fund may engage in
frequent trading of its portfolio securities in connection with its tracking of
the index or in response to market conditions. A portfolio turnover rate of
200%, for example, is equivalent to the fund buying and selling all of its
securities two times during the course of the year. A high portfolio turnover
rate (such as 100% or more) could result in high brokerage costs. A high
portfolio turnover rate also can result in an increase in taxable capital gains
distributions to the fund’s shareholders.
Derivatives Risk. The fund may invest in derivative instruments.
The principal types of derivatives used by the fund are futures contracts. A
futures contract is an agreement to buy or sell a financial instrument at a
specific price on a specific day. The fund’s use of derivative instruments
involves risks different from, or possibly greater than, the risks associated
with investing directly in securities and other traditional investments. Certain
of these risks, such as market risk, credit risk, liquidity risk, leverage risk
and operational risk, are discussed elsewhere in this prospectus. The fund’s use
of derivatives is also subject to lack of availability risk, valuation risk,
correlation risk and tax risk. Lack of availability risk is the risk that
suitable derivative transactions may not be available in all circumstances for
risk management or other purposes. Valuation risk is the risk that a particular
derivative may be valued incorrectly. Correlation risk is the risk that changes
in the value of the derivative may not correlate perfectly with the underlying
asset, rate or index. Tax risk is the risk that the use of derivatives may cause
the fund to realize higher amounts of short-term capital gains. The fund’s use
of derivatives could reduce the fund’s performance, increase the fund’s
volatility, and cause the fund to lose more than the initial amount invested.
The fund’s use of derivatives also could create a risk of counterparty default
under certain transactions, risks that the fund would need to liquidate
portfolio positions when it may not be advantageous to do so in order to meet
margin and payment obligations, and legal risks relating to insufficient
documentation, insufficient capacity or authority of a counterparty, or legality
or enforceability of a contract. Furthermore, the use of derivatives subject to
regulation by the Commodity Futures Trading Commission (CFTC) could cause the
fund to become a commodity pool, which would require the fund to comply with
certain CFTC rules.
Liquidity Risk. Liquidity risk exists when particular
investments may be difficult to purchase, sell or value, especially during
stressed market conditions. The market for certain investments may become
illiquid due to specific adverse changes in the conditions of a particular
issuer or under adverse market or economic conditions independent of the issuer.
In addition, limited dealer inventories of certain securities could potentially
lead to decreased liquidity. In such cases, the fund, due to limitations on
investments in illiquid securities and the difficulty in readily purchasing and
selling such securities at favorable times or prices, may decline in value,
experience lower returns and/or be unable to achieve its desired level of
exposure to a certain issuer or sector. Further, transactions in illiquid
securities may entail transaction costs that are higher than those for
transactions in liquid securities.
Leverage Risk. Certain fund transactions, such as derivatives
transactions, may give rise to a form of leverage and may expose the fund to
greater risk. Leverage tends to magnify the effect of any decrease or increase
in the value of the fund’s portfolio securities which means even a small amount
of leverage can have a disproportionately large impact on the fund. The use of
leverage may cause the fund to liquidate portfolio positions when it would not
be advantageous to do so in order to satisfy its obligations.
Securities Lending
Risk. The fund may lend its
portfolio securities to brokers, dealers, and other financial institutions
provided a number of conditions are satisfied, including that the loan is fully
collateralized. When the fund lends portfolio securities, its investment
performance will continue to reflect changes in the value of the securities
loaned, and the fund will also receive a fee or interest on the collateral.
Securities lending involves the risk of loss of rights in, or delay in recovery
of, the loaned securities if the borrower fails to return the security loaned or
becomes insolvent. The fund will also bear the risk of any decline in value of
securities acquired with cash collateral. The fund may pay lending fees to a
party arranging the loan.
Schwab Fixed-Income
ETFs | Fund Details15
Market Trading
Risk. Although fund shares are
listed on national securities exchanges, there can be no assurance that an
active trading market for fund shares will develop or be maintained. If an
active market is not maintained, investors may find it difficult to buy or sell
fund shares. Trading of shares of the fund on a national securities exchange may
be halted if exchange officials deem such action appropriate, if the fund is
delisted, or if the activation of marketwide “circuit breakers” halts stock
trading generally. If the fund’s shares are delisted, the fund may seek to list
its shares on another market, merge with another ETF, or redeem its shares at
NAV.
Shares of the Fund May
Trade at Prices Other Than NAV. As
with all ETFs, fund shares may be bought and sold in the secondary market at
market prices. Although it is expected that the market price of the shares of
the fund will approximate the fund’s NAV, there may be times when the market
price and the NAV vary significantly. Thus, an investor may pay more than NAV
when buying shares of the fund in the secondary market, and an investor may
receive less than NAV when selling those shares in the secondary market. The
investment adviser cannot predict whether shares will trade above (premium),
below (discount) or at NAV. The fund may have a limited number of financial
institutions that may act as “Authorized Participants” or market makers. Only
Authorized Participants who have entered into agreements with the fund’s
distributor may engage in creation or redemption transactions directly with the
fund (as discussed in the “Creation and Redemption” section below). If those
Authorized Participants exit the business or are unable to process creation
and/or redemption orders (including in situations where Authorized Participants
have limited or diminished access to capital required to post collateral), and
no other Authorized Participant is able to step forward to create and/or redeem,
fund shares may trade at a premium or discount to NAV like closed-end fund
shares (and may even face delisting). Similar effects may result if market
makers exit the business or are unable to continue making markets in the fund’s
shares. Risks associated with having a limited number of Authorized Participants
may be heightened for ETFs that invest in securities issued by non-U.S. issuers
or other instruments that have lower trading volumes. More generally, market
makers are not obligated to make a market in the fund’s shares, and Authorized
Participants are not obligated to submit purchase or redemption orders for
Creation Units. Further, while the creation/redemption feature is designed to
make it likely that shares normally will trade close to the value of the fund’s
holdings, disruptions to creations and/or redemptions, including disruptions at
market makers, Authorized Participants or market participants, or during periods
of significant market volatility, may result in market prices that differ
significantly from the value of the fund’s holdings. In addition, transactions
by large shareholders may account for a large percentage of trading volume
on the fund’s primary listing exchange and may, therefore, have a material
effect on the market price of the fund’s shares.
The market price of fund shares during the
trading day, like the price of any exchange-traded security, may be impacted by
a “bid/ask” spread. The bid/ask spread is the difference between what investors
are willing to pay for fund shares (the “bid” price) and the price at which
investors are willing to sell fund shares (the “ask” price). The spread may vary
over time and is based on many factors including supply and demand for the
underlying securities held by the fund, supply and demand for shares of the fund
itself, and the historical and current magnitude of price fluctuation of the
fund’s asset class. The spread is generally narrower if the fund has higher
trading volume and wider if the fund has lower trading volume (which may be the
case for funds that are newly launched or small in size). Bid/ask spreads may
also be wider during times of higher market volatility. At those times, fund
shares are most likely to be traded at a discount to NAV, and the discount is
likely to be greatest when the price of shares is falling fastest, which may be
the time that investors most want to sell shares.
There are various methods by which investors can
purchase and sell shares of the fund and various types of orders that may be
placed. Investors should consult their financial intermediary before purchasing
or selling shares of the fund.
Money Market
Fund Risk. An investment by
the fund in an underlying money market fund has risks. The fund may invest in
underlying money market funds that seek to maintain a stable $1.00 NAV. Although
an underlying money market fund seeks to maintain a stable $1.00 NAV, it is
possible to lose money by investing in such a money market fund. In addition,
money market funds are not designed to offer capital appreciation. In exchange
for their emphasis on stability and liquidity, money market investments may
offer lower long-term performance than stock or bond investments. Certain
underlying money market funds may impose a fee upon the sale of shares under
certain circumstances.
Maturity
and Duration: A Brief Explanation
“Maturity” and “duration” are concepts generally
associated with fixed-income investments, such as bonds, and, as an investor or
potential investor in a fixed-income fund, it is important that you have a basic
understanding of each concept and how each relates to your investment. The
following discussion about maturity and duration will also help you understand
how bond prices – and, by extension, the share price of a fund that invests in
bonds – can be expected to change given a change in interest rates.
Maturity and Duration – The Basics
A BOND is a loan between an issuer and a bondholder
that obligates the issuer to pay the bondholder a specified sum of money,
usually at specific intervals, over a specified period of time. More
specifically, in exchange for the loan amount, or PRINCIPAL, a bondholder receives INTEREST – or COUPON – payments from the issuer as compensation for
the use – or borrowing – of the bondholder’s principal for a specific period of
time. “ISSUERS” may include entities such as corporations, governments,
government agencies and municipalities, while “BONDHOLDERS” may include, but are
not limited to, mutual funds or ETFs, banks, insurance companies and
individuals.
16Schwab Fixed-Income
ETFs | Fund Details
In addition to the coupon payments that an
issuer is obligated to pay a bondholder, the issuer is also obligated to repay
the principal amount at “maturity.” A bond’s MATURITY represents when the final principal payment of
a bond is scheduled to be repaid. Simply, it is the period of time until a
bondholder can expect to receive all of its money, or principal, back from the
issuer. A bond’s MATURITY DATE is the specific date by which the entire
principal amount is to be repaid.
DURATION is a measure that estimates the sensitivity of
a bond’s price relative to interest rate changes. Duration is often expressed as
a period of time (i.e., 6 months, 1 year, 2.5 years, etc.). Generally,
a lower duration indicates a lower sensitivity to changes in interest rates, and
a higher duration indicates a higher sensitivity to changes in interest rates.
Unlike maturity, which only measures the time until final payment of principal,
duration considers the timing and pattern of interest and principal payments.
Because different factors are considered when calculating maturity and duration,
a bond’s duration is often shorter than its maturity and can at times be
significantly shorter than the maturity. A characteristic of duration is that as
interest rates decline, duration tends to increase. For municipal and
mortgage-backed securities, duration may also increase when interest rates
increase.
When thinking about the concepts of maturity and
duration, there are two common risks1 generally associated with fixed-income
investments that are important to consider. The first relates to maturity:
there is risk
that an issuer may be unable to repay the principal due. Usually, this risk increases with time.
Bondholders typically have greater transparency with respect to an issuer’s
ability to repay a loan over shorter time horizons, while assessing the future
becomes more difficult as the periods get longer. As a result, bonds with longer
maturities tend to carry higher repayment risk than bonds with shorter
maturities. This is one reason why longer-maturity bonds typically pay higher
interest rates than shorter-maturity bonds. Similarly, funds that invest in
bonds with longer maturities are subject to higher repayment risk, but will
typically pay higher dividends than funds that invest in bonds with shorter
maturities.
The second risk relates to the impact of interest rates on a
bond’s price. Interest rates
generally fluctuate; meaning, they can increase or decrease prior to a bond’s
maturity date. This means that during an investor’s holding period, a bond’s
coupon may be less than or greater than current market interest rates. To the
extent a bond’s coupon is different from current market interest rates,
a bond’s price
will fall or rise to align with current market interest rates. Bond prices exhibit an inverse relationship
relative to interest rates: when interest rates decline, bond prices increase
and vice versa. For example, assume you purchased a new issue bond when interest
rates were 4%. Now assume that since you purchased that bond interest rates
increased by 1% to 5%. Keeping in mind that bond prices and interest rates have
an inverse relationship – when interest rates increase, a bond’s price declines
– the price of the purchased 4% coupon bond in this example would decline
because bonds can now be purchased with 5% coupons making the 4% coupon bond
less valuable.
More on Duration
While having a basic understanding of both
maturity and duration is important for any fixed-income investor, maturity tends
to be more straightforward than the concept of duration, which requires a bit
more discussion. In its simplest terms, duration attempts to quantify and
estimate how much a bond’s price can be expected to change in response to
changing interest rates. Typically, duration increases as a bond’s maturity
increases and decreases as a bond’s maturity decreases; meaning, longer-maturity
bonds have higher durations than shorter-maturity bonds. With this in mind,
remember that as duration increases, a bond’s sensitivity to changes in interest
rates increases. That means that when interest rates increase:
•
Relative to longer duration bonds, shorter
duration bonds would fall less in price because an investor’s principal would be
repaid at the lower interest rate sooner.
•
Longer-duration bonds, on the other hand, would
fall in price more than shorter-duration bonds, due to the longer horizon of
holding bonds paying less interest than current interest rates.
So, when looking at the example above, where
interest rates rose from 4% to 5%, the extent to which the 4% coupon bond would
decline in price is dependent upon the bond’s duration – the longer the
duration, the more it would decline in price. For example, a 4% coupon bond with
a duration of 2 years would decline less in price than a 4% coupon bond
with a duration of 4 years. This is true when assessing the extent to which
any bond’s price may change when interest rates change.
Beyond providing a way to compare the relative
interest rate sensitivity of bonds, duration attempts to estimate the expected
change in a bond’s value should interest rates change by 1%. Again, recall the
example above, where interest rates rose from 4% to 5%. Under this scenario, a
bond with a 6 year duration would generally be expected to decline in price by
approximately 6% (1% price move for each year of duration), while a bond with a
7 year duration would generally be expected to decline in price by approximately
7%. If the example above were reversed and interest rates instead declined by
1%, from 4% to 3%, the opposite would occur:
•
Relative to longer-duration bonds, shorter
duration bonds would appreciate less in price; longer-duration bonds would
appreciate more in price than shorter-duration bonds.
?
1
All investments are subject to risks, including
risks not discussed in this section of the prospectus. Please refer to the risks
disclosed elsewhere in this prospectus and the SAI to understand the risks of
investing in the funds.
Schwab Fixed-Income
ETFs | Fund Details17
•
A bond with a 6 year duration would generally be
expected to increase in value by approximately 6% (1% price move for each year
of duration), while a bond, or bond fund, with a 7 year duration would generally
be expected to increase in value by approximately 7%.
It is important to understand that a bond’s
duration is not constant. As stated earlier, duration considers the timing and
pattern of interest and principal payments. As time progresses, the period of
time remaining until interest and principal payments are made changes, impacting
the duration of a bond – as the time until those payments are made shortens, the
duration also shortens. In addition, and as discussed previously, duration is
also impacted by interest rate changes. As such, duration is a gauge of a bond’s
sensitivity to interest rate changes, but it should not be relied on as an exact
measure of the price change if interest rates change.
Maturity and Duration – At the
Fund Level
A fund that invests in bonds is impacted in the
same way as the individual bond described in the examples above – as interest
rates increase the value of fund shares will decline, and as interest rates
decline the value of fund shares will increase. To provide investors with
information about a fund’s interest rate risk exposure, the fund typically
provides the average maturity and duration of the portfolio, which take into
consideration the maturity and duration of all the fund’s fixed-income
investments. A fund with a shorter portfolio average maturity and duration is
expected to be less impacted by changing interest rates than a fund with a
longer portfolio average maturity and duration. Simply stated, a fund with a
shorter portfolio average maturity and duration is generally less volatile as a
result of interest rate changes than a fund with a longer portfolio average
maturity and duration.
In the same way that a bond’s duration is not
constant, a fund’s portfolio average maturity and duration are not constant. A
fund’s portfolio average duration will change as a result of duration changes to
the bonds the fund owns, as described above. Further, both the average maturity
and duration may change as the fund’s portfolio manager buys and/or sells bonds
owned by the fund. To remain aware of the interest rate sensitivity of funds you
own, it is helpful to periodically review the fund’s reported average portfolio
maturity and duration.
Maturity and Duration – Other Fixed-Income
Securities
The above discussion provides a general overview
of the concepts of maturity and duration. Application and calculation of these
concepts may be slightly different or become more complex when applied to other
types of fixed-income securities, which may require different assessments to
determine and/or calculate maturity and duration. For example, to calculate the
duration for securitized investments, such as mortgage-backed securities and
certain asset-backed securities, an investor must look-through to the
instruments underlying the securities and must account for the pace of repayment
of the underlying instruments. To learn more about maturity and duration for the
specific types of fixed-income investments that the funds may invest in, please
refer to the SAI.
Portfolio
Holdings
A description of the funds’ policies and
procedures with respect to the disclosure of a fund’s portfolio securities is
available in the SAI.
18Schwab Fixed-Income
ETFs | Fund Details
Financial
Highlights
This section provides further details about each
fund’s financial history for the past five years or, if shorter, for its period
of operations. Certain information reflects financial results for a single fund
share. “Total return” shows the percentage that an investor in a fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The information has been audited by the funds’ independent
registered public accounting firm, Deloitte & Touche LLP (Deloitte).
Deloitte’s full report is included in each fund’s annual holdings and financial
statements, which are included in each fund’s Form N-CSR (see back
cover).
Schwab High Yield Bond ETF
| | | |
9/1/24– 8/31/25(1) |
| |
9/1/23– 8/31/24(1) |
| |
7/11/23(2) – 8/31/23(1) |
| | | | | | | |||||||||
| Per-Share Data | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net asset value at beginning of period | | | | $ | 26.45 | | | | | $ | 25.51 | | | | | $ | 25.00 | | | | | | | | |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Net
investment income (loss)(3)
|
| | | | 1.93 | | | | | | 2.01 | | | | | | 0.28 | | | | | | | | |
|
Net
realized and unrealized gains (losses) |
| | | | 0.11 | | | | | | 0.89 | | | | | | 0.23 | | | | | | | | |
|
Total from investment operations
|
| | | | 2.04 | | | | | | 2.90 | | | | | | 0.51 | | | | | | | | |
| Less distributions: | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Distributions from net investment
income |
| | | | (1.87) | | | | | | (1.96) | | | | | | – | | | | | | | | |
| Net asset value at end of period | | | | $ | 26.62 | | | | | $ | 26.45 | | | | | $ | 25.51 | | | | | | | | |
| Total return | | | | | 8.02% | | | | | | 11.95% | | | | | | 2.04%(4) | | | | | | | | |
| Ratios/Supplemental Data | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ratios to average net assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Total expenses |
| | | | 0.03% | | | | | | 0.03%(5) | | | | | | 0.10%(6) | | | | | | | | |
|
Net
investment income (loss) |
| | | | 7.37% | | | | | | 7.87% | | | | | | 7.88%(6) | | | | | | | | |
| Portfolio turnover rate(7) | | | | | 24% | | | | | | 24% | | | | | | 1%(4) | | | | | | | | |
| Net assets, end of period (x 1,000,000) | | | | $ | 1,429 | | | | | $ | 439 | | | | | $ | 46 | | | | | | | | |
(1)
Per-Share Data has been retroactively adjusted
to reflect a 2-for-1 share split effective after the close of U.S. markets on
October 10, 2024.
(2)
Commencement of
operations.
(3)
Calculated based on the average
shares outstanding during the period.
(4)
Not annualized.
(5)
Effective September 25, 2023,
the annual operating expense ratio was reduced to 0.03%. The ratio presented for
the period ended August 31, 2024, is a blended ratio.
(6)
Annualized.
(7)
Portfolio turnover rate
excludes securities received or delivered from processing of in-kind creations
or redemptions.
Schwab Fixed-Income ETFs | Financial
Highlights19
Schwab Mortgage-Backed Securities ETF
| | | |
11/19/24(1) – 08/31/25 |
| | | | | | | | | | | | | |||
| Per-Share Data | | | | | | | | | | | | | | | | | | | |
| Net asset value at beginning of period | | | | $ | 25.00 | | | | | | | | | | | | | | |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | | | | | |
|
Net
investment income (loss)(2)
|
| | | | 1.02 | | | | | | | | | | | | | | |
|
Net
realized and unrealized gains (losses) |
| | | | 0.31 | | | | | | | | | | | | | | |
|
Total from investment operations
|
| | | | 1.33 | | | | | | | | | | | | | | |
| Less distributions: | | | | | | | | | | | | | | | | | | | |
|
Distributions from net investment
income |
| | | | (0.82) | | | | | | | | | | | | | | |
| Other capital(2) | | | | | 0.01 | | | | | | | | | | | | | | |
| Net asset value at end of period | | | | $ | 25.52 | | | | | | | | | | | | | | |
| Total return | | | | | 5.47%(3) | | | | | | | | | | | | | | |
| Ratios/Supplemental Data | | | | | | | | | | | | | | | | | | | |
| Ratios to average net assets: | | | | | | | | | | | | | | | | | | | |
|
Total expenses |
| | | | 0.03%(4) | | | | | | | | | | | | | | |
|
Net
investment income (loss) |
| | | | 5.19%(4) | | | | | | | | | | | | | | |
| Portfolio turnover rate(5) | | | | | 20%(3) | | | | | | | | | | | | | | |
| Net assets, end of period (x 1,000,000) | | | | $ | 5,445 | | | | | | | | | | | | | | |
(1)
Commencement of operations.
?
(2)
Calculated based on the average
shares outstanding during the period.
?
(3)
Not annualized.
?
(4)
Annualized.
?
(5)
Portfolio turnover rate
excludes securities received or delivered from processing of in-kind creations
or redemptions.
20Schwab Fixed-Income
ETFs | Financial Highlights
Fund Management
The investment adviser for the funds is Charles
Schwab Investment Management, Inc., dba Schwab Asset Management, 9800 Schwab
Way, Lone Tree, CO 80124. The investment adviser was founded in 1989 and as of
October 31, 2025, managed approximately $1.5 trillion in assets.
The investment adviser oversees the asset
management and administration of the funds. As compensation for these services,
the investment adviser receives a management fee from each fund. For the 12
months ended August 31, 2025, these fees were 0.03% for the Schwab High Yield
Bond ETF. This figure, which is expressed as a percentage of the Schwab High
Yield Bond ETF’s average daily net assets, represents the actual amount paid.
The investment adviser receives a management fee of 0.03% of the average daily
net assets of the Schwab Mortgage-Backed Securities ETF.
Pursuant to an Amended and Restated Advisory
Agreement between the investment adviser and Schwab Strategic Trust, on behalf
of each fund, the investment adviser pays the operating expenses of each fund,
excluding taxes, any brokerage expenses, and extraordinary or non-routine
expenses.
A discussion regarding the basis for the Board
of Trustees’ approval of each fund’s Amended and Restated Advisory Agreement is
available in the funds’ 2025 annual holdings and financial statements, which are
included in each fund’s Form N-CSR and covers the period from September 1, 2024,
or commencement of operations, through August 31, 2025.
Matthew Hastings,
CFA, Managing Director and Head of
Bond Index Strategies for Schwab Asset Management, is responsible for the
day-to-day co-management of the funds. Mr. Hastings leads the portfolio
management team for the Schwab Taxable Bond Mutual Funds and Schwab Fixed-Income
ETFs. He also has overall responsibility for all aspects of the management of
the funds. Prior to joining Schwab in 1999, Mr. Hastings was in fixed income
sales and trading at Lehman Brothers. He has worked in the fixed income
securities industry since 1996.
Ryan Hook, CFA, Senior Portfolio Manager for Schwab Asset
Management, is responsible for the day-to-day co-management of the Schwab High
Yield Bond ETF. Prior to joining Schwab in 2022, Mr. Hook spent nearly 2 years
as a portfolio strategist at Capital Group, where he was responsible for
managing high yield institutional mandates. Prior to that, he spent 14 years at
Goldman Sachs working mainly in high yield portfolio construction and trading,
as well as product management.
Steven Hung, Senior Portfolio Manager for Schwab Asset
Management, is responsible for the day-to-day co-management of the Schwab High
Yield Bond ETF. He is primarily responsible for the management and oversight of
corporate bonds, within the taxable bond strategies, with additional
responsibility for managing municipal bond index strategies. Mr. Hung has been a
portfolio manager with Schwab Asset Management since 2005 and prior to that,
served in various roles as an associate portfolio manager and trader since 1999.
In 1998, he joined Schwab’s management training program and worked as a clerk on
the options trading floor of the Pacific Coast Stock Exchange.
Mark McKissick,
CFA, Senior Portfolio Manager for
Schwab Asset Management, is responsible for the day-to-day co-management of the
Schwab Mortgage-Backed Securities ETF. Prior to joining Schwab Asset Management
in 2016, Mr. McKissick worked at Denver Investments for 17 years, most
recently as a director of fixed income and portfolio manager. In this role he
co-managed multiple bond strategies, as well as oversaw the firm’s fixed-income
business including the investment process, client service and other
administrative functions.
Alfonso Portillo,
Jr., Senior Portfolio Manager for
Schwab Asset Management, is responsible for the day-to-day co-management of the
Schwab Mortgage-Backed Securities ETF. His primary focus is securitized
products. Prior to joining Schwab Asset Management in 2007, Mr. Portillo
worked for ten years at Pacific Investment Management Company, most
recently as a vice president and member of the mortgage and asset-backed
portfolio management team. He has worked in fixed- income asset management
since 1996.
Olga Kislova,
CFA, Portfolio Manager for Schwab
Asset Management, is responsible for the day-to-day co-management of the Schwab
High Yield Bond ETF. Ms. Kislova began her career at Schwab in 2014 as a
research analyst focused on Schwab’s money market and bond funds. Prior to
joining Schwab, Ms. Kislova was a credit research analyst at Nomura Asset
Management U.K. Ltd. She has worked in the fixed income securities industry
since 2007.
Additional information about the portfolio
managers’ compensation, other accounts managed by the portfolio managers and the
portfolio managers’ ownership of securities in each fund is available in the
SAI.
Distributor. The funds’ Distributor is SEI Investments
Distribution Co. The Distributor, located at 1 Freedom Valley Drive, Oaks, PA
19456, is a broker-dealer registered with the SEC. The Distributor distributes
Creation Units for the funds and does not maintain a secondary market in shares
of the funds.
Schwab Fixed-Income
ETFs | Fund Management21
Investing
in the Fund
On the following pages, you will find
information on buying and selling shares. Most investors will invest in the
funds by placing orders through their brokerage account at Charles Schwab &
Co., Inc. (Schwab) or an account with another broker/dealer or other
intermediary. Authorized Participants (as defined in “Purchase and Redemption of
Creation Units,” below) may invest directly in the funds by placing orders for
Creation Units through the funds’ transfer agent, State Street Bank and Trust
Company (direct orders). Helpful information on taxes is included as
well.
The funds generally are not registered for sale
in jurisdictions outside the United States and are intended for purchase by
persons residing in the United States. A person is considered resident in the
United States if at the time of the investment (i) the account has an
address of record in the United States or a U.S. territory (including
APO/FPO/DPO) and (ii) all account owners are resident in the United States
or a U.S. territory and have a valid U.S. taxpayer identification number. If an
existing account is updated to reflect a non-U.S. address, the account may be
restricted from making additional investments.
Shares of the funds trade on national securities
exchanges and elsewhere during the trading day and can be bought and sold
throughout the trading day like other shares of publicly traded securities. When
buying or selling shares through a broker most investors will incur customary
brokerage commissions and charges. In addition, you may incur the cost of the
“spread” – that is, any difference between the bid price (the highest price a
buyer is willing to pay for a share of a fund) and the ask price (the lowest
price a seller is willing to accept for a share of a fund).
Shares of the fund trade under the following
trading symbols:
| | Schwab High Yield Bond ETF | | | SCYB | |
| |
Schwab Mortgage-Backed Securities
ETF |
| | SMBS | |
Shares of the funds may be acquired or redeemed
directly from the funds only in Creation Units or multiples thereof, as
discussed in the “Creation and Redemption” section below. Once created, shares
of the funds trade in the secondary market in amounts less than a Creation Unit.
The funds do not impose any minimum investment for shares of the funds purchased
on an exchange or in the secondary market. Except when aggregated in Creation
Units, shares are not redeemable by the funds.
Share
Trading Prices
As with other types of securities, the trading
prices of shares in the secondary market can be affected by market forces such
as supply and demand, economic conditions and other factors. The price you pay
or receive when you buy or sell your shares in the secondary market may be more
(a premium) or less (a discount) than the NAV of such shares.
Premium/Discount Information
Information showing the number of days the
market price of each fund’s shares was greater than the fund’s NAV per share
(i.e., at a premium) and the number of days it was less than the fund’s NAV per
share (i.e., at a discount), for various time periods, is available by visiting
the funds’ website www.schwabassetmanagement.com.
Determination
of Net Asset Value
The NAV of a fund’s shares is calculated as of
the close of regular trading on the New York Stock Exchange (NYSE), generally
4:00 p.m. Eastern Time, on each day the NYSE is open for trading (each, a
Business Day). NAV per share is calculated by dividing a fund’s net assets by
the number of the fund’s shares outstanding. If the NYSE is closed due to
weather or other extenuating circumstances on a day it would typically be open
for business, or the NYSE has an unscheduled early closing on a day it has
opened for business, the funds reserve the right to treat such day as a Business
Day and accept purchase and redemption orders and calculate their respective
NAVs as of the normally scheduled close of regular trading on the NYSE for that
day.
The funds’ portfolio securities are valued using
market quotations or official closing prices if they are readily available. In
cases where market quotations are not readily available or the investment
adviser deems them unreliable, the funds’ portfolio securities are valued based
on fair values developed following procedures approved by the funds’ Board of
Trustees. The Board of Trustees has designated the investment adviser as the
valuation designee (Valuation Designee) for the funds to perform the fair value
determination relating to all fund
22Schwab Fixed-Income
ETFs | Investing in the
Fund
investments. When valuing fixed-income
securities with remaining maturities of more than 60 days, the funds use
the value of the security provided by pricing services. The pricing services
value most fixed-income securities at an evaluated price by employing
methodologies that utilize actual market transactions, broker-supplied
valuations, or other methodologies designed to identify the market value for
such securities. Securities with remaining maturities of 60 days or less
are generally valued at an evaluated price; however, such securities may be
valued at their amortized cost if it approximates the security’s market
value.
The funds’ Board of Trustees has approved
procedures to fair value the funds’ securities when market prices are not
“readily available” or are unreliable. For example, the funds may fair value a
security when a security is de-listed or its trading is halted or suspended;
when a security’s primary pricing source is unable or unwilling to provide a
price; when a security’s primary trading market is closed during regular
domestic market hours; or when a security’s value is materially affected by
events occurring after the close of the security’s primary trading market. By
fair valuing securities whose prices may have been affected by events occurring
after the close of trading of the security’s primary trading market, the funds
seek to establish prices that investors might expect to realize upon the current
sales of these securities. The Valuation Designee’s policies and procedures,
which govern the selection and application of methodologies for determining the
fair value of fund investments, seek to ensure that the prices at which the
funds’ shares are purchased and redeemed are fair and do not result in dilution
of shareholder interest or other harm to shareholders. Generally, when fair
valuing a security, the Valuation Designee will take into account all reasonably
available information that may be relevant to a particular valuation including,
but not limited to, fundamental analytical data regarding the issuer,
information relating to the issuer’s business, recent trades or offers of the
security, general and specific market conditions and the specific facts giving
rise to the need to fair value the security. The Valuation Designee makes fair
value determinations in good faith and in accordance with the fair value
procedures approved by the Board of Trustees. Due to the subjective and variable
nature of fair value pricing, there can be no assurance that the funds could
obtain the fair value assigned to the security upon the sale of such
security.
Transactions in fund shares will be priced at
NAV only if you purchase or redeem shares directly from the funds in Creation
Units. Fund shares that are purchased or sold on the secondary market will be
effected at prevailing market prices, which may be higher or lower than NAV, and
may be subject to brokerage commissions and charges. As described below,
purchases and redemptions of Creation Units will be priced at the NAV next
determined after receipt of the purchase or redemption order.
Purchase
and Redemption of Creation Units
Creation and Redemption
The shares that trade in the secondary market
are “created” at NAV. The funds issue and redeem shares only in Creation Units,
which are large blocks of shares. Only institutional investors who have entered
into an authorized participant agreement (known as Authorized Participants) may
purchase or redeem Creation Units. Creation Units generally are issued and
redeemed in exchange for a specified basket of securities and/or a designated
amount of cash. Each Business Day, prior to the opening of trading, the funds
publish the specific securities and designated amount of cash included in that
day’s basket for the funds through the National Securities Clearing Corporation
(NSCC) or other method of public dissemination. The funds reserve the right to
accept or pay out a basket of securities or cash that differs from the published
basket. The prices at which creations and redemptions occur are based on the
next calculation of NAV after an order is received and deemed acceptable by the
transfer agent. Orders from Authorized Participants to create or redeem Creation
Units will only be accepted on a Business Day and are also subject to acceptance
by the funds and the transfer agent.
Creations and redemptions must be made by an
Authorized Participant that has executed an agreement with the Distributor with
respect to creations and redemptions of Creation Unit aggregations. Information
about the procedures regarding creation and redemption of Creation Units is
included in the SAI.
Authorized Participants and the Continuous
Offering of Shares
Because new shares may be created and issued on
an ongoing basis, at any point during the life of the funds, a “distribution,”
as such term is used in the 1933 Act, may be occurring. Broker-dealers and other
persons are cautioned that some activities on their part may, depending on the
circumstances, result in them being deemed participants in a distribution in a
manner that could render them statutory underwriters and subject to the
prospectus-delivery and liability provisions of the 1933 Act. Nonetheless, any
determination of whether one is an underwriter must take into account all the
relevant facts and circumstances of each particular case.
Broker-dealers should also note that dealers who
are not “underwriters,” but are participating in a distribution (as contrasted
to ordinary secondary transactions), and thus dealing with shares that are part
of an “unsold allotment” within the meaning of Section 4(a)(3)(C) of the
1933 Act, would be unable to take advantage of the prospectus delivery exemption
provided by Section 4(a)(3) of the 1933 Act. For delivery of prospectuses
to exchange members, the prospectus delivery mechanism of Rule 153 under
the 1933 Act is only available with respect to transactions on a national
securities exchange.
Schwab Fixed-Income ETFs | Investing in the
Fund23
Creation and Redemption Transaction Fees for
Creation Units
The funds may impose a creation transaction fee
and a redemption transaction fee to offset transfer and other transaction costs
associated with the issuance and redemption of Creation Units. The creation and
redemption transaction fees applicable to the funds are listed below. The
standard creation transaction fee is charged to each purchaser on the day such
purchaser creates a Creation Unit. The standard fee is a single charge and will
be the amount indicated below regardless of the number of Creation Units
purchased by an investor on the same day. Similarly, the standard redemption
transaction fee will be the amount indicated below regardless of the number of
Creation Units redeemed that day. In addition, purchasers and redeemers of
shares in Creation Units are responsible for payment of the costs of
transferring securities to or out of the funds. Purchasers and redeemers of
Creation Units for cash may also be subject to an additional variable charge up
to the maximum amount shown in the table below. This additional variable charge
will offset the transaction costs to the funds of buying or selling portfolio
securities. In certain circumstances, the cost of any standard transaction fees
and/or additional variable charges may be waived by a fund when doing so is
believed to be in the best interests of the fund. From time to time, the
investment adviser may cover the cost of any transaction fees.
The following table shows, as of November 28,
2025, the approximate value of one Creation Unit of each fund, including the
standard and maximum additional creation and redemption transaction fee. These
fees are payable only by investors who purchase shares directly from the funds.
Retail investors who purchase shares through their brokerage account will not
pay these fees. Investors who use the services of a broker or other such
intermediary may pay fees for such services.
|
Fund |
| |
Approximate Value of One Creation Unit |
| |
Standard Creation/Redemption Transaction Fee |
| |
Maximum Additional Creation Transaction Fee(1) |
| |
Maximum Additional Redemption Transaction Fee(1) |
| ||||||||||||
| Schwab High Yield Bond ETF | | | | $ | 2,656,960 | | | | | $ | 100 | | | | | | 3.0% | | | | | | 2.0% | | |
|
Schwab Mortgage-Backed Securities
ETF |
| | | $ | 2,583,524 | | | | | $ | 100 | | | | | | 3.0% | | | | | | 2.0% | | |
(1)
As a percentage of total amount invested
or redeemed.
Additional
Policies
Policy Regarding Short-Term or Excessive
Trading
The funds do not impose any restrictions on the
frequency of purchases and redemptions of fund shares. When considering that a
policy regarding short-term or excessive trading was not necessary for the
funds, the Board of Trustees considered the structure of the funds as ETFs and
that fund shares are purchased and redeemed directly with the funds only in
large quantities (Creation Units) by Authorized Participants who are authorized
to purchase and redeem shares directly with the funds. Because purchase and
redemption transactions with Authorized Participants are an essential part of
the ETF process and help keep ETF trading prices in line with NAV, the funds
accommodate frequent purchases and redemptions by Authorized Participants.
Frequent purchases and redemptions for cash may increase index tracking error
and portfolio transaction costs and may lead to realization of capital gains.
Frequent in-kind creations and redemptions do not give rise to these concerns.
The funds reserve the right to reject or limit any purchase order at any
time.
The funds reserve the right to impose
restrictions on disruptive or abusive trading. Such trading is defined by the
funds as purchases and sales of fund shares in amounts and frequency determined
by the funds to be significant and in a pattern of activity that can potentially
be detrimental to the funds and their shareholders. Such adverse effects can
include diluting the value of the shareholders’ holdings, increasing fund
transaction costs, disrupting portfolio management strategy, incurring unwanted
taxable gains, or forcing funds to hold excess levels of cash. The funds may
reject purchase or redemption orders in such instances. The funds also impose a
transaction fee on Creation Unit transactions that is designed to offset the
funds’ transfer and other transaction costs associated with the issuance and
redemption of the Creation Units. The Board of Trustees may determine that
policies and procedures regarding the frequency of purchases and redemptions of
fund shares are necessary in the future.
Investments by Registered Investment
Companies
Section 12(d)(1) of the Investment Company
Act of 1940, as amended, restricts investments by registered investment
companies in the securities of other investment companies, including shares of
the funds. Registered investment companies are permitted to invest in the funds
beyond the limits set forth in section 12(d)(1), subject to certain terms and
conditions including in some cases that such investment companies enter into an
agreement with the funds.
Payments to Financial Intermediaries
The investment adviser or its affiliates make
payments out of their own resources, or provide products and services at a
discount, to certain brokerage firms, banks, insurance companies, retirement
plan service providers and other financial intermediaries that perform
shareholder, recordkeeping, sub-accounting and other administrative services in
connection with investments in fund shares. The investment adviser or its
24Schwab Fixed-Income
ETFs | Investing in the
Fund
affiliates also make payments out of their own
resources, or provide products and services at a discount, to certain financial
intermediaries in connection with certain activities or services which may
facilitate, directly or indirectly, investment in the funds. These payments may
relate to marketing and/or fund promotion activities and presentations,
educational training programs, conferences, the development and support of
technology platforms and/or reporting systems, data analytics and support, or
making shares of the funds available to its customers. These payments, which may
be significant, are paid by the investment adviser or its affiliates out of
their own resources and not from the assets of the funds.
Payments to a financial intermediary may create
potential conflicts of interest between the intermediary and its clients as the
payments may provide such intermediary with an incentive to favor sales of
shares of the funds over other investment options they make available to their
customers. Please see the SAI for additional information.
Distributions
and Taxes
Any investment in the funds typically involves
several tax considerations. The information below is meant as a general summary
for U.S. citizens and residents. Please see the SAI for additional information.
Because each person’s tax situation is different, you should consult your tax
advisor about the tax implications of your investment in the fund. You also can
visit the Internal Revenue Service (IRS) website at www.irs.gov.
As a shareholder, you are entitled to your share
of the dividends and gains your fund earns. Dividends from net investment
income, if any, are generally declared and paid monthly for the funds. To
receive a dividend distribution, you must be a registered shareholder on the
date that dividends are declared. Dividend distributions are paid to
shareholders on the payable date. Distributions of net realized capital gains,
if any, generally are declared and paid once a year, although the funds may do
so more frequently as determined by the Board of Trustees. Although it is not
generally expected, if a fund’s distributions exceed its realized taxable income
and capital gains during a taxable year, then all or a portion of the
distributions made during that year may be characterized as a return of capital
to shareholders. A return of capital distribution generally will not be taxable
but will reduce the shareholder’s cost basis and result in a higher capital gain
or lower capital loss when those shares on which the distribution was received
are sold. To the extent that a return of capital distribution exceeds a
shareholder’s adjusted basis, the distribution will be treated as gain from the
sale of shares. Each fund reserves the right to declare special distributions
if, in its reasonable discretion, such action is necessary or advisable to
preserve its status as a regulated investment company or to avoid imposition of
income or excise taxes on undistributed income or realized gains. Dividends and
other distributions on shares of the funds are distributed on a pro rata
basis to beneficial owners of such shares. During the fourth quarter of the
year, typically in early November, an estimate of the funds’ year-end
distributions, if any, may be made available on the funds’ website www.schwabassetmanagement.com.
Unless you are investing through an IRA, 401(k)
or other tax-advantaged account, your fund distributions generally have tax
consequences. Each fund’s taxable investment income and short-term capital gains
are distributed as dividends and will be taxable as ordinary income. Other
capital gains distributions are taxable as long-term capital gains, regardless
of how long you have held your shares in a fund. The maximum individual rate
applicable to long-term capital gains and qualified dividend income is generally
either 15% or 20%, depending on whether the individual’s income exceeds certain
threshold amounts. However, it is not expected that any of the funds’
distributions will be eligible to be treated as qualified dividend income
subject to the reduced rates. Distributions generally are taxable in the tax
year in which they are declared, whether you reinvest them or take them in
cash.
Generally, any sale of your shares is a taxable
event. A sale of your shares may give rise to a gain or loss. In general, any
gain or loss realized upon a taxable disposition of shares will be treated as
long-term capital gain or loss if the shares have been held for more than one
year. Otherwise, the gain or loss on the taxable disposition of shares will be
treated as short-term capital gain or loss. The maximum individual rate
applicable to long-term capital gains is generally either 15% or 20%, depending
on whether the individual’s income exceeds certain threshold amounts. Any loss
realized upon a taxable disposition of shares held for six months or less
will be treated as long-term, rather than short-term, to the extent of any
long-term capital gains distributions received (or deemed received) by you with
respect to the shares. All or a portion of any loss realized upon a taxable
disposition of shares will be disallowed if you purchase other substantially
identical shares within 30 days before or after the disposition. In such a
case, the basis of the newly purchased shares will be adjusted to reflect the
disallowed loss.
An additional 3.8% Medicare tax is imposed on
certain net investment income (including ordinary dividends and capital gains
distributions received from a fund and net gains from redemptions or other
taxable dispositions of fund shares) of U.S. individuals, estates and trusts to
the extent that such person’s “modified adjusted gross income” (in the case of
an individual) or “adjusted gross income” (in the case of an estate or trust)
exceeds certain threshold amounts.
At the beginning of every year, the funds
provide shareholders with information detailing the tax status of any
distributions the funds paid during the previous calendar year. Schwab customers
also receive information on distributions and transactions in their monthly
account statements.
Schwab Fixed-Income ETFs | Investing in the
Fund25
If you are investing through a taxable account
and purchase shares of the funds just before it declares a distribution, you may
receive a portion of your investment back as a taxable distribution. This is
because when the funds makes a distribution, the share price is reduced by the
amount of the distribution. You can avoid “buying a dividend,” as it is often
called, by finding out if a distribution is imminent and waiting until
afterwards to invest. Of course, you may decide that the opportunity to gain a
few days of investment performance outweighs the tax consequences of buying a
dividend.
Foreign shareholders may be subject to different
U.S. federal income tax treatment, including withholding tax at the rate of 30%
on amounts treated as ordinary dividends from a fund, as discussed in more
detail in the SAI. Furthermore, the funds are required to withhold U.S. tax (at
a 30% rate) on payments of taxable dividends made to certain non-U.S. entities
that fail to comply (or be deemed compliant) with extensive reporting and
withholding requirements designed to inform the U.S. Department of the Treasury
of U.S.-owned foreign investment accounts. Shareholders may be requested to
provide additional information to a fund to enable the fund to determine whether
withholding is required.
Taxes on Creation and Redemption of Creation
Units
An Authorized Participant who exchanges
securities for Creation Units generally will recognize a gain or a loss equal to
the difference between the market value of the Creation Units at the time of the
exchange and the sum of the exchanger’s aggregate basis in the securities
surrendered and the cash component paid. A person who redeems Creation Units
will generally recognize a gain or loss equal to the difference between the
exchanger’s basis in the Creation Units and the sum of the aggregate market
value of the securities and the amount of cash received for such Creation Units.
The IRS, however, may assert that a loss realized upon an exchange of securities
for Creation Units cannot be deducted currently under the rules governing “wash
sales,” or on the basis that there has been no significant change in economic
position. Persons exchanging securities for Creation Units should consult a tax
advisor with respect to whether wash sale rules apply and when a loss might be
deductible. Any capital gain or loss realized upon a redemption (or creation) of
Creation Units is generally treated as long-term capital gain or loss if the
fund’s shares (or securities surrendered) have been held for more than one year
and as short-term capital gain or loss if the shares (or securities surrendered)
have been held for one year or less.
If you purchase or redeem Creation Units, you
will be sent a confirmation statement showing how many shares you purchased or
sold and at what price. Persons purchasing or redeeming Creation Units should
consult their own tax advisors with respect to the tax treatment of any creation
or redemption transaction.
Additional
Information
Index Provider
Charles Schwab Investment Management, Inc., dba
Schwab Asset Management, has entered into a license agreement with ICE Data
Indices, LLC to use the ICE BofA US Cash Pay High Yield Constrained Index. Fees
payable under the license agreement are paid by the investment adviser. ICE Data
Indices, LLC has no obligation to continue to provide the ICE BofA US Cash Pay
High Yield Constrained Index to Schwab Asset Management beyond the term of the
license agreement.
Schwab Asset Management has also entered into a
license agreement with Bloomberg Finance L.P. to use the Bloomberg US MBS Float
Adjusted Total Return Index. Fees payable under the license agreement are paid
by the investment adviser. Bloomberg Finance L.P. has no obligation to continue
to provide the Bloomberg US MBS Float Adjusted Total Return Index to Schwab
Asset Management beyond the term of the license agreement.
Disclaimers
Source ICE Data Indices, LLC (ICE Data), is used
with permission. “ICE®” is a registered trademark of ICE Data Indices,
LLC or its affiliates and “BofA®” is a registered trademark of Bank of America
Corporation licensed by Bank of America Corporation and its affiliates (“BofA”)
and may not be used without BofA’s prior written approval. These trademarks have
been licensed, along with the ICE BofA US Cash Pay High Yield Constrained Index
(Index) for use by Charles Schwab Investment Management, Inc., dba Schwab Asset
Management, in connection with the Schwab High Yield Bond ETF (the Fund).
Neither Schwab Asset Management, Schwab Strategic Trust (the Trust) nor the
Fund, as applicable, is sponsored, endorsed, sold or promoted by ICE Data
Indices, LLC, its affiliates or its Third Party Suppliers (ICE Data and its
Suppliers). ICE Data and its Suppliers make no representations or warranties
regarding the advisability of investing in securities generally, in the Fund
particularly, the Trust or the ability of the Index to track general stock
market performance. ICE Data’s only relationship to Schwab Asset Management is
the licensing of certain trademarks and trade names and the Index or components
thereof. The Index is determined, composed and calculated by ICE Data without
regard to Schwab Asset Management or the Fund or its holders. ICE Data has no
obligation to take the needs of Schwab Asset Management or the holders of the
Fund into consideration in determining, composing or calculating the Index. ICE
Data is not responsible for and has not participated in the determination of the
timing of, prices of, or quantities of the Fund to be issued or in the
determination or calculation of the equation by which the Fund is to be priced,
sold, purchased, or redeemed. Except for certain custom index calculation
services, all information provided by ICE Data is general in nature and not
tailored to the needs of Schwab
26Schwab Fixed-Income
ETFs | Investing in the
Fund
Asset Management or any other person, entity or
group of persons. ICE Data has no obligation or liability in connection with the
administration, marketing, or trading of the Fund. ICE Data is not an investment
advisor. Inclusion of a security within an index is not a recommendation by ICE
Data to buy, sell, or hold such security, nor is it considered to be investment
advice.
ICE DATA AND ITS SUPPLIERS DISCLAIM ANY AND ALL
WARRANTIES AND REPRESENTATIONS, EXPRESS AND/OR IMPLIED, INCLUDING ANY WARRANTIES
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, INCLUDING THE
INDICES, INDEX DATA AND ANY INFORMATION INCLUDED IN, RELATED TO, OR DERIVED
THEREFROM (INDEX DATA). ICE DATA AND ITS SUPPLIERS SHALL NOT BE SUBJECT TO ANY
DAMAGES OR LIABILITY WITH RESPECT TO THE ADEQUACY, ACCURACY, TIMELINESS OR
COMPLETENESS OF THE INDICES AND THE INDEX DATA, WHICH ARE PROVIDED ON AN “AS IS”
BASIS AND YOUR USE IS AT YOUR OWN RISK.
BLOOMBERG® and Bloomberg US MBS Float Adjusted Total
Return Index (Bloomberg Index) are service marks of Bloomberg Finance L.P. and
its affiliates, including Bloomberg Index Services Limited (BISL), the
administrator of the index (collectively, Bloomberg) and have been licensed for
use for certain purposes by Schwab Asset Management.
The Schwab Mortgage-Backed Securities ETF is not
sponsored, endorsed, sold or promoted by Bloomberg. Bloomberg does not make any
representation or warranty, express or implied, to the owners of or
counterparties to the Schwab Mortgage-Backed Securities ETF or any member of the
public regarding the advisability of investing in securities generally or in the
Schwab Mortgage-Backed Securities ETF particularly. The only relationship of
Bloomberg to Schwab Asset Management is the licensing of certain trademarks,
trade names and service marks and of the Bloomberg Index, which is determined,
composed and calculated by BISL without regard to Schwab Asset Management or the
owners of the Schwab Mortgage-Backed Securities ETF. Bloomberg has no obligation
to take the needs of Schwab Asset Management or the owners of the Schwab
Mortgage-Backed Securities ETF into consideration in determining, composing or
calculating the Bloomberg Index. Bloomberg is not responsible for and has not
participated in the determination of the timing of, prices at, or quantities of
the Schwab Mortgage-Backed Securities ETF to be issued. Bloomberg shall not have
any obligation or liability, including, without limitation, to the Schwab
Mortgage-Backed Securities ETF’s customers, in connection with the
administration, marketing or trading of the Schwab Mortgage-Backed Securities
ETF.
BLOOMBERG DOES NOT GUARANTEE THE ACCURACY AND/OR
THE COMPLETENESS OF THE BLOOMBERG INDEX OR ANY DATA RELATED THERETO AND SHALL
HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. BLOOMBERG
DOES NOT MAKE ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY
SCHWAB ASSET MANAGEMENT, OWNERS OF THE SCHWAB MORTGAGE-BACKED SECURITIES ETF OR
ANY OTHER PERSON OR ENTITY FROM THE USE OF THE BLOOMBERG INDEX OR ANY DATA
RELATED THERETO. BLOOMBERG DOES NOT MAKE ANY EXPRESS OR IMPLIED WARRANTIES AND
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE BLOOMBERG INDEX OR ANY DATA
RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, TO THE MAXIMUM EXTENT
ALLOWED BY LAW, BLOOMBERG, ITS LICENSORS, AND ITS AND THEIR RESPECTIVE
EMPLOYEES, CONTRACTORS, AGENTS, SUPPLIERS, AND VENDORS SHALL HAVE NO LIABILITY
OR RESPONSIBILITY WHATSOEVER FOR ANY INJURY OR DAMAGES—WHETHER DIRECT, INDIRECT,
CONSEQUENTIAL, INCIDENTAL, PUNITIVE OR OTHERWISE—ARISING IN CONNECTION WITH THE
SCHWAB MORTGAGE-BACKED SECURITIES ETF OR BLOOMBERG INDEX OR ANY DATA OR VALUES
RELATING THERETO—WHETHER ARISING FROM THEIR NEGLIGENCE OR OTHERWISE, EVEN IF
NOTIFIED OF THE POSSIBILITY THEREOF.
Shares of the funds are not sponsored, endorsed
or promoted by NYSE Arca, Inc. NYSE Arca makes no representation or warranty,
express or implied, to the owners of the shares of the funds or any member of
the public regarding the ability of a fund to track the total return performance
of its underlying index or the ability of the underlying index to track stock or
bond market performance. NYSE Arca is not responsible for, nor has it
participated in, the determination of the compilation or the calculation of any
underlying index, nor in the determination of the timing of, prices of, or
quantities of shares of the funds to be issued, nor in the determination or
calculation of the equation by which the shares are redeemable. NYSE Arca has no
obligation or liability to owners of the shares of the funds in connection with
the administration, marketing or trading of the shares of the funds.
NYSE Arca shall have no liability for damages,
claims, losses or expenses caused by any errors, omissions, or delays in
calculating or disseminating any current index or portfolio value; the current
value of the portfolio of securities required to be deposited to the funds; the
amount of any dividend equivalent payment or cash distribution to holders of
shares of the funds; net asset value; or other information relating to the
creation, redemption or trading of shares of the funds, resulting from any
negligent act or omission by NYSE Arca, or any act, condition or cause beyond
the reasonable control of NYSE Arca, including, but not limited to, an act of
God; fire; flood; extraordinary weather conditions; war; insurrection; riot;
strike; accident; action of government; communications or power failure;
equipment or software malfunction; or any error, omission or delay in the
reporting of transactions in one or more underlying securities. NYSE Arca makes
no warranty, express or implied, as to results to be obtained by any person or
entity from the use of any underlying index or data included therein and NYSE
Arca makes no express or implied warranties, and disclaims all warranties of
merchantability or fitness for a particular purpose with respect to shares of
the funds or any underlying index or data included therein.
The funds and Schwab Asset Management do not
guarantee the accuracy and/or the completeness of the index or any data included
therein and shall have no liability for any errors, omissions, or interruptions
therein. The funds and Schwab Asset Management make no warranty, express or
implied, as to results to be obtained by the funds, or any other person or
entity from the use of index or any data included
Schwab Fixed-Income ETFs | Investing in the
Fund27
therein. The funds and Schwab Asset Management
make no express or implied warranties, and expressly disclaims all warranties,
of merchantability or fitness for a particular purpose or use with respect to
the index or any data included therein, without limiting any of the foregoing,
in no event shall the funds and Schwab Asset Management have any liability for
any lost profits or indirect, punitive, special or consequential damages
(including lost profits), even if notified of the possibility of such
damages.
28Schwab Fixed-Income
ETFs | Investing in the
Fund
Prospectus | December 22, 2025
Schwab
Fixed-Income ETFs
To Learn More
This prospectus contains important information
on the funds and should be read and kept for reference. You also can obtain more
information from the following sources:
Recent information regarding a fund’s NAV,
market price, premiums and discounts, and bid-ask spreads is available at
www.schwabassetmanagement.com.
Additional information about the funds’
investments is available in the funds’ annual and semiannual
reports to shareholders, which are
sent to current investors, and in Form N-CSR. In the funds’ annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds’ performance during its last fiscal year. In
Form N-CSR, you will find the funds’ annual and semiannual financial
statements.
The Statement of Additional
Information (SAI) includes a more
detailed discussion of investment policies and the risks associated with various
investments. The SAI is incorporated by reference into the prospectus, making it
legally part of the prospectus.
For a free copy of any of these documents, to
request other information, or ask questions about the funds, call 1-877-824-5615. In addition, you may visit
www.schwabassetmanagement.com/prospectus for a free copy of these documents.
www.schwabassetmanagement.com/prospectus for a free copy of these documents.
The SAI, the funds’ annual and semiannual
reports, the funds’ holdings and financial statements, and other related
materials are available from the EDGAR Database on the SEC’s website
(www.sec.gov). You can obtain copies of this information,
after paying a duplicating fee, by sending a request by e-mail to
[email protected].
| | SEC File Number | | | | |
| |
Schwab Strategic Trust 811‑22311 |
| | REG120232-03 | |