Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-22311
Schwab Strategic Trust
(Exact name of registrant as specified in charter)
211 Main Street, San Francisco, California 94105
(Address of principal executive offices) (Zip code)
Marie Chandoha
Schwab Strategic Trust
211 Main Street, San Francisco, California 94105
(Name and address of agent for service)
Registrant’s telephone number, including area code: (415) 636-7000
Date of fiscal year end: December 31
Date of reporting period: December 31, 2016
Table of Contents
Item 1: Report(s) to Shareholders.
Table of Contents
Annual
Report | December 31, 2016
Schwab Fixed-Income ETFs
Schwab U.S. TIPS ETF™
Schwab Short-Term
U.S. Treasury ETF™
U.S. Treasury ETF™
Schwab
Intermediate-Term
U.S. Treasury ETF™
U.S. Treasury ETF™
Schwab U.S. Aggregate
Bond ETF™
Bond ETF™
This page is intentionally left blank.
In This Report
Fund investment adviser: Charles Schwab Investment Management, Inc.
(CSIM).
Distributor: SEI Investments Distribution Co. (SIDCO).
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Schwab Fixed-Income ETFs | Annual Report
Schwab Fixed-Income ETFs
Performance at a
Glance
The performance data quoted represents past performance. Past performance
does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or
higher than the performance quoted. To obtain performance information current to the most recent month end, please visit www.csimfunds.com/schwabetfs_prospectus.
| Total Returns for the 12 Months Ended December 31, 2016 | |
| Schwab U.S. TIPS ETF (Ticker Symbol: SCHP) | |
| Market Price Return1 | 4.64% |
| NAV Return1 | 4.60% |
| Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L) | 4.68% |
| ETF Category: Morningstar Inflation-Protected Bond2 | 4.59% |
| Performance Details | pages 8-9 |
| Schwab Short-Term U.S. Treasury ETF (Ticker Symbol: SCHO) | |
| Market Price Return1 | 0.78% |
| NAV Return1 | 0.78% |
| Bloomberg Barclays U.S. 1-3 Year Treasury Bond Index | 0.86% |
| ETF Category: Morningstar Short Government2 | 0.55% |
| Performance Details | pages 10-11 |
| Schwab Intermediate-Term U.S. Treasury ETF (Ticker Symbol: SCHR) | |
| Market Price Return1 | 0.95% |
| NAV Return1 | 1.16% |
| Bloomberg Barclays U.S. 3-10 Year Treasury Bond Index | 1.28% |
| ETF Category: Morningstar Intermediate Government2 | 0.89% |
| Performance Details | pages 12-13 |
| Schwab U.S. Aggregate Bond ETF (Ticker Symbol: SCHZ) | |
| Market Price Return1 | 2.21% |
| NAV Return1 | 2.49% |
| Bloomberg Barclays U.S. Aggregate Bond Index | 2.65% |
| ETF Category: Morningstar Intermediate-Term Bond2 | 3.23% |
| Performance Details | pages 14-15 |
All total returns on this page
assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and cannot be invested in directly. Performance results less than one year are not
annualized.
For index definitions, please see the
Glossary.
Performance does not reflect the deduction of
taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.
Shares are bought and sold at market price, which may be higher
or lower than the net asset value (NAV). Brokerage commissions will reduce returns.
Fixed income securities are subject to increased loss of
principal during periods of rising interest rates. An investment in the fund(s) is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency.
TIPS generally have lower yields than conventional fixed rate
bonds and will likely decline in price during periods of deflation, which could result in losses.
The names identifying the Bloomberg Barclays' indices are
trademarks and service marks of Bloomberg Finance L.P. and its affiliates (Bloomberg) and Barclays Bank PLC and its affiliates (Barclays) and have been licensed for use in connection with the Fund. The Fund is not sponsored by, endorsed, sold or
promoted by Bloomberg, Barclays or their respective affiliates (together, the Index Sponsors) and the Index Sponsors do not make any representation regarding the advisability of investing in such fund.
| 1 | ETF performance must be shown based on both a Market Price and a Net Asset Value (NAV) basis. The fund’s per share net asset value (NAV) is the value of one share of the fund. NAV is calculated by taking the fund’s total assets (including the market value of securities owned), subtracting liabilities, and dividing by the number of shares outstanding. The NAV Return is based on the NAV of the fund, and the Market Price Return is based on the market price per share of the fund. The price used to calculate market return (Market Price) is determined by using the midpoint between the highest bid and the lowest offer on the primary stock exchange on which the shares of the fund are listed for trading, as of the time that the fund’s NAV is calculated. Market Price and NAV returns assume that dividends and capital gain distributions have been reinvested in the fund at Market Price and NAV, respectively. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all passively- and actively-managed ETFs within the category as of the report date. |
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Schwab Fixed-Income ETFs | Annual Report
Schwab Fixed-Income ETFs
Yields
of U.S. Treasury Securities: Effective Yields of Three-Month, Two-Year and 10-Year Treasuries
Data source:
Bloomberg L.P.
Nothing in this report
represents a recommendation of a security by the investment adviser.
Management views and portfolio holdings may have
changed since the report date.
Indices are
unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. Index return figures assume dividends and distributions were reinvested. Past performance is not a guarantee of future results.
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Schwab Fixed-Income ETFs | Annual Report
Schwab Fixed-Income ETFs
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Schwab Fixed-Income ETFs | Annual Report
Schwab Fixed-Income ETFs
The Investment
Environment
Over the 12-month reporting period, fixed-income markets
performed well for much of the year as many investors continued to seek the perceived safety of bonds, then faltered after the U.S. presidential election and the Federal Reserve’s (Fed) increase in short-term interest rates. Global economic
growth remained sluggish for most of 2016, while events such as the United Kingdom’s (U.K.) vote to leave the European Union (Brexit) and the U.S. presidential election added to investor uncertainty. In this environment, the Bloomberg Barclays
U.S. Aggregate Bond Index returned 2.65%, while the Bloomberg Barclays U.S. Treasury: 1-3 Years Index and the Bloomberg Barclays U.S. Treasury: 3-10 Years Index returned 0.86% and 1.28%, respectively. Over the same period, the Bloomberg Barclays
U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L) generated one of the better performance records, returning 4.68% for the 12 months.
The 12-month reporting period was marked by bouts of
volatility, especially in the first part of 2016. The price of crude oil fell sharply early in the year, causing a selloff in energy stocks and high-yield debt, and prices continued to fluctuate as the reporting period continued. Concerns about
financial turmoil in China and in parts of Europe weighed on global economic growth, and currency movements and central bank policies in both the U.S. and abroad also contributed to market ups and downs. The results of the U.K.’s Brexit
referendum in June triggered a selloff in global equities and sent bond yields downward across the globe, with the yield on the 10-year Treasury note falling below 1.4% for the first time on record less than two weeks later. Though many markets
calmed in late summer and early fall, uncertainty surrounding the U.S. presidential election contributed to an uptick in both equity and bond market volatility in October and November. Bond yields fell and prices rose as the election results came in
and then reversed directions in the hours that followed, with yields on the 10-year Treasury note rising to above 2.0% the following day and staying there for the remainder of the year. This reaction suggested that many investors believed the
president-elect will follow through with his pledge to expand fiscal spending, lower taxes, and reduce regulation during his term.
During the reporting period, the U.S. economic picture
generally improved, despite several uneven measurements. Nonfarm payroll numbers came in near expectations each month outside of a steep drop in May, and the unemployment rate dropped to 4.6% in November—the lowest level since before the 2008
financial crisis. The U.S. housing market continued to recover, with steady demand for single-family homes, and an overall upward trend in the number of building permits issued. Meanwhile, U.S. economic growth trended upwards after dipping slightly
in the first quarter of 2016, with the third quarter’s measurement coming in as the fastest growth rate recorded in two years.
Over the 12-month reporting period, U.S. monetary policy
remained accommodative. The Fed left short-term interest rates unchanged through its November meeting, as concerns about inconsistent U.S. economic data and sluggish global growth remained. The Brexit vote and uncertainty surrounding the U.S.
election also further complicated the Fed’s decision. However, at the Fed’s last meeting of the year in December, members voted to raise the federal funds rate by 25 basis points to a range of 0.50% to 0.75%, with forecasts for two to
three additional hikes in 2017. The Fed voiced optimism about the U.S. economy, noting belief that “….the economy will continue to perform well, with the job market strengthening further and inflation rising to 2% over the next couple of
years.” Bond yields rose and prices fell in response, with yields on 2-year Treasuries hitting approximately 1.25%, their highest level in about 7 years. The U.S. dollar also continued its upward trajectory, with the Wall Street Journal Dollar
Index (WSJ Dollar Index)1 of the dollar’s value against the currencies of 16 major trading partners hitting a 14-year high one day after the
Fed’s meeting.
Outside of the U.S., many other
central banks continued to increase accommodative monetary policies. The European Central Bank stepped up its bond purchases, lowered a key interest rate further into negative territory, and launched a program to provide cheap funding for European
banks. Facing a decelerating economy and heightened fears surrounding the devalued yuan, the People’s Bank of China cut its reserve requirement ratio and increased its lending facilities. Meanwhile, the Bank of Japan expanded its quantitative
easing program over the reporting period and introduced negative interest rates, following central bank interest rate policies in Switzerland, Sweden, and Denmark.
| 1 | The WSJ Dollar Index measures the U.S. dollar against a basket of 16 major currencies by basing its value on actual, up-to-date turnover by all participants in the foreign-exchange market. |
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Schwab Fixed-Income ETFs | Annual Report
Schwab Fixed-Income ETFs
The Investment
Environment (continued)
Overall, yields on U.S. Treasuries remained low for much of
2016 and did not increase until the end of the reporting period. Short-term rates, which are directly influenced by Fed policy, rose as expectations for December Fed rate hike increased. Longer-term yields, which are generally driven by growth and
inflation expectations, rose in the second half of 2016 and climbed further following the unexpected outcome of the U.S. presidential election. The yields on many international government-backed securities also remained lower than those in the U.S.,
with some in negative territory, further increasing the appeal of U.S. Treasuries.
Index figures assume dividends and distributions were
reinvested, and do not include trading and management costs, which would lower performance. Indices are unmanaged, do not incur management fees, costs or expenses, and you cannot invest in them directly. For index definitions, please see the
Glossary.
Management views may have changed since the
report date.
Past performance cannot guarantee future
results
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Schwab Fixed-Income ETFs | Annual Report
Schwab Fixed-Income ETFs
Fund Management
 |
Matthew Hastings, CFA, Vice President and Head of Taxable Bond Strategies, leads the portfolio management team for Schwab Fixed Income ETFs and Schwab’s taxable bond funds. He also has overall responsibility for all aspects of the management of the funds. Prior to joining CSIM 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. |
 |
Steven Chan, CFA, Managing Director and Portfolio Manager, is responsible for the day-to-day co-management of the funds. His primary focus is government securities, including Treasury inflation-protected securities. Mr. Chan has been a portfolio manager with CSIM since 2007, and has held a number of positions at the firm since beginning his tenure in 1996. His previous roles include managing the Portfolio Operations and Analytics group, and working as a senior manager in Finance. Prior to joining CSIM, Mr. Chan was a manager of finance at GT Capital Management. |
 |
Steven Hung, Managing Director and Senior Portfolio Manager, is responsible for the day-to-day co-management of the Schwab U.S. Aggregate Bond ETF. His primary focus is corporate bonds. Prior to joining CSIM in 1999, Mr. Hung was an associate in Schwab’s management training program for nine months. In that role, he worked as a clerk on the Options Trading Floor of the Pacific Coast Stock Exchange. |
 |
Alfonso Portillo, Jr., Managing Director and Senior Portfolio Manager, is responsible for the day-to-day co-management of the Schwab U.S. Aggregate Bond ETF. His primary focus is securitized products. Prior to joining CSIM 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. |
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Schwab Fixed-Income ETFs | Annual Report
Schwab U.S. TIPS ETF
Performance and Fund
Facts as of 12/31/16
The Schwab U.S. TIPS ETF (the
fund) seeks to track as closely as possible, before fees and expenses, the price and yield performance of the Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index, Series-L (the index). To pursue this investment objective,
the fund generally invests in all of the securities in approximately the same weight as represented by the index. For more information about the fund’s investment objective, strategy, and risks, please see the fund’s
prospectus.
Market Highlights. A noticeable upturn in inflation data for the 12-month reporting period along with a partial recovery of commodity prices resulted in increased demand of U.S. Treasury Inflation-Protected Securities (TIPS). This
increased demand caused TIPS prices to rise, resulting in lower real yields.
In December, a full year after its last move, the Federal
Reserve raised the federal funds target rate by one-quarter point, citing a pickup in economic growth since mid-year and expectations of a continuing strong economy. This increase in short-term rates drove yields higher and prices lower on U.S.
Treasuries. Yields on inflation-protected securities fell relative to non–inflation protected securities, leading TIPS to outperform U.S. Treasuries for the reporting period.
Performance. For the 12 months
ended December 31, 2016, the fund’s market price return was 4.64% and its NAV return was 4.60% (for an explanation of market price and NAV returns, please refer to footnote 2 on the following page). The index returned 4.68% during the same
period. Differences between the return of the fund and the return of the index may be attributable to, among other things, the operational and transactional costs incurred by the fund and not the index.
Contributors and Detractors.
The fund closely tracked the performance of the index for the 12-month reporting period. Regardless of their maturities, all TIPS produced positive results for the reporting period, but those with longer durations performed better than those with
shorter durations.
Portfolio Composition % of investments
By Security Type1
| Weighted Average Maturity3 | 8.3 Yrs |
| Weighted Average Duration3 | 7.5 Yrs |
Management views and portfolio holdings may have changed
since the report date.
An index is a statistical composite
of a specified financial market or sector. Unlike the fund, an index does not actually hold a portfolio of securities and its return is not inclusive of operational and transaction costs incurred by the fund.
Fixed income securities are subject to increased loss of
principal during periods of rising interest rates. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency.
TIPS generally have lower yields than conventional fixed rate
bonds and will likely decline in price during periods of deflation, which could result in losses.
| 1 | This list is not a recommendation of any security type by the investment adviser. |
| 2 | Includes the fund’s position in money market mutual funds registered under the Investment Company Act of 1940, as amended. |
| 3 | See Glossary for definitions of maturity and duration. |
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Schwab Fixed-Income ETFs | Annual Report
Schwab U.S. TIPS ETF
Performance and Fund
Facts as of 12/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may
be lower or higher than the performance quoted. To obtain performance information current to the most recent month end, please visit www.csimfunds.com/schwabetfs_prospectus.
Performance of Hypothetical $10,000 Investment (August 5, 2010
– December 31, 2016)1
Average Annual Total Returns1
| Fund and Inception Date | 1 Year | 5 Years | Since Inception* |
| Fund: Schwab U.S. TIPS ETF (8/5/10) | |||
| Market Price Return2 | 4.64% | 0.75% | 2.85% |
| NAV Return2 | 4.60% | 0.81% | 2.85% |
| Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L) | 4.68% | 0.89% | 2.95% |
| ETF Category: Morningstar Inflation-Protected Bond3 | 4.59% | 0.42% | 2.11% |
| Fund Expense Ratio4: 0.07% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and cannot be invested in directly.
For index definitions, please see the Glossary.
Shares are bought and sold at market price, which may be higher
or lower than the net asset value (NAV). Brokerage commissions will reduce returns.
The names identifying the Bloomberg Barclays' indices are
trademarks and service marks of Bloomberg Finance L.P. and its affiliates (Bloomberg) and Barclays Bank PLC and its affiliates (Barclays) and have been licensed for use in connection with the Fund. The Fund is not sponsored by, endorsed, sold or
promoted by Bloomberg, Barclays or their respective affiliates (together, the Index Sponsors) and the Index Sponsors do not make any representation regarding the advisability of investing in such fund.
| * | Inception (8/5/10) represents the date that the shares began trading in the secondary market. |
| 1 | Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. |
| 2 | ETF performance must be shown based on both a Market Price and a Net Asset Value (NAV) basis. The fund’s per share net asset value (NAV) is the value of one share of the fund. NAV is calculated by taking the fund’s total assets (including the market value of securities owned), subtracting liabilities, and dividing by the number of shares outstanding. The NAV Return is based on the NAV of the fund, and the Market Price Return is based on the market price per share of the fund. The price used to calculate market return (Market Price) is determined by using the midpoint between the highest bid and the lowest offer on the primary stock exchange on which the shares of the fund are listed for trading, as of the time that the fund’s NAV is calculated. NAV is used as a proxy for purposes of calculating Market Price Return on inception date. Market Price and NAV returns assume that dividends and capital gain distributions have been reinvested in the fund at Market Price and NAV, respectively. |
| 3 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all passively- and actively-managed ETFs within the category as of the report date. |
| 4 | As stated in the prospectus. |
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Schwab Fixed-Income ETFs | Annual Report
Schwab Short-Term U.S. Treasury ETF
Performance and Fund
Facts as of 12/31/16
The Schwab Short-Term U.S. Treasury ETF (the fund) seeks to track as closely as possible, before fees and expenses, the price and yield performance of the Bloomberg Barclays U.S. 1–3 Year Treasury Bond Index (the index). To pursue this investment
objective, the fund generally invests in a representative sample of securities in the index. For more information about the fund’s investment objective, strategy, and risks, please see the fund’s prospectus.
Market Highlights. U.S. bonds
posted modest returns for 2016, with shorter-term Treasury performance driven primarily by Federal Reserve (Fed) policy, although market volatility in China and the unexpected results of the Brexit vote in June also had an impact. The first half of
the year was characterized by slower-than-expected economic growth and low inflation, and the Fed’s continuing delay of a widely anticipated interest-rate hike. With the federal funds target rate remaining between 0.25% and 0.50%, volatility
was fairly low and shorter-term Treasury yields stayed within a tight range. In July, after hitting lows for the year, interest rates began to rise on increasing inflation expectations, and accelerated after the U.S. presidential election. In
December, as the market continued to price in future rate increases, the Fed finally enacted a quarter-point hike in the federal funds target rate.
Yields on two-year Treasuries began 2016 at 1.02%, hit their
low for the year of 0.56% in early July and rose to a high of 1.29% in mid-December before ending the year at 1.20%. One- and three-year Treasuries exhibited a similar pattern.
Performance. For the 12 months
ended December 31, 2016, the fund’s market price return and its NAV return were both 0.78% (for an explanation of market price and NAV returns, please refer to footnote 2 on the following page). The index returned 0.86% during the same period.
Differences between the return of the fund and the return of the index may be attributable to, among other things, the operational and transactional costs incurred by the fund and not the index.
Contributors and Detractors.
The fund closely tracked the performance of the index for the 12-month reporting period. Coupon income generated by the fund’s holdings contributed positively to performance, more than offsetting the overall impact of negative price returns
that detracted from the fund’s return.
Portfolio Composition % of investments
By Security Type1
| Weighted Average Maturity3 | 2.0 Yrs |
| Weighted Average Duration3 | 2.0 Yrs |
Management views and portfolio holdings may have changed
since the report date.
An index is a statistical composite
of a specified financial market or sector. Unlike the fund, an index does not actually hold a portfolio of securities and its return is not inclusive of operational and transaction costs incurred by the fund.
Fixed income securities are subject to increased loss of
principal during periods of rising interest rates. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency.
| 1 | This list is not a recommendation of any security type by the investment adviser. |
| 2 | Includes the fund’s position in money market mutual funds registered under the Investment Company Act of 1940, as amended. |
| 3 | See Glossary for definitions of maturity and duration. |
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Schwab Fixed-Income ETFs | Annual Report
Schwab Short-Term U.S. Treasury ETF
Performance and Fund
Facts as of 12/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may
be lower or higher than the performance quoted. To obtain performance information current to the most recent month end, please visit www.csimfunds.com/schwabetfs_prospectus.
Performance of Hypothetical $10,000 Investment (August 5, 2010
– December 31, 2016)1
Average Annual Total Returns1
| Fund and Inception Date | 1 Year | 5 Years | Since Inception* |
| Fund: Schwab Short-Term U.S. Treasury ETF (8/5/10) | |||
| Market Price Return2 | 0.78% | 0.46% | 0.62% |
| NAV Return2 | 0.78% | 0.47% | 0.62% |
| Bloomberg Barclays U.S. 1-3 Year Treasury Bond Index | 0.86% | 0.57% | 0.72% |
| ETF Category: Morningstar Short Government3 | 0.55% | 0.40% | 0.66% |
| Fund Expense Ratio4: 0.06% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and cannot be invested in directly.
For index definitions, please see the Glossary.
Shares are bought and sold at market price, which may be higher
or lower than the net asset value (NAV). Brokerage commissions will reduce returns.
The names identifying the Bloomberg Barclays' indices are
trademarks and service marks of Bloomberg Finance L.P. and its affiliates (Bloomberg) and Barclays Bank PLC and its affiliates (Barclays) and have been licensed for use in connection with the Fund. The Fund is not sponsored by, endorsed, sold or
promoted by Bloomberg, Barclays or their respective affiliates (together, the Index Sponsors) and the Index Sponsors do not make any representation regarding the advisability of investing in such fund.
| * | Inception (8/5/10) represents the date that the shares began trading in the secondary market. |
| 1 | Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. |
| 2 | ETF performance must be shown based on both a Market Price and a Net Asset Value (NAV) basis. The fund’s per share net asset value (NAV) is the value of one share of the fund. NAV is calculated by taking the fund’s total assets (including the market value of securities owned), subtracting liabilities, and dividing by the number of shares outstanding. The NAV Return is based on the NAV of the fund, and the Market Price Return is based on the market price per share of the fund. The price used to calculate market return (Market Price) is determined by using the midpoint between the highest bid and the lowest offer on the primary stock exchange on which the shares of the fund are listed for trading, as of the time that the fund’s NAV is calculated. NAV is used as a proxy for purposes of calculating Market Price Return on inception date. Market Price and NAV returns assume that dividends and capital gain distributions have been reinvested in the fund at Market Price and NAV, respectively. |
| 3 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all passively- and actively-managed ETFs within the category as of the report date. |
| 4 | As stated in the prospectus. |
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Schwab Fixed-Income ETFs | Annual Report
Schwab Intermediate-Term U.S. Treasury ETF
Performance and Fund
Facts as of 12/31/16
The Schwab Intermediate-Term U.S. Treasury ETF (the fund) seeks to track as closely as possible, before fees and expenses, the price and yield performance of the Bloomberg Barclays U.S. 3–10 Year Treasury Bond Index (the index). To pursue this investment
objective, the fund generally invests in a representative sample of securities included in the index. For more information about the fund’s investment objective, strategy, and risks, please see the fund’s prospectus.
Market Highlights. U.S. bonds
posted modest returns for 2016, with shorter-term Treasury performance driven primarily by Federal Reserve (Fed) policy, although market volatility in China and the unexpected results of the Brexit vote in June also had an impact. The first half of
the year was characterized by slower-than-expected economic growth and low inflation, and the Fed’s continuing delay of a widely anticipated interest-rate hike. With the federal funds target rate remaining between 0.25% and 0.50%, volatility
was fairly low and shorter-term Treasury yields stayed within a tight range. In July, after hitting lows for the year, interest rates began to rise on increasing inflation expectations and accelerated after the November presidential election. In
December, as the market continued to price in future rate increases, the Fed enacted a quarter-point hike in the federal funds target rate.
Yields on three-year Treasuries began 2016 at 1.31%, hit their
low for the year of 0.66% in early July and rose to a high of 1.61% in mid-December before ending the year at 1.47%. Yields on Treasuries with maturities between five and ten years have historically been less affected by Fed policy and driven more
by economic growth and inflation expectations, however, those expectations rose toward the end of the year and, as a result, yields on five- and 10-year Treasuries exhibited a similar pattern over the year as did three-year Treasuries: Five-year
Treasury yields started the year at 1.73%, hit their low for the year at 0.94% in early July, and rose to a high of 2.10% in mid-December before ending the year at 1.93%. Yields on 10-year Treasuries began the year at 2.24%, hit their low of 1.37%
in early July, and rose to a high of 2.60% in mid-December before closing out the year at 2.45%.
Performance. For the 12 months
ended December 31, 2016, the fund’s market price return was 0.95% and its NAV return was 1.16% (for an explanation of market price and NAV returns, please refer to footnote 2 on the following page). The index returned 1.28% during the same
period. Differences between the return of the fund and the return of the index may be attributable to, among other things, the operational and transactional costs incurred by the fund and not the index.
Contributors and Detractors.
The fund closely tracked the performance of the index for the 12-month reporting period. Coupon income generated by the fund’s holdings contributed positively to performance, more than offsetting the overall impact of negative price returns
that detracted from the fund’s return.
Portfolio Composition % of investments
By Security Type1
| Weighted Average Maturity2 | 5.6 Yrs |
| Weighted Average Duration2 | 5.2 Yrs |
Management views and portfolio holdings may have changed
since the report date.
An index is a statistical composite
of a specified financial market or sector. Unlike the fund, an index does not actually hold a portfolio of securities and its return is not inclusive of operational and transaction costs incurred by the fund.
Fixed income securities are subject to increased loss of
principal during periods of rising interest rates. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency.
| 1 | This list is not a recommendation of any security type by the investment adviser. |
| 2 | See Glossary for definitions of maturity and duration. |
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Schwab Fixed-Income ETFs | Annual Report
Schwab Intermediate-Term U.S. Treasury ETF
Performance and Fund
Facts as of 12/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may
be lower or higher than the performance quoted. To obtain performance information current to the most recent month end, please visit www.csimfunds.com/schwabetfs_prospectus.
Performance of Hypothetical $10,000 Investment (August 5, 2010
– December 31, 2016)1
Average Annual Total Returns1
| Fund and Inception Date | 1 Year | 5 Years | Since Inception* |
| Fund: Schwab Intermediate-Term U.S. Treasury ETF (8/5/10) | |||
| Market Price Return2 | 0.95% | 1.25% | 2.44% |
| NAV Return2 | 1.16% | 1.32% | 2.46% |
| Bloomberg Barclays U.S. 3-10 Year Treasury Bond Index | 1.28% | 1.43% | 2.57% |
| ETF Category: Morningstar Intermediate Government3 | 0.89% | 1.15% | 1.97% |
| Fund Expense Ratio4: 0.06% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and cannot be invested in directly.
For index definitions, please see the Glossary.
Shares are bought and sold at market price, which may be higher
or lower than the net asset value (NAV). Brokerage commissions will reduce returns.
The names identifying the Bloomberg Barclays' indices are
trademarks and service marks of Bloomberg Finance L.P. and its affiliates (Bloomberg) and Barclays Bank PLC and its affiliates (Barclays) and have been licensed for use in connection with the Fund. The Fund is not sponsored by, endorsed, sold or
promoted by Bloomberg, Barclays or their respective affiliates (together, the Index Sponsors) and the Index Sponsors do not make any representation regarding the advisability of investing in such fund.
| * | Inception (8/5/10) represents the date that the shares began trading in the secondary market. |
| 1 | Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. |
| 2 | ETF performance must be shown based on both a Market Price and a Net Asset Value (NAV) basis. The fund’s per share net asset value (NAV) is the value of one share of the fund. NAV is calculated by taking the fund’s total assets (including the market value of securities owned), subtracting liabilities, and dividing by the number of shares outstanding. The NAV Return is based on the NAV of the fund, and the Market Price Return is based on the market price per share of the fund. The price used to calculate market return (Market Price) is determined by using the midpoint between the highest bid and the lowest offer on the primary stock exchange on which the shares of the fund are listed for trading, as of the time that the fund’s NAV is calculated. NAV is used as a proxy for purposes of calculating Market Price Return on inception date. Market Price and NAV returns assume that dividends and capital gain distributions have been reinvested in the fund at Market Price and NAV, respectively. |
| 3 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all passively- and actively-managed ETFs within the category as of the report date. |
| 4 | As stated in the prospectus. |
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Schwab Fixed-Income ETFs | Annual Report
Schwab U.S. Aggregate Bond ETF
Performance and Fund
Facts as of 12/31/16
The Schwab U.S. Aggregate Bond ETF (the fund) seeks to track as closely as possible, before fees and expenses, the total return of the Bloomberg Barclays U.S. Aggregate Bond Index (the index). To pursue this investment objective, the fund generally
invests in a representative sample of securities included in the index. In addition, for the 12-month reporting period ended December 31, 2016, the fund also held positions in TBAs, or “to be announced” securities. TBAs are
mortgage-backed bonds that settle on a forward date and are used to gain exposure to the mortgage market. The average month-end position in these securities was 7.0% of the fund, with a minimum exposure of 3.3% and a maximum exposure of 10.2%. For
more information about the fund’s investment objective, strategy, and risks, please see the fund’s prospectus.
Market Highlights. U.S. bonds
posted modest returns for 2016, with shorter-term Treasury performance driven primarily by Federal Reserve (Fed) policy, although market volatility in China and the unexpected results of the Brexit vote in June also had an impact. The first half of
the year was characterized by slower-than-expected economic growth and low inflation, and the Fed’s continuing delay of a widely anticipated interest-rate hike. With the federal funds target rate remaining between 0.25% and 0.50%, volatility
was fairly low and shorter-term Treasury yields stayed within a tight range. In July, after hitting lows for the year, interest rates began to rise on increasing inflation expectations and accelerated after the November presidential election. In
December, as the market continued to price in future rate increases, the Fed enacted a quarter-point hike in the federal funds target rate.
Historically, longer-term Treasuries are less affected by Fed
policy and are more dependent on economic growth and inflation expectations—which rose toward the end of the year. As a result, shorter-term and longer-term Treasuries exhibited similar yield patterns, and the yield curve remained relatively
consistent throughout the year.
In this environment,
increasing economic growth and inflation expectations, along with market-moving events including an early-year global sell-off, the surprising Brexit vote, and the unexpected outcome of the U.S. presidential election, most bond indexes posted gains
of between 1% and 3%. It was a volatile year for corporate bonds, but they ended the year up 0.37%.
Performance. For the 12-month
reporting period, the fund’s market price return was 2.21% and its NAV return was 2.49% (for an explanation of market price and NAV returns, please refer to footnote 2 on the following page). The index returned 2.65% during the same period.
Differences between the return of the fund and the return of the index may be attributable to, among other things, the operational and transactional costs incurred by the fund and not the index.
Contributors and Detractors.
The fund closely tracked the performance of the index for the 12-month reporting period, which meant keeping the fund’s credit quality, duration, and sector allocations aligned to the index. Treasury yields provided a slightly positive price
return for the fund, but coupon income generated by the fund’s holdings significantly boosted fund performance, even after accounting for the effects of principal payments on the fund’s mortgage-backed securities.
Portfolio Composition % of investments
By Security Type1
| Weighted Average Maturity4 | 8.0 Yrs |
| Weighted Average Duration4 | 5.8 Yrs |
Management views and portfolio holdings may have changed since
the report date.
An index is a statistical composite of a
specified financial market or sector. Unlike the fund, an index does not actually hold a portfolio of securities and its return is not inclusive of operational and transaction costs incurred by the fund.
Fixed income securities are subject to increased loss of
principal during periods of rising interest rates. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency.
| 1 | This list is not a recommendation of any security type by the investment adviser. |
| 2 | The fund may seek to obtain exposure to U.S. agency mortgage pass-through securities, in part or in full, through the use of “to-be-announced” or “TBA” transactions, which are standardized contracts for future delivery of mortgage pass-through securities in which the exact mortgage pools to be delivered are not specified until a few days prior to settlement. These transactions represented approximately 4.6% of total investments on December 31, 2016. |
| 3 | Includes the fund’s position in money market mutual funds registered under the Investment Company Act of 1940, as amended. |
| 4 | See Glossary for definitions of maturity and duration. |
14
Schwab Fixed-Income ETFs | Annual Report
Schwab U.S. Aggregate Bond ETF
Performance and Fund
Facts as of 12/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may
be lower or higher than the performance quoted. To obtain performance information current to the most recent month end, please visit www.csimfunds.com/schwabetfs_prospectus.
Performance of Hypothetical $10,000 Investment (July 14, 2011
– December 31, 2016)1
Average Annual Total Returns1
| Fund and Inception Date | 1 Year | 5 Years | Since Inception* |
| Fund: Schwab U.S. Aggregate Bond ETF (7/14/11) | |||
| Market Price Return2 | 2.21% | 2.01% | 2.60% |
| NAV Return2 | 2.49% | 2.11% | 2.62% |
| Bloomberg Barclays U.S. Aggregate Bond Index | 2.65% | 2.23% | 2.74% |
| ETF Category: Morningstar Intermediate-Term Bond3 | 3.23% | 2.61% | 2.80% |
| Fund Expense Ratio4: 0.04% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and cannot be invested in directly.
For index definitions, please see the Glossary.
Shares are bought and sold at market price, which may be higher
or lower than the net asset value (NAV). Brokerage commissions will reduce returns.
The names identifying the Bloomberg Barclays' indices are
trademarks and service marks of Bloomberg Finance L.P. and its affiliates (Bloomberg) and Barclays Bank PLC and its affiliates (Barclays) and have been licensed for use in connection with the Fund. The Fund is not sponsored by, endorsed, sold or
promoted by Bloomberg, Barclays or their respective affiliates (together, the Index Sponsors) and the Index Sponsors do not make any representation regarding the advisability of investing in such fund.
| * | Inception (7/14/11) represents the date that the shares began trading in the secondary market. |
| 1 | Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. |
| 2 | ETF performance must be shown based on both a Market Price and a Net Asset Value (NAV) basis. The fund’s per share net asset value (NAV) is the value of one share of the fund. NAV is calculated by taking the fund’s total assets (including the market value of securities owned), subtracting liabilities, and dividing by the number of shares outstanding. The NAV Return is based on the NAV of the fund, and the Market Price Return is based on the market price per share of the fund. The price used to calculate market return (Market Price) is determined by using the midpoint between the highest bid and the lowest offer on the primary stock exchange on which the shares of the fund are listed for trading, as of the time that the fund’s NAV is calculated. NAV is used as a proxy for purposes of calculating Market Price Return on inception date. Market Price and NAV returns assume that dividends and capital gain distributions have been reinvested in the fund at Market Price and NAV, respectively. |
| 3 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all passively- and actively-managed ETFs within the category as of the report date. |
| 4 | As stated in the prospectus. |
15
Schwab Fixed-Income ETFs | Annual Report
Schwab Fixed-Income ETFs
Fund Expenses (Unaudited)
Examples for a $1,000 Investment
| Expense
Ratio1 (Annualized) |
Beginning
Account Value at 7/1/16 |
Ending
Account Value (Net of Expenses) at 12/31/16 |
Expenses
Paid During Period2 7/1/16–12/31/16 | |
| Schwab U.S. TIPS ETF | ||||
| Actual Return | 0.07% | $1,000.00 | $ 985.20 | $0.35 |
| Hypothetical 5% Return | 0.07% | $1,000.00 | $1,024.75 | $0.36 |
| Schwab Short-Term U.S. Treasury ETF | ||||
| Actual Return | 0.08% | $1,000.00 | $ 994.00 | $0.40 |
| Hypothetical 5% Return | 0.08% | $1,000.00 | $1,024.70 | $0.41 |
| Schwab Intermediate-Term U.S. Treasury ETF | ||||
| Actual Return | 0.09% | $1,000.00 | $ 962.50 | $0.44 |
| Hypothetical 5% Return | 0.09% | $1,000.00 | $1,024.65 | $0.46 |
| Schwab U.S. Aggregate Bond ETF | ||||
| Actual Return | 0.05% | $1,000.00 | $ 973.40 | $0.25 |
| Hypothetical 5% Return | 0.05% | $1,000.00 | $1,024.85 | $0.25 |
| 1 | Based on the most recent six-month expense ratio; may differ from the expense ratio provided in the Financial Highlights which covers a 12-month period. |
| 2 | Expenses for each share class are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 days of the period, and divided by 366 days of the fiscal year. |
16
Schwab Fixed-Income ETFs | Annual Report
Schwab U.S. TIPS ETF
Financial Statements
Financial
Highlights
| 1/1/16–
12/31/16 |
1/1/15–
12/31/15 |
1/1/14–
12/31/14 |
1/1/13–
12/31/13 |
1/1/12–
12/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $53.15 | $54.11 | $52.92 | $58.31 | $55.46 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.99 1 | 0.17 1 | 0.64 | 0.28 | 0.92 | |
| Net realized and unrealized gains (losses) | 1.46 | (0.98) | 1.26 | (5.32) | 2.85 | |
| Total from investment operations | 2.45 | (0.81) | 1.90 | (5.04) | 3.77 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.76) | (0.15) | (0.71) | (0.35) | (0.92) | |
| Net asset value at end of period | $54.84 | $53.15 | $54.11 | $52.92 | $58.31 | |
| Total return | 4.60% | (1.50%) | 3.56% | (8.66%) | 6.83% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Total expenses | 0.07% | 0.07% | 0.07% | 0.07% | 0.12% 2 | |
| Net investment income (loss) | 1.78% | 0.31% | 1.10% | 0.51% | 1.72% | |
| Portfolio turnover rate3 | 16% | 19% | 20% | 20% | 22% | |
| Net assets, end of period (x 1,000) | $1,614,977 | $815,816 | $549,259 | $399,564 | $571,441 | |
1
Calculated based on the average shares outstanding during
the period.
2
Effective September 20, 2012, the annual operating expense
ratio was reduced. The ratio presented for the period ended 12/31/12 is a blended ratio.
3
Portfolio turnover rate excludes securities received or
delivered from processing of in-kind creations or redemptions.
17
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. TIPS ETF
Portfolio Holdings as of December 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings on a daily basis on the fund's
website at www.csimfunds.com/schwabetfs_prospectus.
For fixed rate obligations, the rate shown is the interest rate
(the rate established when the obligation was issued). For variable rate obligations, the rate shown is the rate as of the report date. The maturity date shown for all the securities is the final legal maturity.
The following is a summary of the inputs used to
value the fund’s investments as of December 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Treasuries | $— | $1,621,809,427 | $— | $1,621,809,427 | |
| Other Investment Company1 | 206,574 | — | — | 206,574 | |
| Total | $206,574 | $1,621,809,427 | $— | $1,622,016,001 |
| 1 | As categorized in Portfolio Holdings. |
18
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. TIPS ETF
Portfolio Holdings as of December 31, 2016 (continued)
The fund's policy is to recognize transfers between Level 1,
Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended December 31, 2016.
19
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. TIPS ETF
Statement of Assets
and Liabilities
As of December 31, 2016
| Assets | ||
| Investments, at value (cost $1,635,636,402) | $1,622,016,001 | |
| Receivables: | ||
| Investments sold | 20,792,415 | |
| Interest | 5,156,951 | |
| Dividends | + | 56 |
| Total assets | 1,647,965,423 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 20,893,611 | |
| Investment adviser fees | 93,662 | |
| Distributions to shareholders | + | 12,000,875 |
| Total liabilities | 32,988,148 | |
| Net Assets | ||
| Total assets | 1,647,965,423 | |
| Total liabilities | – | 32,988,148 |
| Net assets | $1,614,977,275 | |
| Net Assets by Source | ||
| Capital received from investors | 1,642,583,611 | |
| Net investment income not yet distributed | 321,364 | |
| Net realized capital losses | (14,307,299) | |
| Net unrealized capital depreciation | (13,620,401) | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $1,614,977,275 | 29,450,000 | $54.84 | ||
20
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. TIPS ETF
Statement of
Operations
For the period January 1, 2016 through December 31, 2016
| Investment Income | ||
| Dividends | $1,699 | |
| Interest | + | 21,437,685 |
| Total investment income | 21,439,384 | |
| Expenses | ||
| Investment adviser fees | 810,250 | |
| Total expenses | – | 810,250 |
| Net investment income | 20,629,134 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized losses on investments | (2,397,914) | |
| Net realized gains on in-kind redemptions | + | 5,864,174 |
| Net realized gains | 3,466,260 | |
| Net change in unrealized appreciation (depreciation) on investments | + | 10,201,020 |
| Net realized and unrealized gains | 13,667,280 | |
| Increase in net assets resulting from operations | $34,296,414 | |
21
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. TIPS ETF
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 1/1/16-12/31/16 | 1/1/15-12/31/15 | |||
| Net investment income | $20,629,134 | $2,226,382 | ||
| Net realized gains (losses) | 3,466,260 | (3,872,973) | ||
| Net change in unrealized appreciation (depreciation) | + | 10,201,020 | (12,788,098) | |
| Increase (decrease) in net assets resulting from operations | 34,296,414 | (14,434,689) | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | ($20,877,300) | ($2,245,705) | ||
| Transactions in Fund Shares | ||||||||
| 1/1/16-12/31/16 | 1/1/15-12/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 16,550,000 | $922,891,013 | 5,500,000 | $299,468,087 | ||||
| Shares redeemed | + | (2,450,000) | (137,148,711) | (300,000) | (16,230,338) | |||
| Net transactions in fund shares | 14,100,000 | $785,742,302 | 5,200,000 | $283,237,749 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 1/1/16-12/31/16 | 1/1/15-12/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 15,350,000 | $815,815,859 | 10,150,000 | $549,258,504 | ||||
| Total increase | + | 14,100,000 | 799,161,416 | 5,200,000 | 266,557,355 | |||
| End of period | 29,450,000 | $1,614,977,275 | 15,350,000 | $815,815,859 | ||||
| Net investment income not yet distributed | $321,364 | $10,307 | ||||||
22
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab Short-Term U.S. Treasury ETF
Financial Statements
Financial
Highlights
| 1/1/16–
12/31/16 |
1/1/15–
12/31/15 |
1/1/14–
12/31/14 |
1/1/13–
12/31/13 |
1/1/12–
12/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $50.43 | $50.55 | $50.51 | $50.53 | $50.50 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.42 1 | 0.35 1 | 0.24 | 0.15 | 0.15 | |
| Net realized and unrealized gains (losses) | (0.03) | (0.13) | 0.04 | (0.02) | 0.03 | |
| Total from investment operations | 0.39 | 0.22 | 0.28 | 0.13 | 0.18 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.41) | (0.34) | (0.24) | (0.15) | (0.15) | |
| Net asset value at end of period | $50.41 | $50.43 | $50.55 | $50.51 | $50.53 | |
| Total return | 0.78% | 0.44% | 0.55% | 0.25% | 0.35% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Total expenses | 0.08% 2 | 0.08% | 0.08% | 0.08% | 0.11% 3 | |
| Net investment income (loss) | 0.83% | 0.69% | 0.49% | 0.31% | 0.29% | |
| Portfolio turnover rate4 | 66% | 89% | 109% | 101% | 101% | |
| Net assets, end of period (x 1,000) | $1,414,092 | $1,071,573 | $702,651 | $444,497 | $250,105 | |
1
Calculated based on the average shares outstanding during
the period.
2
Effective December 29, 2016, the annual operating expense
ratio was reduced. The ratio presented for the period ended 12/31/16 is a blended ratio. (See financial note 4)
3
Effective September 20, 2012, the annual operating expense
ratio was reduced. The ratio presented for the period ended 12/31/12 is a blended ratio.
4
Portfolio turnover rate excludes securities received or
delivered from processing of in-kind creations or redemptions.
23
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab Short-Term U.S. Treasury ETF
Portfolio Holdings as of December 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings on a daily basis on the fund's
website at www.csimfunds.com/schwabetfs_prospectus.
For fixed rate obligations, the rate shown is the interest rate
(the rate established when the obligation was issued). For variable rate obligations, the rate shown is the rate as of the report date. The maturity date shown for all the securities is the final legal maturity.
24
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab Short-Term U.S. Treasury ETF
Portfolio Holdings as of December 31, 2016 (continued)
The following is a summary of the inputs used to
value the fund’s investments as of December 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Treasuries | $— | $1,409,607,400 | $— | $1,409,607,400 | |
| Other Investment Company1 | 560,046 | — | — | 560,046 | |
| Total | $560,046 | $1,409,607,400 | $— | $1,410,167,446 |
| 1 | As categorized in Portfolio Holdings. |
The fund's
policy is to recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended December 31, 2016.
25
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab Short-Term U.S. Treasury ETF
Statement of Assets
and Liabilities
As of December 31, 2016
| Assets | ||
| Investments, at value (cost $1,416,186,194) | $1,410,167,446 | |
| Receivables: | ||
| Investments sold | 68,015,033 | |
| Fund shares sold | 7,558,455 | |
| Interest | 5,592,085 | |
| Dividends | + | 188 |
| Total assets | 1,491,333,207 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 76,250,111 | |
| Investment adviser fees | 89,152 | |
| Distributions to shareholders | + | 902,340 |
| Total liabilities | 77,241,603 | |
| Net Assets | ||
| Total assets | 1,491,333,207 | |
| Total liabilities | – | 77,241,603 |
| Net assets | $1,414,091,604 | |
| Net Assets by Source | ||
| Capital received from investors | 1,420,890,574 | |
| Net investment income not yet distributed | 74,049 | |
| Net realized capital losses | (854,271) | |
| Net unrealized capital depreciation | (6,018,748) | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $1,414,091,604 | 28,050,000 | $50.41 | ||
26
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab Short-Term U.S. Treasury ETF
Statement of
Operations
For the period January 1, 2016 through December 31, 2016
| Investment Income | ||
| Dividends | $3,996 | |
| Interest | + | 10,725,101 |
| Total investment income | 10,729,097 | |
| Expenses | ||
| Investment adviser fees | 944,914 | |
| Total expenses | – | 944,914 |
| Net investment income | 9,784,183 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized gains on investments | 278,746 | |
| Net realized gains on in-kind redemptions | + | 1,106,036 |
| Net realized gains | 1,384,782 | |
| Net change in unrealized appreciation (depreciation) on investments | + | (2,882,284) |
| Net realized and unrealized losses | (1,497,502) | |
| Increase in net assets resulting from operations | $8,286,681 | |
27
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab Short-Term U.S. Treasury ETF
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 1/1/16-12/31/16 | 1/1/15-12/31/15 | |||
| Net investment income | $9,784,183 | $6,003,139 | ||
| Net realized gains | 1,384,782 | 96,671 | ||
| Net change in unrealized appreciation (depreciation) | + | (2,882,284) | (3,593,255) | |
| Increase in net assets resulting from operations | 8,286,681 | 2,506,555 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | ($9,710,295) | ($6,005,570) | ||
| Transactions in Fund Shares | ||||||||
| 1/1/16-12/31/16 | 1/1/15-12/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 12,850,000 | $650,788,272 | 14,350,000 | $727,215,229 | ||||
| Shares redeemed | + | (6,050,000) | (306,846,020) | (7,000,000) | (354,793,945) | |||
| Net transactions in fund shares | 6,800,000 | $343,942,252 | 7,350,000 | $372,421,284 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 1/1/16-12/31/16 | 1/1/15-12/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 21,250,000 | $1,071,572,966 | 13,900,000 | $702,650,697 | ||||
| Total increase | + | 6,800,000 | 342,518,638 | 7,350,000 | 368,922,269 | |||
| End of period | 28,050,000 | $1,414,091,604 | 21,250,000 | $1,071,572,966 | ||||
| Net investment income not yet distributed | $74,049 | $161 | ||||||
28
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab Intermediate-Term U.S. Treasury ETF
Financial Statements
Financial
Highlights
| 1/1/16–
12/31/16 |
1/1/15–
12/31/15 |
1/1/14–
12/31/14 |
1/1/13–
12/31/13 |
1/1/12–
12/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $53.55 | $53.52 | $52.08 | $54.18 | $53.39 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.79 1 | 0.85 1 | 0.77 | 0.56 | 0.58 | |
| Net realized and unrealized gains (losses) | (0.15) | 0.02 2 | 1.44 | (2.10) | 0.79 | |
| Total from investment operations | 0.64 | 0.87 | 2.21 | (1.54) | 1.37 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.78) | (0.84) | (0.77) | (0.56) | (0.58) | |
| Net asset value at end of period | $53.41 | $53.55 | $53.52 | $52.08 | $54.18 | |
| Total return | 1.16% | 1.62% | 4.27% | (2.86%) | 2.57% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Total expenses | 0.09% 3 | 0.10% 4 | 0.10% | 0.10% | 0.11% 5 | |
| Net investment income (loss) | 1.44% | 1.59% | 1.43% | 1.06% | 1.07% | |
| Portfolio turnover rate6 | 30% | 32% | 49% | 54% | 47% | |
| Net assets, end of period (x 1,000) | $790,506 | $441,747 | $254,226 | $236,969 | $216,733 | |
1
Calculated based on the average shares outstanding during
the period.
2
The per share amount does not accord with the change in
aggregate gains and losses in securities on the Statement of Operations during the period because of the timing of sales and repurchases of fund shares in relation to fluctuating market values.
3
Effective December 29, 2016, the annual operating expense
ratio was reduced. The ratio presented for the period ended 12/31/16 is a blended ratio. (See financial note 4)
4
Effective February 24, 2015, the annual operating expense
ratio was reduced. The ratio presented for the period ended 12/31/15 is a blended ratio.
5
Effective September 20, 2012, the annual operating expense
ratio was reduced. The ratio presented for the period ended 12/31/12 is a blended ratio.
6
Portfolio turnover rate excludes securities received or
delivered from processing of in-kind creations or redemptions.
29
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab Intermediate-Term U.S. Treasury ETF
Portfolio Holdings as of December 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings on a daily basis on the fund's
website at www.csimfunds.com/schwabetfs_prospectus.
For fixed rate obligations, the rate shown is the interest rate
(the rate established when the obligation was issued). For variable rate obligations, the rate shown is the rate as of the report date. The maturity date shown for all the securities is the final legal maturity.
30
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab Intermediate-Term U.S. Treasury ETF
Portfolio Holdings as of December 31, 2016 (continued)
The following is a summary of the inputs used to
value the fund’s investments as of December 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Treasuries | $— | $787,034,089 | $— | $787,034,089 | |
| Other Investment Company1 | 191,961 | — | — | 191,961 | |
| Total | $191,961 | $787,034,089 | $— | $787,226,050 |
| 1 | As categorized in Portfolio Holdings. |
The fund's
policy is to recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended December 31, 2016.
31
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab Intermediate-Term U.S. Treasury ETF
Statement of Assets
and Liabilities
As of December 31, 2016
| Assets | ||
| Investments, at value (cost $806,324,711) | $787,226,050 | |
| Receivables: | ||
| Investments sold | 17,661,451 | |
| Interest | 4,386,860 | |
| Foreign tax reclaims | 2,749 | |
| Dividends | + | 41 |
| Total assets | 809,277,151 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 17,813,405 | |
| Investment adviser fees | 56,641 | |
| Distributions to shareholders | + | 901,320 |
| Total liabilities | 18,771,366 | |
| Net Assets | ||
| Total assets | 809,277,151 | |
| Total liabilities | – | 18,771,366 |
| Net assets | $790,505,785 | |
| Net Assets by Source | ||
| Capital received from investors | 811,438,586 | |
| Net investment income not yet distributed | 37,601 | |
| Net realized capital losses | (1,871,741) | |
| Net unrealized capital depreciation | (19,098,661) | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $790,505,785 | 14,800,000 | $53.41 | ||
32
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab Intermediate-Term U.S. Treasury ETF
Statement of
Operations
For the period January 1, 2016 through December 31, 2016
| Investment Income | ||
| Dividends | $2,100 | |
| Interest | + | 10,195,078 |
| Total investment income | 10,197,178 | |
| Expenses | ||
| Investment adviser fees | 597,927 | |
| Total expenses | – | 597,927 |
| Net investment income | 9,599,251 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized gains on investments | 352,491 | |
| Net realized gains on in-kind redemptions | + | 4,548,577 |
| Net realized gains | 4,901,068 | |
| Net change in unrealized appreciation (depreciation) on investments | + | (16,394,158) |
| Net realized and unrealized losses | (11,493,090) | |
| Decrease in net assets resulting from operations | ($1,893,839) | |
33
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab Intermediate-Term U.S. Treasury ETF
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 1/1/16-12/31/16 | 1/1/15-12/31/15 | |||
| Net investment income | $9,599,251 | $5,612,890 | ||
| Net realized gains | 4,901,068 | 893,396 | ||
| Net change in unrealized appreciation (depreciation) | + | (16,394,158) | (3,405,419) | |
| Increase (decrease) in net assets resulting from operations | (1,893,839) | 3,100,867 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | ($9,572,870) | ($5,601,670) | ||
| Transactions in Fund Shares | ||||||||
| 1/1/16-12/31/16 | 1/1/15-12/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 10,100,000 | $555,368,163 | 4,600,000 | $249,158,732 | ||||
| Shares redeemed | + | (3,550,000) | (195,142,443) | (1,100,000) | (59,137,085) | |||
| Net transactions in fund shares | 6,550,000 | $360,225,720 | 3,500,000 | $190,021,647 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 1/1/16-12/31/16 | 1/1/15-12/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 8,250,000 | $441,746,774 | 4,750,000 | $254,225,930 | ||||
| Total increase | + | 6,550,000 | 348,759,011 | 3,500,000 | 187,520,844 | |||
| End of period | 14,800,000 | $790,505,785 | 8,250,000 | $441,746,774 | ||||
| Net investment income not yet distributed | $37,601 | $11,220 | ||||||
34
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Financial Statements
Financial
Highlights
| 1/1/16–
12/31/16 |
1/1/15–
12/31/15 |
1/1/14–
12/31/14 |
1/1/13–
12/31/13 |
1/1/12–
12/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $51.41 | $52.20 | $50.28 | $52.43 | $51.50 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 1.06 1 | 1.00 1 | 1.00 | 0.83 | 0.84 | |
| Net realized and unrealized gains (losses) | 0.23 2 | (0.71) | 1.98 | (1.97) | 1.16 | |
| Total from investment operations | 1.29 | 0.29 | 2.98 | (1.14) | 2.00 | |
| Less distributions: | ||||||
| Distributions from net investment income | (1.15) | (1.08) | (1.06) | (1.01) | (1.07) | |
| Net asset value at end of period | $51.55 | $51.41 | $52.20 | $50.28 | $52.43 | |
| Total return | 2.49% | 0.56% | 5.97% | (2.19%) | 3.90% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Total expenses | 0.05% 3 | 0.05% | 0.05% | 0.06% 4 | 0.08% 5 | |
| Net investment income (loss) | 2.01% | 1.92% | 1.96% | 1.59% | 1.52% | |
| Portfolio turnover rate6,7 | 119% | 104% 8 | 74% | 152% | 151% | |
| Net assets, end of period (x 1,000) | $3,309,447 | $2,102,482 | $1,226,778 | $497,801 | $387,954 | |
1
Calculated based on the average shares outstanding during
the period.
2
The per share amount does not accord with the change in
aggregate gains and losses in securities on the Statement of Operations during the period because of the timing of sales and repurchases of fund shares in relation to fluctuating market values.
3
Effective October 7, 2016, the annual operating expense
ratio was reduced. The ratio presented for the period ended 12/31/16 is a blended ratio. (See financial note 4)
4
The expense ratio would have been 0.05%, if interest expense
related to charges on agency mortgage-backed securities not delivered on a timely basis had not been incurred. (See financial note 2f)
5
Effective September 20, 2012, the annual operating expense
ratio was reduced. The ratio presented for the period ended 12/31/12 is a blended ratio.
6
Portfolio turnover rate excludes securities received or
delivered from processing of in-kind creations or redemptions.
7
Includes to-be-announced (TBA) transactions. (See financial
note 2)
8
Revised methodology adopted as of December 31, 2015. For
comparison purposes, portfolio turnover rate would have been 146% using previous methodology.
35
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings on a daily basis on the fund's
website at www.csimfunds.com/schwabetfs_prospectus.
For fixed rate obligations, the rate shown is the interest rate
(the rate established when the obligation was issued). For variable rate obligations, the rate shown is the rate as of the report date. The maturity date shown for all the securities is the final legal maturity.
36
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
37
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
38
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
39
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
40
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
41
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
42
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
43
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
44
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
45
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
46
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
47
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
48
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
49
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
50
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
51
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
52
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
53
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
54
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
55
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
56
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
57
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
58
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Portfolio Holdings as of December 31, 2016 (continued)
| GO — | General obligation |
| RB — | Revenue bond |
| USD — | Unified school district |
The following is a summary of the inputs used to value the
fund’s investments as of December 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Corporates 1 | $— | $849,483,819 | $— | $849,483,819 | |
| Treasuries | — | 1,194,594,005 | — | 1,194,594,005 | |
| Government Related1 | — | 250,555,376 | — | 250,555,376 | |
| Securitized 1 | — | 1,001,624,350 | — | 1,001,624,350 | |
| Other Investment Company1 | 55,781,049 | — | — | 55,781,049 | |
| Short-Term Investment1 | — | 109,983,060 | — | 109,983,060 | |
| Total | $55,781,049 | $3,406,240,610 | $— | $3,462,021,659 |
| 1 | As categorized in Portfolio Holdings. |
The fund's policy is to
recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended December 31, 2016.
59
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Statement of Assets
and Liabilities
As of December 31, 2016
| Assets | ||
| Investments, at value (cost $3,492,697,075) | $3,462,021,659 | |
| Cash | 249,291 | |
| Cash collateral on deposit at broker | $300,000 | |
| Receivables: | ||
| Investments sold | 38,619,133 | |
| Interest | 19,946,970 | |
| Fund shares sold | 10,289,618 | |
| Foreign tax reclaims | 17,456 | |
| Dividends | + | 16,539 |
| Total assets | 3,531,460,666 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 51,197,621 | |
| Investments bought — Delayed delivery | 164,316,903 | |
| Investment adviser fees | 110,101 | |
| Distributions to shareholders | 6,374,400 | |
| Accrued expenses | + | 14,240 |
| Total liabilities | 222,013,265 | |
| Net Assets | ||
| Total assets | 3,531,460,666 | |
| Total liabilities | – | 222,013,265 |
| Net assets | $3,309,447,401 | |
| Net Assets by Source | ||
| Capital received from investors | 3,350,611,251 | |
| Net investment income not yet distributed | 74,126 | |
| Net realized capital losses | (10,562,560) | |
| Net unrealized capital depreciation | (30,675,416) | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $3,309,447,401 | 64,200,000 | $51.55 | ||
60
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Statement of
Operations
For the period January 1, 2016 through December 31, 2016
| Investment Income | ||
| Dividends | $79,981 | |
| Interest (net of foreign withholding tax of $425) | + | 59,179,336* |
| Total investment income | 59,259,317 | |
| Expenses | ||
| Investment adviser fees | 1,359,889 | |
| Interest expense | 64,958* | |
| Total expenses | – | 1,424,847 |
| Net investment income | 57,834,470 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized gains on investments | 4,531,631 | |
| Net change in unrealized appreciation (depreciation) on investments | + | (18,239,903) |
| Net realized and unrealized losses | (13,708,272) | |
| Increase in net assets resulting from operations | $44,126,198 | |
| * | Includes $70,307 in interest income and $64,958 in interest expense related to charges on Agency Mortgage-Backed Securities not received or delivered on a timely basis (see financial note 2f). |
61
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab U.S. Aggregate Bond ETF
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 1/1/16-12/31/16 | 1/1/15-12/31/15 | |||
| Net investment income | $57,834,470 | $31,987,031 | ||
| Net realized gains (losses) | 4,531,631 | (1,226,895) | ||
| Net change in unrealized appreciation (depreciation) | + | (18,239,903) | (28,048,130) | |
| Increase in net assets resulting from operations | 44,126,198 | 2,712,006 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | ($64,137,240) | ($35,389,870) | ||
| Transactions in Fund Shares | ||||||||
| 1/1/16-12/31/16 | 1/1/15-12/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 24,200,000 | $1,274,995,902 | 17,400,000 | $908,381,895 | ||||
| Shares redeemed | + | (900,000) | (48,019,484) | — | — | |||
| Net transactions in fund shares | 23,300,000 | $1,226,976,418 | 17,400,000 | $908,381,895 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 1/1/16-12/31/16 | 1/1/15-12/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 40,900,000 | $2,102,482,025 | 23,500,000 | $1,226,777,994 | ||||
| Total increase | + | 23,300,000 | 1,206,965,376 | 17,400,000 | 875,704,031 | |||
| End of period | 64,200,000 | $3,309,447,401 | 40,900,000 | $2,102,482,025 | ||||
| Net investment income not yet distributed | $74,126 | $2,554 | ||||||
62
Schwab Fixed-Income ETFs | Annual Report
See financial notes
Schwab Fixed-Income ETFs
Financial Notes
1. Business Structure of the Funds:
Each of
the funds in this report is a series of Schwab Strategic Trust (the trust), a no-load, open-end management investment company. The trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as
amended (the 1940 Act). The list below shows all the operational funds in the trust as of the end of the period, including the funds discussed in this report, which are highlighted:
| SCHWAB STRATEGIC TRUST (ORGANIZED JANUARY 27, 2009) | |
| Schwab U.S. TIPS ETF | Schwab International Equity ETF™ |
| Schwab Short-Term U.S. Treasury ETF | Schwab International Small-Cap Equity ETF™ |
| Schwab Intermediate-Term U.S. Treasury ETF | Schwab Emerging Markets Equity ETF™ |
| Schwab U.S. Aggregate Bond ETF | Schwab U.S. REIT ETF™ |
| Schwab U.S. Broad Market ETF™ | Schwab Fundamental U.S. Broad Market Index ETF |
| Schwab U.S. Large-Cap ETF™ | Schwab Fundamental U.S. Large Company Index ETF |
| Schwab U.S. Large-Cap Growth ETF™ | Schwab Fundamental U.S. Small Company Index ETF |
| Schwab U.S. Large-Cap Value ETF™ | Schwab Fundamental International Large Company Index ETF |
| Schwab U.S. Mid-Cap ETF™ | Schwab Fundamental International Small Company Index ETF |
| Schwab U.S. Small-Cap ETF™ | Schwab Fundamental Emerging Markets Large Company Index ETF |
| Schwab U.S. Dividend Equity ETF™ | |
The funds issue and redeem shares at their net asset value per
share (NAV) only in large blocks of shares, typically 50,000 shares or more (Creation Units). These transactions are usually in exchange for a basket of securities and/or an amount of cash. As a practical matter, only institutions or large investors
purchase or redeem Creation Units. Except when aggregated in Creation Units, shares of the funds are not redeemable securities.
Individual shares of the funds trade on national securities
exchanges and elsewhere during the trading day and can only be bought and sold at market prices throughout the trading day through a broker-dealer. Because fund shares trade at market prices rather than NAV, shares may trade at a price greater than
NAV (premium) or less than NAV (discount).
Each fund
maintains its own account for purposes of holding assets and accounting, and is considered a separate entity for tax purposes. Within its account, each fund may also keep certain assets in segregated accounts, as required by securities law.
2. Significant Accounting Policies:
The following is
a summary of the significant accounting policies the funds use in their preparation of financial statements. The funds follow the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standard
Codification Topic 946 Financial Services — Investment Companies. The accounting policies are in conformity with accounting principles generally accepted in the United States of America (GAAP).
The funds may invest in certain other investment companies
(underlying funds). For more information about the underlying funds' operations and policies, please refer to those funds' semiannual and annual reports, which are filed with the U.S. Securities and Exchange Commission (SEC).
(a) Security Valuation:
Under procedures approved by the funds’ Board of Trustees
(the Board), the investment adviser has formed a Pricing Committee to administer the pricing and valuation of portfolio securities and other assets and to ensure that prices used for internal purposes or provided by third parties reasonably reflect
fair market value. Among other things, these procedures allow the funds to utilize independent pricing services, quotations from securities and financial instrument dealers and other market sources to determine fair value.
The funds value the securities in their portfolios every
business day. The funds use the following policies to value various types of securities:
•
Bonds and notes: Bonds and notes are valued at the mean of the most recent bid and ask quotes or, if such quotes are unavailable, at prices for securities of comparable maturity, credit quality and type.
Valuations for bonds and notes are provided by independent bond-pricing services.
•
Securities for which no quoted value is available: The Board has adopted procedures to fair value each fund’s securities when market prices are not “readily available” or are unreliable.
For example, a fund may fair value a security when it is de-listed or its trading is halted or suspended; when a security’s primary pricing source is unable or unwilling to provide a
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Financial Notes (continued)
2. Significant Accounting
Policies (continued):
price;
or when a security’s primary trading market is closed during regular market hours. Each fund makes fair value determinations in good faith in accordance with the fund’s valuation procedures. The Pricing Committee considers a number of
factors, including unobservable market inputs when arriving at fair value. The Pricing Committee may employ techniques such as the review of related or comparable assets or liabilities, related market activities, recent transactions, market
multiples, book values, transactional back-testing, disposition analysis and other relevant information. The Pricing Committee regularly reviews these inputs and assumptions to calibrate the valuations. Due to the subjective and variable nature of
fair value pricing, there can be no assurance that a fund could obtain the fair value assigned to the security upon the sale of such security. The Board convenes on a regular basis to review fair value determinations made by the funds pursuant to
the valuation procedures.
•
Short-term securities (60 days or less to maturity): A short-term security may be valued at its amortized cost when it approximates the security's market value.
• Underlying funds: Mutual funds are valued at their respective NAVs.
In accordance with the authoritative guidance on fair value
measurements and disclosures under GAAP, the funds disclose the fair value of their investments in a hierarchy that prioritizes the significant inputs to valuation techniques used to measure the fair value. The hierarchy gives the highest priority
to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3
measurements). If inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the valuation. If the funds determine that either the
volume and/or level of activity for an asset or liability has significantly decreased (from normal conditions for that asset or liability) or price quotations or observable inputs are not associated with orderly transactions, increased analysis and
management judgment will be required to estimate fair value.
The three levels of the fair value hierarchy are as
follows:
•
Level 1—quoted prices in active markets for identical securities—Investments
whose values are based on quoted market prices in active markets, and whose values are therefore classified as Level 1 prices, include active listed equities. Investments in mutual funds are valued daily at their NAVs, which are classified as Level
1 prices, without consideration to the classification level of the specific investments held by an underlying fund.
•
Level 2—other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)—Investments that trade in markets that are not considered to be active, but whose values are based on quoted market prices, dealer quotations or valuations provided by
alternative pricing sources supported by observable inputs are classified as Level 2 prices. These generally include U.S. government and sovereign obligations, most government agency securities, investment-grade corporate bonds, certain mortgage
products, less liquid listed equities, and state, municipal and provincial obligations.
•
Level 3—significant unobservable inputs (including the funds’ own assumptions in determining the fair value of
investments)—Investments whose values are classified as Level 3 prices have significant unobservable inputs, as they may trade infrequently or not at all. When
observable prices are not available for these securities, the funds use one or more valuation techniques for which sufficient and reliable data is available. The inputs used by the funds in estimating the value of Level 3 prices may include the
original transaction price, quoted prices for similar securities or assets in active markets, completed or pending third-party transactions in the underlying investment or comparable issuers, and changes in financial ratios or cash flows. Level 3
prices may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the funds in the absence of market information. Assumptions used by the funds due to the lack of observable inputs may
significantly impact the resulting fair value and therefore the funds’ results of operations.
The inputs or methodology used for valuing securities are
not necessarily an indication of the risk associated with investing in those securities.
(b) Accounting Policies for certain Portfolio Investments
(if held):
Securities Lending: Under the trust’s Securities Lending Program, a fund (lender) may make short-term loans of its securities to another party (borrower) to generate additional revenue for the fund. The borrower pledges collateral
in the form of cash, securities issued or fully guaranteed by the U.S. government or foreign governments, or letters of credit issued by a bank. Collateral at the individual loan level is required to be maintained on a daily marked-to-market basis
in an amount at least equal to the current value of the securities loaned. The lending agent provides a fund with indemnification against borrower default (the borrower fails to
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Financial Notes (continued)
2. Significant
Accounting Policies (continued):
return the
security on loan) reducing the risk of loss as a result of default. The cash collateral of securities loaned is currently invested in money market portfolios operating under Rule 2a-7 of the 1940 Act. Each fund bears the risk of loss with respect to
the investment of cash collateral. The terms of the securities lending agreements allow the funds or the lending agent to terminate any loan at any given time and the securities must be returned within the earlier of the standard trade settlement
period or the specified time period under the relevant securities lending agreement. Securities lending income, as disclosed in each fund’s Statement of Operations, if applicable, represents the income earned from the investment of the cash
collateral plus any fees paid by borrowers, less the fees paid to the lending agent and broker rebates which are subject to adjustments pursuant to the securities lending agreement. On loans not collateralized by cash, a fee is received from the
borrower, and is allocated between a fund and the lending agent. The aggregate market value of securities loaned will not at any time exceed one-third of the total assets of a fund, including collateral received from the loan (at market value
computed at the time of the loan). Total costs and expenses, including lending agent fees and broker rebates, associated with securities lending activities under the trust’s Securities Lending Program paid to the unaffiliated lending agents
start at 10% of gross lending revenue, with subsequent breakpoints to a low of 7.5%.
Inflation-Protected Securities: The Schwab U.S. TIPS ETF invests in inflation-protected securities. Inflation-protected securities are fixed-income securities whose principal value is periodically adjusted to the rate of inflation. The interest rate on
these instruments is generally fixed at issuance at a rate lower than typical bonds or notes. Over the life of an inflation-indexed instrument, however, interest will be paid based on a principal value, which is adjusted for any inflation or
deflation. Any increase or decrease in the principal amount of an inflation-protected security will be included as an addition or reduction to interest income on the Statement of Operations, even though investors do not receive their principal until
maturity.
TBA Commitments: The Schwab U.S. Aggregate Bond ETF may enter into “TBA” (to be announced) commitments to purchase or sell securities for a fixed price at a future date. Payments or proceeds of TBA commitments are not
delivered until the contractual settlement date. Unsettled TBA commitments are valued at the current market value generally according to the procedures described above in the Security Valuation section. The fund's use of TBA commitments may cause
the fund to experience higher portfolio turnover and higher transaction costs.
Agency MBS Transactions: In
November 2012, the Treasury Market Practices Group (TMPG) (an industry group sponsored by the Federal Reserve Bank of New York) recommended the margining of certain forward-settling Agency MBS transactions to reduce counterparty and systemic risks.
The Treasury Market Practices Group recommended market participants exchange two-way variation margin on a regular basis. The Schwab U.S. Aggregate Bond ETF posts and receives variation margin with certain counterparties in instances where the
unrealized gain/loss on such transactions exceeded certain pre-determined thresholds. The variation margin, if any, is disclosed on the Statement of Assets and Liabilities.
In August 2016, the Financial Industry Regulatory Authority
(FINRA) issued amendments to FINRA Rule 4210 (Margin Requirements). The rule was amended to include the margining of certain forward-settling MBS transactions, including TBAs, and includes some of the practices recommended by the TMPG. The rule
becomes effective in two phases: The amendments relating to the risk limit determination requirements are effective on December 15, 2016. All other amendments pursuant to the rule change go into effect on December 15, 2017, which includes the
posting and receiving of variation margin with certain counterparties in instances where the unrealized gain/loss on such TBA transactions exceeds certain pre-determined thresholds. Management is currently evaluating the impact of this rule
amendment and intends to comply with those changes.
Delayed Delivery Transactions and When-Issued Securities: During the period, certain funds transacted in securities on a delayed delivery or when-issued basis. Payment and delivery may take place after the customary settlement period for that security. The price of the
underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. The securities purchased on a delayed delivery or when-issued basis are identified as such in the funds’
Portfolio Holdings. The funds may receive compensation for interest forgone in the purchase of a delayed delivery or when-issued security. With respect to purchase commitments, the funds identify securities as segregated in their records with a
value at least equal to the amount of the commitment. Losses may arise due to changes in the value of the underlying securities or if the counterparty does not perform under the contract’s terms, or if the issuer does not issue the securities
due to political, economic, or other factors.
(c) Security Transactions:
Security transactions are recorded as of the date the order
to buy or sell the security is executed. Realized gains or losses from security transactions are based on the identified costs of the securities involved. Gains and losses from paydowns on mortgage and asset backed securities are recorded as
adjustments to interest income.
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Financial Notes (continued)
2. Significant
Accounting Policies (continued):
(d) Investment
Income:
Interest income is recorded as it accrues. If
a fund buys a debt security at a discount (less than face value) or a premium (more than face value), it amortizes premiums and accretes discounts from the purchase settlement date up to maturity. The fund then increases (in the case of discounts)
or reduces (in the case of premiums) the income it records from the security. If the security is callable (meaning that the issuer has the option to pay it off before its maturity date), then the fund amortizes the premium and accretes discounts to
the security's call date and price, rather than the maturity date and price.
(e) Expenses:
Pursuant to the Investment Advisory Agreement (Advisory
Agreement) between Charles Schwab Investment Management, Inc. (CSIM or the investment adviser) and the trust, the investment adviser will pay the operating expenses of each fund, excluding interest expense, taxes, any brokerage expenses, and
extraordinary or non-routine expenses. Interest expense, taxes, any brokerage expenses and extraordinary or non-routine expenses that are specific to a fund are charged directly to the fund.
(f) U.S. Treasury, Agency Debt & Agency
Mortgage-Backed Securities Charges:
Due to market
conditions or other reasons, delivery of U.S. Treasury securities, agency debt and agency mortgage-backed securities may not occur on a timely basis. In these instances, a fund may fail to receive a security purchased causing the fund to be unable
to deliver a security sold. The TMPG recommends voluntary fail charges when securities are not delivered as agreed by the parties.
The Schwab U.S. Aggregate Bond ETF received $70,307 and
paid $64,958 for the untimely delivery of agency mortgage-backed securities for the period ended December 31, 2016.
(g) Distributions to Shareholders:
The funds make distributions from net investment income, if
any, monthly and from net realized capital gains, if any, once a year.
(h) Accounting Estimates:
The accounting policies described in this report conform to
GAAP. Notwithstanding this, shareholders should understand that in order to follow these principles, fund management has to make estimates and assumptions that affect the information reported in the financial statements. It’s possible that
once the results are known, they may turn out to be different from these estimates and these differences may be material.
(i) Federal Income Taxes:
The funds intend to meet federal income and excise tax
requirements for regulated investment companies under subchapter M of the Internal Revenue Code, as amended. Accordingly, the funds distribute substantially all of their net investment income and net realized capital gains, if any, to their
respective shareholders each year. As long as a fund meets the tax requirements, it is not required to pay federal income tax.
(j) Indemnification:
Under the funds’ organizational documents, the
officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the funds. In addition, in the normal course of business the funds enter into contracts with their vendors and others that provide
general indemnifications. The funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the funds. However, based on experience, the funds expect the risk of loss attributable to
these arrangements to be remote.
3. Risk Factors:
Investing in the funds may involve
certain risks, as discussed in the funds’ prospectus, including, but not limited to, those described below. Any of these risks could cause an investor to lose money.
Market Risk. Bond markets rise
and fall daily. As with any investment whose performance is tied to these markets, the value of an investment in a fund will fluctuate, which means that the shareholder could lose money.
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Financial Notes (continued)
3. Risk
Factors (continued):
Investment Style Risk. The funds are not actively managed. Therefore, the funds follow the securities included in an index during upturns as well as downturns. Because of their indexing strategy, the funds do not take steps to reduce market
exposure or to lessen the effects of a declining market. In addition, because of each fund's expenses, each fund’s performance may be below that of their respective index.
Interest Rate Risk. The
funds are subject to the risk that interest rates will rise and fall over time. As with any investment whose yield reflects current interest rates, a fund’s yield will change over time. During periods when interest rates are low, a
fund’s yield (and total return) also may be low. Changes in interest rates also may affect a fund’s share price: a rise in interest rates could cause a fund’s share price to fall. The risk is greater when a fund holds fixed income
securities with longer maturities. A fund may also lose money if interest rates rise. The longer a 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. Because interest rates in the United States and other countries are near historically low levels, a change in a central bank's monetary policy or
improving economic conditions may result in an increase in interest rates. Rising interest rates may decrease liquidity in the fixed income securities markets, making it more difficult for a 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 a fund's fixed income securities holdings.
Credit Risk. The funds are
subject to the risk that a decline in the credit quality of a portfolio investment could cause the funds to lose money or underperform. The funds could lose money if the issuer or guarantor of a portfolio investment fails to make timely principal or
interest payments or otherwise honor its obligations.
Inflation Protected Security Risk. The value of inflation-protected securities, including TIPS, generally will fluctuate in response to changes in “real” interest rates, generally decreasing when real interest rates rise and increasing when
real interest rates fall. Real interest rates represent nominal (or stated) interest rates reduced by the expected impact of inflation. In addition, interest payments on inflation-indexed securities will generally vary up or down along with the rate
of inflation.
Sampling Index Tracking Risk. To the extent a fund uses statistical sampling techniques, the fund will not fully replicate the index and may hold securities not included in the index. As a result, a fund will be 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. If a fund utilizes a sampling approach, it may not track the return of the index as
well as it would if a fund purchased all of the securities in its index.
Tracking Error Risk. As
index funds, the funds seek to track the performance of an index, although they may not be successful in doing so. The divergence between the performance of a 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, a fund may not invest in certain securities in the index or match the securities' weighting to the index.
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, dealer inventories of certain securities—an indication of the ability of dealers to engage in “market making”—are near historic lows in relation to market size, which could potentially lead to decreased liquidity. In such cases, a 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.
Transactions in illiquid securities may entail transaction costs that are higher than those for transactions in liquid securities.
Securities Lending Risk.
Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent.
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 a fund will approximate the fund’s NAV, there may be times when the
market price and the NAV vary significantly. Investors may pay more than NAV when they buy shares of a fund in the secondary market, and may receive less than NAV when they sell those shares in the secondary market. The market price of the fund
shares may deviate, sometimes significantly, from NAV during periods of market volatility. (See the unaudited Frequency Distribution of Discounts and Premiums in Other Information for an overview showing the frequency at which the daily closing
price was at a discount or a premium to a fund's daily NAV.)
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Financial Notes (continued)
3. Risk
Factors (continued):
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.
Non-U.S. Issuer Risk.
Schwab U.S. Aggregate Bond ETF may invest in U.S.-registered, dollar-denominated bonds of non-U.S. corporations, governments, agencies and supra-national entities to the extent such bonds are included in the fund’s index. 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 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.
Mortgage-Backed and Mortgage Pass-Through Securities Risk. With respect to the Schwab U.S. Aggregate Bond ETF, certain of the mortgage-backed securities in which the fund may invest 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. Mortgage-backed securities tend to increase in value less than other debt securities when interest rates decline, but
are subject to similar 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 bonds. Small movements in
interest rates—both increases and
decreases—may quickly and significantly affect the value of certain mortgage-backed
securities. Transactions in mortgage pass-through securities often occur through TBA transactions, as described in the fund’s prospectus. Default by or bankruptcy of a counterparty to a TBA transaction could expose the fund to possible losses
because of an adverse market action, expenses, or delays in connection with the purchase or sale of the pools of mortgage pass-through securities specified in the TBA transaction.
Prepayment and Extension Risk. With respect to the Schwab U.S. Aggregate Bond ETF, certain of the funds’ investments are subject to the risk that the securities may be paid off earlier or later than expected. Either situation could cause a fund
to hold securities paying lower-than-market rates of interest, which could hurt a fund’s yield or share price.
Derivatives Risk. Schwab
U.S. Aggregate bond ETF may invest in derivatives instruments. The principal types of derivatives the fund used by 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,
liquidity risk, and credit risk are discussed elsewhere in this section. The fund’s use of derivatives is also subject to leverage risk, lack-of-availability risk, valuation risk, correlation risk and tax risk. Leverage risk is the risk that
use of derivatives may magnify the effect of any decrease or increase in the value of the fund’s portfolio securities. 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. 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 gain. 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. 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.
Concentration Risk. With
respect to the Schwab U.S. Aggregate Bond ETF, to the extent that the fund's or an 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 susceptible to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector
or asset class.
Please refer to the
funds’ prospectus for a more complete description of the principal risks of investing in the funds.
4. Affiliates and Affiliated Transactions:
CSIM, a
wholly owned subsidiary of The Charles Schwab Corporation, serves as each fund’s investment adviser pursuant to an Advisory Agreement between CSIM and the trust.
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Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
For its
advisory services to the funds, CSIM is entitled to receive an annual fee, payable monthly, based on a percentage of each fund’s average daily net assets as follows:
| Schwab
U.S. TIPS ETF |
Schwab
Short-Term U.S. Treasury ETF |
Schwab
Intermediate-Term U.S. Treasury ETF |
Schwab
U.S. Aggregate Bond ETF |
| 0.07% | 0.06% | 0.06% | 0.04% |
Prior to October 7, 2016, the
advisory fees for the Schwab U.S. Aggregate Bond ETF was 0.05%.
Prior to December 29, 2016, the advisory fees for the Schwab
Short-Term U.S. Treasury ETF and Schwab Intermediate-Term U.S. Treasury ETF were 0.08% and 0.09%, respectively.
Subsequent to the reporting period ended December 31, 2016, and
effective March 1, 2017, the advisory fees of the Schwab U.S. TIPS ETF will be reduced to 0.05%. In addition, advisory fees will include interest expense, which was previously excluded.
Certain Schwab funds may own shares of other Schwab funds. The
table below reflects the percentages of shares of each fund in this report that are owned by other Schwab funds as of December 31, 2016, as applicable:
| Underlying Funds | |||
| Schwab
U.S. TIPS ETF |
Schwab
U.S. Aggregate Bond ETF | ||
| Schwab VIT Balanced Portfolio | 0.1% | 0.6% | |
| Schwab VIT Balanced with Growth Portfolio | 0.2% | 1.1% | |
| Schwab VIT Growth Portfolio | 0.1% | 0.5% | |
Pursuant to an exemptive order
issued by the SEC, the funds may enter into interfund borrowing and lending transactions with other funds in the Fund Complex (for definition refer to Trustees and Officers section). All loans are for temporary or emergency purposes and the interest
rate to be charged will be the average of the overnight repurchase agreement rate and the short-term bank loan rate. All loans are subject to numerous conditions designed to ensure fair and equitable treatment of all participating funds/portfolios.
The interfund lending facility is subject to the oversight and periodic review of the Board. The funds had no interfund borrowing or lending activity during the period.
5. Other Service Providers:
SEI Investments
Distribution Co. is the principal underwriter and distributor of shares of the funds.
State Street Bank and Trust Company (State Street) serves as
the funds’ transfer agent. As part of these services, the transfer agent maintains records pertaining to the sale, redemption and transfer of the funds’ shares.
State Street also serves as custodian and accountant for the
funds. The custodian is responsible for the daily safekeeping of securities and cash held by the funds. The funds’ accountant maintains all books and records related to the funds’ transactions.
6. Board of Trustees:
The Board may include people
who are officers and/or directors of CSIM or its affiliates. Federal securities law limits the percentage of such “interested persons” who may serve on a trust’s board, and the trust was in compliance with these limitations
throughout the report period. The trust does not pay any interested or non-interested trustees (independent trustees). The independent trustees are paid by CSIM. For information regarding the trustees, please refer to the Trustees and Officers table
at the end of this report.
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Financial Notes (continued)
7.
Borrowing from Banks:
During the period, the funds were
participants with other U.S. registered investment companies managed by CSIM in a joint, syndicated, committed $530 million line of credit (the Credit Facility), which matured on October 6, 2016. Under the terms of the Credit Facility, in addition
to the interest charged on any borrowings by a fund, each fund paid a commitment fee of 0.125% per annum on its proportionate share of the unused portion of the Credit Facility. On October 6, 2016, the Credit Facility was amended to run for a new
364 day period with an increased line of $555 million and a commitment fee of 0.15% per annum. There were no borrowings from the line of credit during the period.
The funds also have access to custodian overdraft facilities. A
fund may have utilized the overdraft facility and incurred an interest expense, which is disclosed on the fund’s Statement of Operations, if any. The interest expense is determined based on a negotiated rate above the current Federal Funds
Rate.
8. Purchases and Sales/Maturities of Investment Securities:
For the period ended December 31, 2016, purchases and
sales/maturities of securities (excluding in-kind transactions and short-term obligations) were as follows:
| Purchases
of Long-Term U.S. Government Securities |
Purchases
of Other Long-Term Securities |
Total
Purchases of Long-Term Securities | |
| Schwab U.S. TIPS ETF | $291,775,105 | $— | $291,775,105 |
| Schwab Short-Term U.S. Treasury ETF | 1,015,289,963 | — | 1,015,289,963 |
| Schwab Intermediate-Term U.S. Treasury ETF | 427,401,633 | — | 427,401,633 |
| Schwab U.S. Aggregate Bond ETF | 4,014,351,555 | 611,354,711 | 4,625,706,266 |
| Sales/Maturities
of Long-Term U.S. Government Securities |
Sales/Maturities
of Other Long-Term Securities |
Total
Sales/Maturities of Long-Term Securities | |
| Schwab U.S. TIPS ETF | $191,612,136 | $— | $191,612,136 |
| Schwab Short-Term U.S. Treasury ETF | 787,025,563 | — | 787,025,563 |
| Schwab Intermediate-Term U.S. Treasury ETF | 195,616,996 | — | 195,616,996 |
| Schwab U.S. Aggregate Bond ETF | 3,194,506,516 | 196,512,875 | 3,391,019,391 |
9. In-Kind Transactions:
The consideration for the
purchase of Creation Units of a fund often consists of the in-kind deposit of a designated portfolio of fixed-income securities, which constitutes an optimized representation of the securities involved in a relevant fund’s underlying index,
and an amount of cash. Due to the composition of the portfolio of the Schwab U.S. Aggregate Bond ETF, consideration for the subscription and redemption of Creation Units generally is cash. Investors purchasing and redeeming Creation Units are
subject to a standard creation transaction fee and a standard redemption transaction fee paid to the custodian to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units. Purchasers and redeemers of
Creation Units for cash are subject to an additional variable charge paid to the fund that will offset the transaction costs to the fund of buying or selling portfolio securities. 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 fund. From time to time, CSIM may cover the cost of any transaction fees when believed to be in the best interests of the fund.
The in-kind transactions for the period ended December 31, 2016
were as follows:
| In-Kind
Purchases of Securities |
In-Kind Sales of Securities | |
| Schwab U.S. TIPS ETF | $816,631,127 | $135,599,726 |
| Schwab Short-Term U.S. Treasury ETF | 421,193,164 | 301,360,691 |
| Schwab Intermediate-Term U.S. Treasury ETF | 320,423,705 | 190,847,074 |
| Schwab U.S. Aggregate Bond ETF | — | — |
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Financial Notes (continued)
9. In-Kind
Transactions (continued):
For the period ended December 31,
2016, the funds (except for the Schwab U.S. Aggregate Bond ETF) realized net capital gains or losses resulting from in-kind redemptions of Creation Units. Because such gains or losses are not taxable to the funds and are not distributed to existing
fund shareholders, the gains or losses are reclassified from accumulated net realized gains or losses to capital received from investors at the end of the funds' tax year. These reclassifications have no effect on net assets or net asset values per
share. The net realized in-kind gains or losses for the period ended December 31, 2016 are disclosed in the funds' Statements of Operations, if any.
10. Federal Income Taxes
As of December 31, 2016, the
components of distributable earnings on a tax-basis were as follows:
| Schwab
U.S. TIPS ETF |
Schwab
Short-Term U.S. Treasury ETF |
Schwab
Intermediate-Term U.S. Treasury ETF |
Schwab
U.S. Aggregate Bond ETF | ||||
| Undistributed ordinary income | $325,124 | $74,049 | $37,601 | $74,126 | |||
| Undistributed long-term capital gains | — | — | — | — | |||
| Unrealized appreciation | 1,330,411 | 22,778 | 15,779 | 15,356,097 | |||
| Unrealized depreciation | (18,533,979) | (6,042,816) | (19,182,352) | (47,303,980) | |||
| Net unrealized appreciation (depreciation) | (17,203,568) | (6,020,038) | (19,166,573) | (31,947,883) |
The primary difference between
book-basis and tax-basis unrealized appreciation or unrealized depreciation of investments is the tax deferral of losses on wash sales.
Net investment income and realized capital gains and losses may
differ for financial statement and tax purposes primarily due to differing treatments of paydown gains and losses and amortization of bond discounts and premiums.
Capital loss carryforwards may be used to offset future
realized capital gains for federal income tax purposes. As of December 31, 2016, the funds had capital loss carryforwards available to offset future net capital gains before the expiration dates as follows:
| Expiration Date | Schwab
U.S. TIPS ETF |
Schwab
Short-Term U.S. Treasury ETF |
Schwab
Intermediate-Term U.S. Treasury ETF |
Schwab
U.S. Aggregate Bond ETF | |||
| December 31, 2018 | $39 | $366 | $2,072 | $— | |||
| No expiration* | 10,727,853 | 852,615 | 1,801,757 | 9,290,093 | |||
| Total | $10,727,892 | $852,981 | $1,803,829 | $9,290,093 |
| * | As a result of the passage of the Regulated Investment Company Modernization Act of 2010, capital losses incurred after December 31, 2010 may now be carried forward indefinitely, but must retain the character of the original loss. |
For tax purposes, net realized capital losses and late-year
ordinary losses incurred after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. For the year ended December 31, 2016, the funds had no capital losses deferred and had capital loss carryforwards
utilized as follows:
| Schwab
U.S. TIPS ETF |
Schwab
Short-Term U.S. Treasury ETF |
Schwab
Intermediate-Term U.S. Treasury ETF |
Schwab
U.S. Aggregate Bond ETF | |
| Capital loss carryforwards utilized | $— | $280,036 | $420,565 | $— |
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Schwab Fixed-Income ETFs | Annual Report
Schwab Fixed-Income ETFs
Financial Notes (continued)
10. Federal Income
Taxes (continued):
The tax-basis components of distributions
paid during the current and prior fiscal years were:
| Schwab
U.S. TIPS ETF |
Schwab
Short-Term U.S. Treasury ETF |
Schwab
Intermediate-Term U.S. Treasury ETF |
Schwab
U.S. Aggregate Bond ETF | |
| Current period distributions | ||||
| Ordinary income | $20,877,300 | $9,710,295 | $9,572,870 | $64,137,240 |
| Long-term capital gains | — | — | — | — |
| Prior period distributions | ||||
| Ordinary income | 2,245,705 | 6,005,570 | 5,601,670 | 35,389,870 |
| Long-term capital gains | — | — | — | — |
Distributions paid to shareholders
are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences reflect the differing character of certain
income items and net realized gains and losses for financial statement and tax purposes, and may result in reclassification among certain capital accounts on the financial statements. The funds may also designate a portion of the amount paid to
redeeming shareholders as a distribution for tax purposes.
Permanent book and tax basis differences may result in
reclassifications between components of net assets as required. The adjustments have no impact on net assets or the results of operations. As of December 31, 2016, the funds made the following reclassifications:
| Schwab
U.S. TIPS ETF |
Schwab
Short-Term U.S. Treasury ETF |
Schwab
Intermediate-Term U.S. Treasury ETF |
Schwab
U.S. Aggregate Bond ETF | |
| Capital shares | $4,773,781 | $1,106,036 | $4,548,401 | $— |
| Undistributed net investment income | 559,223 | — | — | 6,374,342 |
| Net realized gains and losses | (5,333,004) | (1,106,036) | (4,548,401) | (6,374,342) |
For the period ended December 31,
2016, the following funds (except for the Schwab U.S. Aggregate Bond ETF) reclassified non-taxable security gains and losses realized on the in-kind redemption of Creation Units (Note 9) as an increase or decrease to capital received from investors
in the Statement of Assets and Liabilities as follows:
| Schwab
U.S. TIPS ETF |
Schwab
Short-Term U.S. Treasury ETF |
Schwab
Intermediate-Term U.S. Treasury ETF |
Schwab
U.S. Aggregate Bond ETF | |
| $5,864,174 | $1,106,036 | $4,548,577 | $— |
As of December 31, 2016, management
has reviewed the tax positions for open periods (for federal purposes, three years from the date of filing and for state purposes, four years from the date of filing) as applicable to the funds, and has determined that no provision for income tax is
required in the funds' financial statements. The funds recognize interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the period ended December 31, 2016, the funds did not
incur any interest or penalties.
11. Recent Regulatory Development:
In October 2016,
the SEC adopted new rules and amended existing rules (together, final rules) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require
standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. Management is currently evaluating the impact
that the adoption of the amendments to Regulation S-X will have on the funds' financial statements and related disclosures.
12. Subsequent Events:
Management has determined there
are no subsequent events or transactions through the date the financial statements were issued that would have materially impacted the financial statements as presented.
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Schwab Fixed-Income ETFs | Annual Report
Schwab Fixed-Income ETFs
Report of
Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of:
Schwab U.S. TIPS ETF
Schwab Short-Term U.S. Treasury ETF
Schwab Intermediate-Term U.S. Treasury ETF
Schwab U.S. Aggregate Bond ETF
Schwab U.S. TIPS ETF
Schwab Short-Term U.S. Treasury ETF
Schwab Intermediate-Term U.S. Treasury ETF
Schwab U.S. Aggregate Bond ETF
In our opinion, the accompanying statements of assets and
liabilities, including the portfolio holdings, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Schwab U.S. TIPS ETF, Schwab
Short-Term U.S. Treasury ETF, Schwab Intermediate-Term U.S. Treasury ETF and Schwab U.S. Aggregate Bond ETF (four of the funds constituting Schwab Strategic Trust, hereafter referred to as the “Funds”) at December 31, 2016, the results
of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with
accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management. Our
responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of
securities at December 31, 2016 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 16, 2017
San Francisco, California
February 16, 2017
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Schwab Fixed-Income ETFs | Annual Report
Schwab Fixed-Income ETFs
Other Information
(unaudited)
Frequency Distribution of Discounts and Premiums
Market Price vs. NAV as of December 31, 2016
Market Price vs. NAV as of December 31, 2016
The following
charts are provided to show the frequency at which the daily closing market price on the NYSE Arca, Inc. (Exchange), the secondary market for shares of each fund, was at a discount or premium to such fund's daily NAV. The “Market Price”
of each fund generally is determined using the midpoint between the highest bid and lowest offer on the Exchange, as of the time that the fund's NAV is calculated. The discount or premium is the percentage difference between the NAV and the Market
Price of a fund. A discount is the amount that a fund is trading below the reported NAV, expressed as a percentage of NAV. A premium is the amount that a fund is trading above the reported NAV, expressed as a percentage of NAV. The NAV of each Fund
will fluctuate with changes in the market value of its portfolio holdings. The Market Price of each fund will fluctuate in accordance with changes in its NAV, as well as supply and demand. The data presented below represents past performance and can
not be used to predict future results. The chart does not include days in which the NAV equals the Market Price.
| Number
of Days Market Price Above NAV |
Number
of Days Market Price Below NAV | |||||||
| 1-49
Basis Points |
50-99
Basis Points |
100-199
Basis Points |
>200
Basis Points |
1-49
Basis Points |
50-99
Basis Points |
100-199
Basis Points |
>200
Basis Points | |
| Schwab U.S. TIPS ETF | ||||||||
| Commencement of trading | ||||||||
| 8/5/10 through 12/31/16 | 1,012 | 3 | — | — | 492 | 1 | — | — |
| Schwab Short-Term U.S. Treasury ETF | ||||||||
| Commencement of trading | ||||||||
| 8/5/10 through 12/31/16 | 853 | — | — | — | 343 | — | — | — |
| Schwab Intermediate-Term U.S. Treasury ETF | ||||||||
| Commencement of trading | ||||||||
| 8/5/10 through 12/31/16 | 878 | — | — | — | 526 | 1 | — | — |
| Schwab U.S. Aggregate Bond ETF | ||||||||
| Commencement of trading | ||||||||
| 7/14/11 through 12/31/16 | 1,155 | 4 | — | — | 170 | 2 | — | — |
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Schwab Fixed-Income ETFs | Annual Report
Schwab Fixed-Income ETFs
Trustees and
Officers
The tables below give information about the trustees and
officers for the Schwab Strategic Trust, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Schwab
Strategic Trust and Laudus Trust. The Fund Complex includes 110 funds.
The address for all trustees and officers is 211 Main Street,
San Francisco, CA 94105. You can find more information about the trustees and officers in the Statement of Additional Information, which is available free by calling 1-877-824-5615.
| Independent Trustees | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Robert
W. Burns 1959 Trustee (Trustee of Schwab Strategic Trust since 2009; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2016) |
Retired/Private Investor (Jan. 2009 – present). Formerly, Managing Director, Pacific Investment Management Company, LLC (PIMCO) and President, PIMCO Funds. | 110 | Director, PS Business Parks, Inc. (2005 – 2012) |
| John
F. Cogan 1947 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Senior Fellow, The Hoover Institution at Stanford University (Oct. 1979 – present); Senior Fellow, Stanford Institute for Economic Policy Research (2000 – present); Professor of Public Policy, Stanford University (1994 – 2015). | 110 | Director, Gilead Sciences, Inc. (2005 – present) |
| Stephen
Timothy Kochis 1946 Trustee (Trustee of Schwab Strategic Trust since 2012; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2016) |
CEO and Owner, Kochis Global (wealth management consulting) (May 2012 – present); Chairman and CEO, Aspiriant, LLC (wealth management) (Jan. 2008 – Apr. 2012). | 110 | None |
| David
L. Mahoney 1954 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2011; Schwab Strategic Trust since 2016) |
Private Investor. | 110 | Director,
Symantec Corporation (2003 – present) Director, Corcept Therapeutics Incorporated (2004 – present) Director, Adamas Pharmaceuticals, Inc. (2009 – present) |
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Schwab Fixed-Income ETFs | Annual Report
Schwab Fixed-Income ETFs
| Independent Trustees (continued) | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Kiran
M. Patel 1948 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2011; Schwab Strategic Trust since 2016) |
Retired. Executive Vice President and General Manager of Small Business Group, Intuit, Inc. (financial software and services firm for consumers and small businesses) (Dec. 2008 – Sept. 2013). | 110 | Director, KLA-Tencor Corporation (2008 – present) |
| Kimberly
S. Patmore 1956 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Consultant, Patmore Management Consulting (management consulting) (2008 – present). | 110 | None |
| Charles
A. Ruffel 1956 Trustee (Trustee of Schwab Strategic Trust since 2009; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2015) |
Co-Chief Executive Officer, Kudu Investment Management, LLC (financial services) (Jan. 2015 – present); Partner, Kudu Advisors, LLC (financial services) (June 2008 – Jan. 2015); Advisor, Asset International, Inc. (publisher of financial services information) (Aug. 2008 – Jan. 2015). | 110 | None |
| Gerald
B. Smith 1950 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2000; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Chairman, Chief Executive Officer and Founder of Smith Graham & Co. (investment advisors) (Mar. 1990 – present). | 110 | Director,
Eaton (2012 – present) Director and Chairman of the Audit Committee, Oneok Partners LP (2003 – 2013) Director, Oneok, Inc. (2009 – 2013) Lead Independent Director, Board of Cooper Industries (2002 – 2012) |
| Joseph
H. Wender 1944 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Senior Consultant, Goldman Sachs & Co., Inc. (investment banking and securities firm) (Jan. 2008 – present); Partner, Colgin Partners, LLC (vineyards) (Feb. 1998 – present). | 110 | Board
Member and Chairman of the Audit Committee, Ionis Pharmaceuticals (1994 – present) Lead Independent Director and Chair of Audit Committee, OUTFRONT Media Inc. (2014 – present) |
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Schwab Fixed-Income ETFs | Annual Report
Schwab Fixed-Income ETFs
| Interested Trustees | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Walter
W. Bettinger II2 1960 Chairman and Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Schwab Strategic Trust since 2009; Laudus Trust since 2010) |
Director, President and Chief Executive Officer, The Charles Schwab Corporation (Oct. 2008 – present); President and Chief Executive Officer (Oct. 2008 – present), Director (May 2008 – present), Charles Schwab & Co., Inc.; Director, Charles Schwab Bank (Apr. 2006 – present); Director, Schwab Holdings, Inc. (May 2008 – present); and Director, Charles Schwab Investment Management, Inc. (July 2016 – present). | 110 | Director, The Charles Schwab Corporation (2008 – present) |
| Marie
A. Chandoha2 1961 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; Trustee (Jan. 2016 – present), President, Chief Executive Officer (Dec. 2010 – present), and Chief Investment Officer (Sept. 2010 – Oct. 2011), Schwab Funds, Laudus Funds and Schwab ETFs; Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Jan. 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (Mar. 2007 – Aug. 2010). | 110 | None |
| Joseph
R. Martinetto2 1962 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Senior Executive Vice President and Chief Financial Officer, The Charles Schwab Corporation and Charles Schwab & Co., Inc. (July 2015 – present); Executive Vice President and Chief Financial Officer of The Charles Schwab Corporation and Charles Schwab & Co., Inc. (May 2007 – July 2015); Director, Charles Schwab & Co., Inc. (May 2007 – present); Director (Apr. 2010 – present) and Chief Executive Officer (July 2013 – Apr. 2015), Charles Schwab Bank; Director, Executive Vice President and Chief Financial Officer (May 2007 – present), Senior Executive Vice President (Feb. 2016 – present), and Executive Vice President (May 2007 - Feb. 2016), Schwab Holdings, Inc. | 110 | None |
| Officers of the Trust | |
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served3) |
Principal Occupations During the Past Five Years |
| Marie
A. Chandoha 1961 President and Chief Executive Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2010) |
Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; Trustee (Jan. 2016 – present), President, Chief Executive Officer (Dec. 2010 – present), and Chief Investment Officer (Sept. 2010 – Oct. 2011), Schwab Funds, Laudus Funds and Schwab ETFs; Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Jan. 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (Mar. 2007 – Aug. 2010). |
| Mark
Fischer 1970 Treasurer and Chief Financial Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2013) |
Treasurer and Chief Financial Officer, Schwab Funds, Laudus Funds and Schwab ETFs (Jan. 2016 – present); Assistant Treasurer, Schwab Funds and Laudus Funds (Dec. 2013 – Dec. 2015), Schwab ETFs (Nov. 2013 – Dec. 2015); Vice President, Charles Schwab Investment Management, Inc. (Oct. 2013 – present); Executive Director, J.P. Morgan Investor Services (Apr. 2011 – Sept. 2013); Assistant Treasurer, Massachusetts Financial Service Investment Management (May 2005 – Mar. 2011). |
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Schwab Fixed-Income ETFs | Annual Report
Schwab Fixed-Income ETFs
| Officers of the Trust (continued) | |
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served3) |
Principal Occupations During the Past Five Years |
| George
Pereira 1964 Senior Vice President and Chief Operating Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2004; Laudus Trust since 2006; Schwab Strategic Trust since 2009) |
Senior Vice President and Chief Financial Officer (Nov. 2004 – present), Chief Operating Officer (Jan. 2011 – present), Charles Schwab Investment Management, Inc.; Senior Vice President and Chief Operating Officer (Jan. 2016 – present), Treasurer and Chief Financial Officer, Laudus Funds (June 2006 – Dec. 2015); Treasurer and Principal Financial Officer, Schwab Funds (Nov. 2004 – Dec. 2015) and Schwab ETFs (Oct. 2009 – Dec. 2015); Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Apr. 2005 – present). |
| Omar
Aguilar 1970 Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies, Charles Schwab Investment Management, Inc. (Apr. 2011 – present); Senior Vice President and Chief Investment Officer – Equities, Schwab Funds, Laudus Funds and Schwab ETFs (June 2011 – present); Head of the Portfolio Management Group and Vice President of Portfolio Management, Financial Engines, Inc. (May 2009 – Apr. 2011); Head of Quantitative Equity, ING Investment Management (July 2004 – Jan. 2009). |
| Brett
Wander 1961 Senior Vice President and Chief Investment Officer – Fixed Income (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President and Chief Investment Officer – Fixed Income, Charles Schwab Investment Management, Inc. (Apr. 2011 – present); Senior Vice President and Chief Investment Officer – Fixed Income, Schwab Funds, Laudus Funds and Schwab ETFs (June 2011 – present); Senior Managing Director, Global Head of Active Fixed-Income Strategies, State Street Global Advisors (Jan. 2008 – Oct. 2010); Director of Alpha Strategies Loomis, Sayles & Company (Apr. 2006 – Jan. 2008). |
| David
Lekich 1964 Chief Legal Officer and Secretary, Schwab Funds and Schwab ETFs Vice President and Assistant Clerk, Laudus Funds (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President (Sept. 2011 – present), Vice President (Mar. 2004 – Sept. 2011), Charles Schwab & Co., Inc.; Senior Vice President and Chief Counsel (Sept. 2011 – present), Vice President (Jan. 2011 – Sept. 2011), Charles Schwab Investment Management, Inc.; Secretary (Apr. 2011 – present) and Chief Legal Officer (Dec. 2011 – present), Schwab Funds; Vice President and Assistant Clerk, Laudus Funds (Apr. 2011 – present); Secretary (May 2011 – present) and Chief Legal Officer (Nov. 2011 – present), Schwab ETFs. |
| Catherine
MacGregor 1964 Vice President and Assistant Secretary, Schwab Funds and Schwab ETFs Chief Legal Officer, Vice President and Clerk, Laudus Funds (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2005; Schwab Strategic Trust since 2009) |
Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc. (July 2005 – present); Vice President (Dec. 2005 – present), Chief Legal Officer and Clerk (Mar. 2007 – present), Laudus Funds; Vice President (Nov. 2005 – present) and Assistant Secretary (June 2007 – present), Schwab Funds; Vice President and Assistant Secretary, Schwab ETFs (Oct. 2009 – present). |
| 1 | Each Trustee shall hold office until the election and qualification of his or her successor, or until he or she dies, resigns or is removed. The retirement policy requires that each independent trustee retire by December 31 of the year in which the Trustee turns 74 or the Trustee’s twentieth year of service as an independent trustee on any trust in the Fund Complex, whichever occurs first. |
| 2 | Mr. Bettinger, Ms. Chandoha, and Mr. Martinetto are Interested Trustees because they own stock of The Charles Schwab Corporation, the parent company of the investment adviser. |
| 3 | The President, Treasurer and Secretary/Clerk hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each of the other officers serves at the pleasure of the Board. |
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Schwab Fixed-Income ETFs | Annual Report
Schwab Fixed-Income ETFs
Glossary
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Schwab Fixed-Income ETFs
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Schwab Fixed-Income ETFs | Annual Report
Schwab Fixed-Income ETFs
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Schwab Fixed-Income ETFs | Annual Report
Notes
Notes
Schwab Fixed-Income ETFs
Schwab ETFs™
Schwab ETFs are designed to be low-cost, diversified
investments which follow broad market indices and provide exposure to specific segments of the market. These ETFs can serve as part of the foundation of a diversified portfolio. The list below shows all currently available Schwab ETFs.
Investors should carefully consider information contained in
the prospectus, including investment objectives, risks, charges and expenses before investing. Please call 1-877-824-5615 for a prospectus, or if available, the summary prospectus, and brochure for any Schwab ETF. Please read the prospectus
carefully before you invest. This report must be preceded or accompanied by a current prospectus.
Proxy Voting Policies, Procedures and Results
A description of the proxy voting policies and procedures
used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting the Schwab ETFs’ website at www.csimfunds.com/schwabetfs_prospectus, the SEC’s
website at www.sec.gov, or by contacting Schwab ETFs at 1-877-824-5615.
Information regarding how a fund voted proxies relating to
portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting the fund’s website at www.csimfunds.com/schwabetfs_prospectus or the SEC’s
website at www.sec.gov.
| * | FUNDAMENTAL INDEX is a registered trademark of Research Affiliates LLC. |
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MFR60171-06
00189420
00189420
Table of Contents
Item 2: Code of Ethics.
| (a) | Registrant has adopted a code of ethics that applies to its principal executive officer, principal financial officer, and any other persons who perform a similar function, regardless of whether these individuals are employed by Registrant or a third party. |
| (c) | During the period covered by the report, no amendments were made to the provisions of this code of ethics. |
| (d) | During the period covered by the report, Registrant did not grant any waivers, including implicit waivers, from the provisions of this code of ethics. |
| (f)(1) | Registrant has filed this code of ethics as an exhibit pursuant to Item 12(a)(1) of Form N-CSR. |
Item 3: Audit Committee Financial Expert.
Registrant’s Board of Trustees has determined that Kiran M. Patel, Robert W. Burns and Kimberly S. Patmore, each currently serving on its audit, compliance and valuation committee, are each an “audit committee financial expert,” as such term is defined in Item 3 of Form N-CSR. Each member of Registrant’s audit, compliance and valuation committee is “independent” under the standards set forth in Item 3 of Form N-CSR.
The designation of each of Mr. Patel, Mr. Burns and Ms. Patmore as an “audit committee financial expert” pursuant to Item 3 of Form N-CSR does not (i) impose upon such individual any duties, obligations, or liability that are greater than the duties, obligations and liability imposed upon such individual as a member of Registrant’s audit, compliance and valuation committee or Board of Trustees in the absence of such designation; and (ii) affect the duties, obligations or liability of any other member of Registrant’s audit, compliance and valuation committee or Board of Trustees.
Item 4: Principal Accountant Fees and Services.
Registrant is composed of twenty-one series. Four series have a fiscal year-end of December 31, whose annual financial statements are reported in Item 1, seven series have a fiscal year-end of February 28 and ten series have a fiscal year-end of August 31. Principal accountant fees disclosed in Items 4(a)-(d) and 4(g) include fees billed for services rendered to each of the twenty-one series, based on their respective 2016 and 2015 fiscal years, as applicable.
The following table presents fees billed by the principal accountant in each of the last two fiscal years for the services rendered to the Funds:
Table of Contents
| (a) Audit Fees | (b)Audit-Related Fees1 |
(c) Tax Fees2 | (d) All Other Fees | |||||||||||
| Fiscal Year 2016 |
Fiscal Year 2015 |
Fiscal Year 2016 |
Fiscal Year 2015 |
Fiscal Year 2016 |
Fiscal Year 2015 |
Fiscal Year 2016 |
Fiscal Year 2015 | |||||||
| $488,203 | $454,657 | $0 | $0 | $80,863 | $100,482 | $0 | $0 | |||||||
| 1 | The nature of the services includes assurance and related services reasonably related to the performance of the audit of financial statements not included in Audit Fees. |
| 2 | The nature of the services includes tax compliance, tax advice and tax planning. |
| (e) | (1) | Registrant’s audit committee does not have pre-approval policies and procedures as described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. | ||
| (2) | There were no services described in each of paragraphs (b) through (d) above (including services required to be approved by Registrant’s audit committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X) that were approved by Registrant’s audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. | |||
(f) Not applicable.
(g) Below are the aggregate non-audit fees billed in each of the last two fiscal years by Registrant’s principal accountant for services rendered to Registrant, to Registrant’s investment adviser, and to any entity controlling, controlled by, or under common control with Registrant’s investment adviser that provides ongoing services to Registrant.
| 2016: $80,863 |
2015: $100,482 |
(h) During the past fiscal year, all non-audit services provided by Registrant’s principal accountant to either Registrant’s investment adviser or to any entity controlling, controlled by, or under common control with Registrant’s investment adviser that provides ongoing services to Registrant were pre-approved. Included in the audit committee’s pre-approval was the review and consideration as to whether the provision of these non-audit services is compatible with maintaining the principal accountant’s independence.
Item 5: Audit Committee of Listed Registrants.
The Registrant is a listed issuer as defined in Rule 10A-3 under the Exchange Act and has separately-designated standing audit committee established in accordance with Section 3(a)58)(A) of the Exchange Act. The Registrant’s audit committee members are Robert W. Burns, Stephen Timothy Kochis, and Charles A. Ruffel.
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Item 6: Schedule of Investments.
The schedules of investments are included as part of the report to shareholders filed under Item 1 of this Form.
Item 7: Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8: Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9: Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10: Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11: Controls and Procedures.
| (a) | Based on their evaluation of Registrant’s disclosure controls and procedures, as of a date within 90 days of the filing date, Registrant’s Chief Executive Officer, Marie Chandoha and Registrant’s Chief Financial Officer, Mark Fischer, have concluded that Registrant’s disclosure controls and procedures are: (i) reasonably designed to ensure that information required to be disclosed in this report is appropriately communicated to Registrant’s officers to allow timely decisions regarding disclosures required in this report; (ii) reasonably designed to ensure that information required to be disclosed in this report is recorded, processed, summarized and reported in a timely manner; and (iii) are effective in achieving the goals described in (i) and (ii) above. |
| (b) | During the second fiscal quarter of the period covered by this report, there have been no changes in Registrant’s internal control over financial reporting that the above officers believe to have materially affected, or to be reasonably likely to materially affect, Registrant’s internal control over financial reporting. |
Item 12: Exhibits.
(a) (1) Registrant’s code of ethics (that is the subject of the disclosure required by Item 2(a)) is attached.
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| (2) | Separate certifications for Registrant’s principal executive officer and principal financial officer, as required by Rule 30a-2(a) under the 1940 Act, are attached. |
| (3) | Not applicable. |
| (b) | A certification for Registrant’s principal executive officer and principal financial officer, as required by Rule 30a-2(b) under the 1940 Act, is attached. This certification is being furnished to the Securities and Exchange Commission solely pursuant to 18 U.S.C. section 1350 and is not being filed as part of the Form N-CSR with the Commission. |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| (Registrant ) Schwab Strategic Trust | ||
| By: | /s/ Marie Chandoha | |
| Marie Chandoha | ||
| Chief Executive Officer | ||
| Date: | 02/13/2017 | |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ Marie Chandoha | |
| Marie Chandoha | ||
| Chief Executive Officer | ||
| Date: | 02/13/2017 | |
| By: | /s/ Mark Fischer | |
| Mark Fischer | ||
| Chief Financial Officer | ||
| Date: | 02/13/2017 | |