We have qualitatively reviewed this strategy and reaffirmed its Above Average Process and People ratings. The following text is from Nov. 2, 2022. 

Schwab U.S. TIPS ETF SCHP provides investors with exposure to the full spectrum of Treasury Inflation-Protected Securities at a low fee. 

The fund tracks the Bloomberg US Treasury Inflation-Linked Bond Index (Series-L), which includes U.S. TIPS with at least one year until maturity. The index weights holdings by their market value excluding amounts held by the Federal Reserve, which mitigates transaction costs. But it also means that issuing activity can change the fund's interest-rate risk. Interest-rate risk is the main risk in this portfolio because its holdings are backed by the credit of the U.S. government and protect against inflation.

TIPS offer a direct hedge against inflation because their principal is linked to the Consumer Price Index, which tracks the prices paid by U.S. consumers in urban areas. The value of the TIPS’ principal is adjusted upward when the CPI rises, resulting in higher coupon payments. A TIPS fund will likely outperform a Treasury fund with a similar maturity when inflation exceeds expectations. However, when inflation is lower than expected, a Treasury fund will likely outperform because the market’s expectation for inflation was already baked into its price.

Credit risk is virtually nonexistent as TIPS are backed by the U.S. government, but TIPS are still exposed to interest-rate risk. This fund is exposed to a fair amount of interest-rate risk since it spans the entire maturity spectrum beyond 1 year. As of August 2022, its average effective duration was 6.88 years, which is slightly higher than the Morningstar Category average of 6.19 years.

Given that TIPS are a narrow and a homogenous sector of the bond market that is free from credit risk, there is limited potential to outperform or underperform. Therefore, fees are an important factor investors should consider. The fund’s active peers often take on more risk away from the TIPS market to recoup their fee, making it difficult for them to outperform this portfolio. The fund's low 0.05% expense ratio should aid the fund in providing sound category-relative performance.

Analyst Rating

Sound TIPS exposure at a low fee.

Associate Analyst

Mo'ath Almahasneh

We have qualitatively reviewed this strategy and reaffirmed its Above Average Process rating. The following text is from Nov. 2, 2022. 

This portfolio replicates the composition of the TIPS market effectively, reaping the benefits of the market’s collective wisdom about the relative pricing of each security. 
It earns an Above Average Process Pillar rating.

Above Average

Process

We have qualitatively reviewed this strategy and reaffirmed its Above Average People rating. The following text is from Nov. 2, 2022.

Schwab’s passive fixed-income portfolio management team has consistently provided tight index-tracking performance.

Its thoughtful process to portfolio construction and continued investment in technology have distinguished it from the pack. The team has earned an Above Average People rating.

Matt Hastings and Mark McKissick are the fund’s named portfolio managers. Hastings leads the bond index portfolio management team and he has managed the fund since its inception in 2010. McKissick joined the firm in 2016 and has been a named manager on this fund since 2017. Management of this fund is a team effort. Schwab's fixed-income portfolio managers are assigned to a fund based on sector expertise, and they are supported by a team of analysts. Each subteam manages a portion of the portfolio that corresponds to its area of expertise.

The managers leverage BlackRock’s Aladdin platform and have automated much of their workflow. Portfolio managers are responsible for the day-to-day management of their funds, including trade execution.

Schwab aligns manager compensation with investors’ interests. Managers are compensated based on the one- and three-year excess returns of their fund relative to the index (where the objective is to get that figure as close to zero as possible), as well as on their risk management performance.

People

Under new but familiar leadership, Schwab Asset Management Solutions maintains its Above Average Parent Pillar rating. 

After the former Schwab CEO was named president of parent Charles Schwab Corporation in 2022, Omar Aguilar, a Schwab CIO since 2011, was promoted to CEO while retaining his CIO role. Under Aguilar's leadership, Schwab remains focused on core-oriented strategies: More than 95% of the firm's fund assets under management are in low-cost index products that are suitable for the biggest portions of investors' portfolios. Index-tracking remains are par with the best teams in the business.

Recent strategic initiatives show a desire to grow in an increasingly competitive landscape. Forays into direct indexing—which customizes separate accounts through tax-loss harvesting, values-based requests, or other client preferences—as well as some new launches, such as Schwab Municipal Bond ETF, fit the firm's strategic focus and are natural extensions of its capabilities. However, other recent launches in more-niche asset classes, including Schwab Crypto Thematic ETF, contrast previous refusals to enter trendy markets. 

Schwab benefits from its association with its parent's brokerage business. This arrangement and efficient operation allow funds to grow quickly and keep fees in line with larger competitors. Historically, Schwab has been quick to match competitor fee cuts and now sports a 0.09% asset-weighted average fee across its mutual funds and ETFs.

Parent

Schwab US TIPS ETF

SCHP tracks a market-value weighted index of US Treasury inflation-protected securities with at least one year remaining in maturity.

SCHP holds a portfolio of long-duration treasury inflation protected securities ("TIPS"). Elevated inflation should boost principal adjustments to SCHP. But with the Fed likely to stand pat unless inflation reaccelerates out of control, so further NAV declines may be limited. On the other hand, if the economy weakens, the Fed appears ready to lower interest rates to support jobs, which should boost NAV for SCHP.

SCHP: Offers Compelling Value Here

We think U.S. bond markets are underestimating how difficult it might be to fight inflation. We'll have confirmation one way or another starting next Tuesday. Schwab U.S. TIPS ETF™ contains TIPS, and an effective duration of around 7 years, where the implied expectations for inflation are too low and therefore the SCHP ETF is attractive. However, the duration and sensitivity to changes in real rate assumptions is a reason why we would opine that additional caution should be taken in addition to caution around macro.

SCHP: Reveals Lack Of Realism In Inflation Picture

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WESTLAKE, Texas--(BUSINESS WIRE)--Schwab Asset Management™, the asset management arm of The Charles Schwab Corporation and the fifth-largest provider1 of ETFs, today announced the reduction of operating expense ratios for the Schwab High Yield Bond ETF (SCYB) and the Schwab U.S. TIPS ETF (SCHP), bringing the fees for Schwab Asset Management's entire lineup of fixed income ETFs to only three basis points. All of Schwab Asset Management's fixed income ETFs are now among the lowest-priced ETFs in.

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TIPs, or Treasury Inflation-Protected Securities, are a type of bond that protects against inflation. TIPs are becoming increasingly popular among investors due to rising inflation concerns. A look at SCHP, a TIPs ETF, follows.

SCHP: Significant Volatility Makes It A Hold

Schwab U.S. TIPS ETF is designed to provide investors with a hedge against rising inflation by investing in Treasury Inflation-Protected Securities. SCHP offers exposure to a wide range of TIPS issued by the U.S. government, providing a reliable and low-risk avenue for participating in inflation-protected fixed-income markets. While SCHP has performed well in terms of inflation protection, it may be outperformed by nominal Treasuries in a slowing inflation and declining interest rate environment.

SCHP: A Time For Nominal

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The final Fed rate hike may come sooner rather than later. Inflation expectations have eased as recent CPI and PCE data have been more tame.

SCHP: Inflation Expectations Have Retreated, Upgrading To Hold

SCHP owns a portfolio of Treasury Inflation-Protected Securities. 2022 was a surprise to many investors, as SCHP delivered a negative total return despite soaring inflation as the fund suffered from duration declines.

SCHP: TIPS ETFs May Perform Best In Slowing Inflation / Declining Interest Rate Scenario

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The SCHP ETF holds a portfolio of Treasury Inflation-Protected Securities. The SCHP ETF has an effective duration of 6.8 years.

SCHP: Duration Acting In Reverse

The SCHP ETF holds a portfolio of Treasury Inflation-Protected Securities. SCHP has an effective duration of 6.9 years, which has been the primary driver of YTD declines.

SCHP: NAV Declines From Duration Risk

SCHP functions as an effective hedge against inflation, and its current yield is high due to the recent multi-decades-high rate of inflation. SCHP's yield is attractive relative to treasuries and bonds, but that might change due to the Federal Reserve's hikes in interest rates.

SCHP: Despite Being An Effective Inflation Hedge, This ETF Is Too Risky

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Treasury Note prices have surged as fears transition from inflation to recession. Real yields are well off their highs, leading to underperformance of TIPS funds vs comparable-maturity Treasurys.

Real Yields Dropping: Playing The TIPS Market Through SCHP

The single basis point cuts will take effect as of July 1.

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Schwab Asset Management today announced that it would reduce the operating expense ratios of 10 passively managed ETFs and actively managed mutual funds. “We continually review our cost-effective product suite to find new opportunities to lower expenses for investors,” said David Botset, managing director, head of equity product management and innovation at Schwab Asset Management.

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Charles Schwab Corp.'s SCHW, -1.43% Schwab Asset Management unit said Tuesday it'll trim operating expense ratios of seven passively managed exchange-traded funds (ETFs) and three actively managed mutual funds. The changes are in addition to fee reductions that took effect in December for five of the seven fixed income ETFs included in Tuesday's price cut.

News for Schwab US TIPS ETF ETF (SCHP)