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 – Schwab U.S. REIT ETF and Schwab Fundamental Index ETFs
(Exact name of registrant as specified in charter)
211 Main Street, San Francisco, California 94105
(Address of principal executive offices) (Zip code)
Jonathan de St. Paer
Schwab Strategic Trust – Schwab U.S. REIT ETF and Schwab Fundamental Index ETFs
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: February 28
Date of reporting period: February 28, 2021
Item 1: Report(s) to Shareholders.
Annual
Report | February 28, 2021
Schwab U.S. REIT ETF
Ticker Symbol SCHH
This page is intentionally left blank.
In
This Report
Fund investment adviser: Charles Schwab Investment Management, Inc.
(CSIM)
Distributor: SEI Investments Distribution Co. (SIDCO)
The Sector/Industry classifications in this report use the
Global Industry Classification Standard (GICS) which was developed by and is the exclusive property of MSCI Inc. (MSCI) and Standard & Poor’s (S&P). GICS is a service mark of MSCI and S&P and has been licensed for use by Charles
Schwab & Co., Inc. The Industry classifications used in the schedule of Portfolio Holdings are sub-categories of Sector classifications.
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Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
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.schwabfunds.com/schwabetfs_prospectus.
| Total Returns for the 12 Months Ended February 28, 2021 | |
| Schwab U.S. REIT ETF (Ticker Symbol: SCHH) | |
| Market Price Return1 | -5.19% |
| NAV Return1 | -4.98% |
| Dow Jones Equity All REIT Capped Index2 | N/A |
| REIT Spliced Index | -5.01% |
| ETF Category: Morningstar Real Estate3 | 5.02% |
| Performance Details | pages 7-9 |
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.
Small-company stocks are subject to greater
volatility than many other asset classes.
The fund is
subject to risks associated with the direct ownership of real estate securities and an investment in the fund will be closely linked to the performance of the real estate markets.
Performance does not reflect the deduction of taxes that a
shareholder would pay on fund distributions or on the redemption or sale 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.
Index ownership — Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones). The Dow Jones Equity All REIT Capped Index (the Index) is a product of
S&P Dow Jones Indices LLC, and the trademark and Index have been licensed for use by CSIM. The Schwab U.S. REIT ETF is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, or any of their respective affiliates
and neither S&P Dow Jones Indices LLC, Dow Jones, nor any of their respective affiliates make any representation regarding the advisability of investing in such product.
| 1 | ETF performance must be shown based on both a market price and NAV basis. The fund’s per share 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 using the Official Closing Price on the primary stock exchange (generally, 4:00 p.m. Eastern time) and may not represent the returns you would receive if shares were traded at other times. 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 | Effective June 22, 2020, the fund changed its index from the Dow Jones U.S. Select REIT IndexTM to the Dow Jones Equity All REIT Capped Index (index) in connection with a change to the fund’s investment objective and investment strategies to invest its assets in accordance with the index. The inception date of the Dow Jones Equity All REIT Capped Index is April 13, 2020. |
| 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. |
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Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
Past performance is no guarantee of future
results.
Diversification and asset allocation
strategies do not ensure a profit and cannot protect against losses in a declining market.
Management views may have changed since the report
date.
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Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
The Investment
Environment
For the 12-month reporting period ended February 28, 2021,
U.S. equity markets generated strong returns amid historic volatility driven by the COVID-19 pandemic, which began impacting global economies in the week prior to the start of the reporting period, prompting dramatic social distancing restrictions
and shuttering businesses. As equity markets fell steeply in late February and March 2020, governments and central banks around the world began passing extensive emergency rescue and fiscal stimulus measures in an effort to support their economies.
The extraordinary response prompted a rally in global equity markets from their March lows, particularly in the U.S. Despite a resurgence of COVID-19 cases in the fall and into winter, markets were buoyed by the initial distribution of COVID-19
vaccines in December 2020 and the expanded rollout in 2021. Major market indices achieved repeated record highs over the second half of the reporting period. After falling steeply early in the reporting period, U.S. real estate investment trusts
(REITs) recovered to some degree throughout the reporting period, although not to the extent of other equities. For the reporting period, the Dow Jones U.S. Select REIT IndexTM returned 1.50%. The FTSE EPRA Nareit Global Index (Net)*, which represents general trends in eligible real estate securities worldwide, returned 0.67%.
The overall U.S. stock market, as measured by the S&P 500® Index, returned 31.29% for the same period.
Despite low interest rates, U.S. REITs fell under severe
pressure during the first half of the reporting period as funding for development waned and demand in multiple sectors fell. U.S. REITs began to recover as the reporting period progressed—some sub-industries much more than others. Among REIT
sub-industries in the Dow Jones U.S. Select REIT IndexTM, returns for the reporting period spanned a wide range. Industrial REITs benefitted from a surge
in e-commerce that boosted demand for facilities. Specialized REITs benefited from positive performance of data centers and infrastructure REITs as a result of increased demand for online and mobile communications. Office REITs fell on waning demand
due to the shift to remote work and the expectation that the trend may continue beyond the end of the COVID-19 pandemic. Retail REITs were also hard-hit amid diminished consumer spending and prolonged stay-at-home orders.
Asset
Class Performance Comparison % returns during the 12 months ended February 28, 2021
Index figures 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. Past performance is not an indication of future results.
For index definitions, please see the Glossary.
Data source: Index provider websites and CSIM.
Nothing in this report represents a recommendation of a security
by the investment adviser.
Management views may have
changed since the report date.
| * | The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes. |
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Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
The Investment
Environment (continued)
In March 2020, amid the fallout of the growing COVID-19
pandemic, the U.S. economy entered recessionary territory at record speed. Bolstered by the extensive emergency rescue and fiscal stimulus measures passed by the U.S. Federal Reserve (Fed) and U.S. Congress, the U.S. economy has held up relatively
well, especially given the intensity of the COVID-19 pandemic’s economic impact. After falling by an annualized rate of 31.4% in the second quarter of 2020, U.S. gross domestic product (GDP) jumped by an annualized rate of 33.4% for the third
quarter of 2020, reflecting pent-up consumer demand and government support. GDP grew at an annualized rate of 4.3% in the fourth quarter of 2020. For the full year of 2020, GDP decreased by 3.5%. Unemployment skyrocketed in April, rising to the
highest level since the Great Depression, but declined over the remainder of the reporting period, dropping below double digits beginning in August. Inflation remained well below the Fed’s traditional target of 2%, although inflation concerns
rose toward the end of the reporting period when the yield on the 10-year U.S. Treasury spiked to its highest level in more than a year.
Central banks around the world, including the Fed, enacted or
maintained low—and for some international central banks, negative—interest rates in response to the COVID-19 pandemic. In the U.S., the Fed cut interest rates by 0.50% in early March and by 1.00% in mid-March, resulting in a federal
funds rate of 0.00% to 0.25%, which it upheld throughout the reporting period. In addition, the Fed also announced extensive emergency measures to support the economy in light of the COVID-19 pandemic, which remained in effect throughout the period,
including large purchases of U.S. Treasuries and other securities to support smooth market function, facilitating the flow of credit to municipalities, new financing for employers, consumers, and businesses, and the establishment of facilities to
support credit to businesses and consumers alike. In August, the Fed announced that it was shifting its interest rate policy approach to allow inflation to rise above its previous 2% target for periods of time, even in times of rising
employment.
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Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
Fund
Management
 |
Christopher Bliss, CFA, Vice President and Head of Passive Equity Strategies, leads the portfolio management team for Schwab’s passive equity mutual funds and ETFs. He also has overall responsibility for all aspects of the management of the fund. Before joining CSIM in 2016, Mr. Bliss spent 12 years at BlackRock (formerly Barclays Global Investors) managing and leading institutional index teams, most recently as a managing director and the head of the Americas institutional index team. Prior to BlackRock, he worked as an equity analyst and portfolio manager for Harris Bretall and before that, as a research analyst for JP Morgan. |
 |
Jeremy Brown, Portfolio Manager, is responsible for the day-to-day co-management of the fund. Prior to joining CSIM in 2017, Mr. Brown spent six years with ALPS Advisors, Inc. in Denver, most recently as a senior analyst on the ETF portfolio management and research team where he performed portfolio management, trading, and analytics/research functions for ALPS ETFs and passive funds. Additionally, Mr. Brown led a number of investment research, commentary, industry trend analysis, and sales and marketing support initiatives. |
 |
Ferian Juwono, CFA, Senior Portfolio Manager, is responsible for the day-to-day co-management of the fund. Prior to joining CSIM in 2010, Mr. Juwono worked at BlackRock (formerly Barclays Global Investors) where he spent more than three years as a portfolio manager, managing equity index funds for institutional clients, and two years as a senior business analyst. Prior to that, Mr. Juwono worked for more than four years as a senior financial analyst with Union Bank of California. |
 |
Sabya Sinha, Portfolio Manager, is responsible for the day-to-day co-management of the fund. Prior to joining CSIM in 2015, Mr. Sinha spent a year at F-Squared Investments on the product development and analytics team. Prior to F-Squared, he worked at IndexIQ Advisors as a senior index portfolio manager for three years and for Bank of America’s Columbia Management subsidiary as a portfolio manager for three years. Mr. Sinha also spent time as a software consultant at DPM Mellon, LLC and an equity trader at Jane Street Capital. |
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Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF as of February 28, 2021
The Schwab U.S. REIT ETF (the
fund) seeks to track as closely as possible, before fees and expenses, the total return of an index composed of U.S. real estate investment trusts (REITs) classified as equities. To pursue its goal, the fund generally invests in securities included
in the Dow Jones Equity All REIT Capped Index (the index). The index is a float-adjusted market capitalization weighted index that is subject to capping constraints at each quarterly rebalancing. The index generally includes all publicly traded
equity REITs with a minimum float-adjusted market capitalization of $200 million and a three-month median daily value traded of at least $5 million. For more information concerning the fund’s investment objective, strategies, and risks, please
see the fund’s prospectus.
Market Highlights. For the 12-month reporting period ended February 28, 2021, U.S. equity markets generated strong returns amid historic volatility driven by the COVID-19 pandemic, which began impacting global economies in the week prior
to the start of the reporting period, prompting dramatic social distancing restrictions and shuttering businesses. As equity markets fell steeply in late February and March 2020, governments and central banks around the world began passing extensive
emergency rescue and fiscal stimulus measures in an effort to support their economies. The extraordinary response prompted a rally in global equity markets from their March lows, particularly in the U.S. However, despite low interest rates, U.S.
REITs fell under severe pressure as funding for development waned and demand in multiple sectors fell. In spite of a resurgence of COVID-19 cases in the fall and into winter, markets were buoyed by the initial distribution of COVID-19 vaccines in
December 2020 and the expanded rollout in 2021. Major market indices achieved repeated record highs over the second half of the reporting period. U.S. REITs recovered to some degree—some sub-industries much more than others—throughout
the reporting period, although not to the extent of other equities.
Performance. For the 12-month
reporting period ended February 28, 2021, the fund’s market price return was -5.19% and its NAV return was -4.98% (for an explanation of the market price and NAV returns, please refer to footnote 2 on the following page). On June 22, 2020, the
fund transitioned from tracking the Dow Jones U.S. Select REIT IndexTM, which returned 1.50% for the 12-month reporting period, to the new index, the Dow
Jones Equity All REIT Capped Index. The Dow Jones Equity All REIT Capped Index has not been in operation for a full calendar year, and therefore has no performance data to present. The REIT Spliced Index returned -5.01% for the same
period.
Contributors and Detractors. The industrial REITs sub-industry contributed the most to the total return of the fund over the reporting period. Industrial REITs represented an average weight of approximately 13% of the fund’s investments and
returned approximately 20% for the reporting period. One example from this sub-industry is Prologis, Inc. The fund’s holdings of Prologis, Inc. represented an average weight of approximately 8% of the fund’s investments and returned
approximately 21% for the reporting period.
The
diversified REITs sub-industry also contributed to the total return of the fund, representing an average weight of approximately 3% of the fund’s investments and returning approximately -4% for the reporting period.
The residential REITs sub-industry detracted the most from the
total return of the fund over the reporting period. Residential REITs represented an average weight of 18% of the fund’s investments and returned approximately -2% for the reporting period. One example from this sub-industry is AvalonBay
Communities, Inc. The fund’s holdings of AvalonBay Communities, Inc. represented an average weight of approximately 3% of the fund’s investments and returned approximately -9% for the reporting period.
The retail REITs sub-industry also detracted from the total
return of the fund, representing an average weight of approximately 10% of the fund’s investments and returning approximately -13% for the reporting period.
Management views and portfolio holdings may have changed
since the report date.
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Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
Performance and
Fund Facts as of February 28, 2021
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.schwabfunds.com/schwabetfs_prospectus.
Performance
of Hypothetical $10,000 Investment (February 28, 2011 – February 28, 2021)1
Average Annual Total Returns1
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Fund: Schwab U.S. REIT ETF (1/13/11) | |||
| Market Price Return2 | -5.19% | 3.62% | 6.43% |
| NAV Return2 | -4.98% | 3.61% | 6.44% |
| Dow Jones Equity All REIT Capped Index3 | N/A | N/A | N/A |
| REIT Spliced Index | -5.01% | 3.68% | 6.53% |
| Dow Jones U.S. Select REIT IndexTM | 1.50% | 5.06% | 7.24% |
| ETF Category: Morningstar Real Estate4 | 5.02% | 6.99% | 7.61% |
| Fund Expense Ratio5: 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. Performance results less than one year are not annualized.
For index definitions, please see the Glossary.
Small-company stocks may be subject to greater volatility than
many other asset classes.
The fund is subject to risks
associated with the direct ownership of real estate securities, and an investment in the fund will be closely linked to the performance of the real estate markets.
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.
Index ownership — Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones). The Dow Jones Equity All REIT Capped Index (the Index) is a product of
S&P Dow Jones Indices LLC, and the trademark and Index have been licensed for use by CSIM. The Schwab U.S. REIT ETF is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, or any of their respective affiliates
and neither S&P Dow Jones Indices LLC, Dow Jones, nor any of their respective affiliates make any representation regarding the advisability of investing in such product.
| 1 | Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption or sale of fund shares. |
| 2 | ETF performance must be shown based on both a market price and NAV basis. The fund’s per share 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 using the Official Closing Price on the primary stock exchange (generally, 4:00 p.m. Eastern time) and may not represent the returns you would receive if shares were traded at other times. 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 | Effective June 22, 2020, the fund changed its index from the Dow Jones U.S. Select REIT IndexTM to the Dow Jones Equity All REIT Capped Index (index) in connection with a change to the fund’s investment objective and investment strategies to invest its assets in accordance with the index. The inception date of the Dow Jones Equity All REIT Capped Index is April 13, 2020. |
| 4 | 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. |
| 5 | As stated in the prospectus. |
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Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
Performance and
Fund Facts as of February 28, 2021 (continued)
Top Equity Holdings % of Net Assets5
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 trading and management costs incurred by the fund.
Source of Industry Classification: S&P and MSCI.
| 1 | Excludes derivatives. |
| 2 | Portfolio turnover rate excludes securities received or delivered from processing of in-kind creations or redemptions. |
| 3 | The percentage may differ from the Portfolio Holdings because the above calculation is based on a percentage of total investments, excluding derivatives, whereas the calculation in the Portfolio Holdings is based on a percentage of net assets. |
| 4 | Amount is less than 0.05%. |
| 5 | This list is not a recommendation of any security by the investment adviser. |
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Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
Fund Expenses (Unaudited)
Examples for a $1,000 Investment
| Expense
Ratio (Annualized)1 |
Beginning
Account Value at 9/1/20 |
Ending
Account Value (Net of Expenses) at 2/28/21 |
Expenses
Paid During Period 9/1/20-2/28/212 | |
| Schwab U.S. REIT ETF | ||||
| Actual Return | 0.07% | $1,000.00 | $1,085.50 | $0.36 |
| Hypothetical 5% Return | 0.07% | $1,000.00 | $1,024.45 | $0.35 |
| 1 | Based on the most recent six-month expense ratio. |
| 2 | Expenses for each fund are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 181 days of the period, and divided by 365 days of the fiscal year. |
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Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
Financial Statements
Financial
Highlights
| 3/1/20–
2/28/21 |
3/1/19–
2/29/20 |
3/1/18–
2/28/19 |
3/1/17–
2/28/18 |
3/1/16–
2/28/17 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $42.29 | $43.29 | $37.08 | $42.08 | $37.71 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss)1 | 0.84 | 1.32 | 1.29 | 1.20 | 1.04 | |
| Net realized and unrealized gains (losses) | (3.08) | (1.00) | 6.33 | (5.28) | 4.48 | |
| Total from investment operations | (2.24) | 0.32 | 7.62 | (4.08) | 5.52 | |
| Less distributions: | ||||||
| Distributions from net investment income | (1.09) | (1.32) | (1.41) | (0.92) | (1.15) | |
| Net asset value at end of period | $38.96 | $42.29 | $43.29 | $37.08 | $42.08 | |
| Total return | (4.98%) | 0.59% | 20.85% | (9.91%) | 14.74% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Total expenses | 0.07% | 0.07% | 0.07% | 0.07% | 0.07% | |
| Net investment income (loss) | 2.33% | 2.88% | 3.17% | 2.93% | 2.50% | |
| Portfolio turnover rate2 | 59% | 6% | 7% | 8% | 14% | |
| Net assets, end of period (x 1,000) | $4,891,906 | $5,717,395 | $5,127,268 | $3,691,377 | $3,037,968 | |
1
Calculated based on the average shares outstanding during
the period.
2
Portfolio turnover rate excludes securities received or
delivered from processing of in-kind creations or redemptions.
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Schwab U.S. REIT ETF | Annual Report
See financial notes
Schwab U.S. REIT ETF
Portfolio
Holdings as of February 28, 2021
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 U.S. Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-PORT Part F. The fund’s Form N-PORT Part F is available on the
SEC’s website at www.sec.gov. You can also obtain this information at no cost on the fund’s website at www.schwabfunds.com/schwabetfs_prospectus, by calling 1-866-414-6349, or by sending an email request to orders@mysummaryprospectus.com. The fund also makes available its complete schedule of portfolio holdings on a daily basis on the
fund’s website.
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Schwab U.S. REIT ETF | Annual Report
See financial notes
Schwab U.S. REIT ETF
Portfolio
Holdings as of February 28, 2021 (continued)
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Schwab U.S. REIT ETF | Annual Report
See financial notes
Schwab U.S. REIT ETF
Portfolio
Holdings as of February 28, 2021 (continued)
The following is a summary of the inputs used to value the
fund’s investments as of February 28, 2021 (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 | |
| Assets | |||||
| Common Stock1 | $4,886,193,823 | $— | $— | $4,886,193,823 | |
| Other Investment Company1 | 1,460,211 | — | — | 1,460,211 | |
| Liabilities | |||||
| Futures Contracts2 | (106,448) | — | — | (106,448) | |
| Total | $4,887,547,586 | $— | $— | $4,887,547,586 |
| 1 | As categorized in Portfolio Holdings. |
| 2 | Futures contracts are valued at unrealized appreciation or depreciation. |
Fund investments in mutual funds are classified as Level 1,
without consideration to the classification level of the underlying securities held by the mutual funds, which could be Level 1, Level 2 or Level 3.
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Schwab U.S. REIT ETF | Annual Report
See financial notes
Schwab U.S. REIT ETF
Statement of
Assets and Liabilities
As of February 28, 2021
| Assets | ||
| Investments in unaffiliated issuers, at value (cost $4,693,963,338) | $4,887,654,034 | |
| Deposit with broker for futures contracts | 1,633,000 | |
| Receivables: | ||
| Fund shares sold | 3,896,381 | |
| Dividends | 2,937,674 | |
| Income from securities on loan | + | 7,519 |
| Total assets | 4,896,128,608 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 3,883,284 | |
| Management fees | 263,876 | |
| Variation margin on futures contracts | + | 75,680 |
| Total liabilities | 4,222,840 | |
| Net Assets | ||
| Total assets | 4,896,128,608 | |
| Total liabilities | – | 4,222,840 |
| Net assets | $4,891,905,768 | |
| Net Assets by Source | ||
| Capital received from investors | 5,688,418,921 | |
| Total distributable loss | (796,513,153) | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $4,891,905,768 | 125,550,000 | $38.96 | ||
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Schwab U.S. REIT ETF | Annual Report
See financial notes
Schwab U.S. REIT ETF
Statement of
Operations
For the period March 1, 2020 through February 28, 2021
| Investment Income | ||
| Dividends | $108,617,688 | |
| Securities on loan, net | + | 459,035 |
| Total investment income | 109,076,723 | |
| Expenses | ||
| Management fees | 3,170,096 | |
| Total expenses | – | 3,170,096 |
| Net investment income | 105,906,627 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized losses on investments | (982,911,495) | |
| Net realized gains on in-kind redemptions | 366,132,965 | |
| Net realized gains on futures contracts | + | 2,786,547 |
| Net realized losses | (613,991,983) | |
| Net change in unrealized appreciation (depreciation) on investments | 150,110,534 | |
| Net change in unrealized appreciation (depreciation) on futures contracts | + | 333,725 |
| Net change in unrealized appreciation (depreciation) | + | 150,444,259 |
| Net realized and unrealized losses | (463,547,724) | |
| Decrease in net assets resulting from operations | ($357,641,097) | |
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Schwab U.S. REIT ETF | Annual Report
See financial notes
Schwab U.S. REIT ETF
Statement of
Changes in Net Assets
For the current and prior report periods
| Operations | ||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||
| Net investment income | $105,906,627 | $166,469,258 | ||
| Net realized gains (losses) | (613,991,983) | 151,705,325 | ||
| Net change in unrealized appreciation (depreciation) | + | 150,444,259 | (323,093,028) | |
| Decrease in net assets resulting from operations | (357,641,097) | (4,918,445) | ||
| Distributions to Shareholders | ||||
| Total distributions | ($134,110,850) | ($166,671,820) | ||
| Transactions in Fund Shares | ||||||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 40,350,000 | $1,438,051,306 | 31,500,000 | $1,434,130,373 | ||||
| Shares redeemed | + | (50,000,000) | (1,771,789,053) | (14,750,000) | (672,412,627) | |||
| Net transactions in fund shares | (9,650,000) | ($333,737,747) | 16,750,000 | $761,717,746 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 135,200,000 | $5,717,395,462 | 118,450,000 | $5,127,267,981 | ||||
| Total increase (decrease) | + | (9,650,000) | (825,489,694) | 16,750,000 | 590,127,481 | |||
| End of period | 125,550,000 | $4,891,905,768 | 135,200,000 | $5,717,395,462 | ||||
17
Schwab U.S. REIT ETF | Annual Report
See financial notes
Schwab U.S. REIT ETF
Financial
Notes
1. Business Structure of the Fund:
Schwab
U.S. REIT ETF 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 fund discussed in this report, which is highlighted:
| SCHWAB STRATEGIC TRUST (ORGANIZED JANUARY 27, 2009) | |
| Schwab U.S. REIT ETF | Schwab Short-Term U.S. Treasury ETF |
| Schwab U.S. Broad Market ETF | Schwab Intermediate-Term U.S. Treasury ETF |
| Schwab 1000 Index® ETF | Schwab Long-Term U.S. Treasury ETF |
| Schwab U.S. Large-Cap ETF | Schwab U.S. Aggregate Bond ETF |
| Schwab U.S. Large-Cap Growth ETF | Schwab 1-5 Year Corporate Bond ETF |
| Schwab U.S. Large-Cap Value ETF | Schwab 5-10 Year Corporate Bond ETF |
| Schwab U.S. Mid-Cap ETF | Schwab Fundamental U.S. Broad Market Index ETF |
| Schwab U.S. Small-Cap ETF | Schwab Fundamental U.S. Large Company Index ETF |
| Schwab U.S. Dividend Equity ETF | Schwab Fundamental U.S. Small Company Index ETF |
| Schwab International Equity ETF | Schwab Fundamental International Large Company Index ETF |
| Schwab International Small-Cap Equity ETF | Schwab Fundamental International Small Company Index ETF |
| Schwab Emerging Markets Equity ETF | Schwab Fundamental Emerging Markets Large Company Index ETF |
| Schwab U.S. TIPS ETF | |
The fund issues and redeems shares at its 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 institutional investors who
have entered into an authorized participant agreement purchase or redeem Creation Units. Except when aggregated in Creation Units, shares of the fund are not redeemable securities.
Individual shares of the fund 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). A chart showing the frequency at which the fund’s daily closing market price was at a discount or premium to the fund’s NAV can be found at www.schwabfunds.com.
The fund maintains its own account for purposes of holding
assets and accounting, and is considered a separate entity for tax purposes. Within its account, the 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 fund uses in its preparation of financial statements. The fund follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) 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 fund may invest in certain mutual funds and
exchange-traded funds (ETFs) referred to as “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) and are available on the SEC’s website at www.sec.gov.
(a) Security Valuation:
Under procedures approved by the fund’s 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 value. Among other things, these procedures allow the fund to utilize independent pricing services, quotations from securities and financial instrument dealers and other market sources to determine fair value.
The fund values the securities in its portfolio every business
day. The fund uses the following policies to value various types of securities:
18
Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
Financial Notes
(continued)
2. Significant
Accounting Policies (continued):
•
Securities traded on an exchange or over-the-counter: Traded securities are valued at the closing value for the day, or, on days when no closing value has been reported, at the mean of the most recent bid
and ask quotes. Securities that are primarily traded on foreign exchanges are valued at the official closing price or the last sales price on the exchange where the securities are principally traded with these values then translated into U.S.
dollars at the current exchange rate, unless these securities are fair valued as discussed below.
•
Securities for which no quoted value is available: The Board has adopted procedures to fair value the 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 price; or when a security’s primary trading market is
closed during regular market hours. The 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
the 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 fund pursuant to the valuation procedures.
• Futures contracts: Futures contracts are valued at their settlement prices as of the close of their exchanges.
• Mutual funds: Mutual funds are valued at their respective NAVs.
In accordance with the authoritative guidance on fair value
measurements and disclosures under GAAP, the fund discloses the fair value of its 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 fund determines 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, mutual funds and futures contracts. Investments in mutual funds are valued daily at their
NAV, which are classified as Level 1 prices, without consideration to the classification level of the specific underlying securities 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 fund’s 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 fund uses one or more valuation techniques for which sufficient and reliable data is available. The inputs used by the fund 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 fund in the absence of market information. Assumptions used by the fund due to the lack of observable inputs may
significantly impact the resulting fair value and therefore the fund’s 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.
19
Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
Financial Notes
(continued)
2. Significant
Accounting Policies (continued):
The levels
associated with valuing the fund’s investments as of February 28, 2021 are disclosed in the Portfolio Holdings.
(b) Accounting Policies for certain Portfolio Investments
(if held):
Futures Contracts: Futures contracts are instruments that represent an agreement between two parties that obligates one party to buy, and the other party to sell, specific instruments at an agreed upon price on a stipulated future date.
The fund must give the broker a deposit of cash and/or securities (initial margin) whenever it enters into a futures contract. The amount of the deposit may vary from one contract to another. Subsequent payments (variation margin) are made or
received by the fund depending on the daily fluctuations in the value of the futures contract and are accounted for as unrealized appreciation or depreciation until the contract is closed, at which time the gains or losses are realized. Futures
contracts are traded publicly on exchanges, and their fair value may change daily.
Securities Lending: Under
the trust’s Securities Lending Program, the 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 the fund with indemnification against borrower default (the borrower fails to 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 pursuant to Rule 2a-7 under the 1940 Act. The fund bears the risk of loss with respect to the investment of cash collateral. The terms of the securities lending
agreement allow the fund 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
agreements. Securities lending income, as disclosed in the 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 the fund and the lending agent. The
aggregate fair value of securities loaned will not at any time exceed one-third of the total assets of the fund, including collateral received from the loan. Securities lending fees paid to the unaffiliated lending agents start at 10% of gross
lending revenue, with subsequent breakpoints to a low of 7.5%. In this context, the gross lending revenue equals the income received from the investment of cash collateral and fees paid by borrowers less any rebates paid to the borrowers. Any
expenses charged by the cash collateral fund are in addition to these fees. All remaining revenue is retained by the fund, as applicable. No portion of lending revenue is paid to or retained by Charles Schwab Investment Management, Inc. (CSIM or the
investment adviser) or any affiliate of CSIM.
As of February 28, 2021, the fund had no securities on
loan.
(c) Security Transactions:
Security transactions are recorded as of the date the order
to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved.
When the fund closes out a futures contract position, it
calculates the difference between the value of the position at the beginning and at the end of the contract, and records a realized gain or loss accordingly.
The fund invests in real estate investment trusts (REITs)
which report information on the source of their distributions annually. The fund policy is to record all REIT distributions initially as dividend income on the ex-dividend date and then re-designate them as return of capital and/or capital gain
distributions at the end of the reporting period based on information provided annually by each REIT, and management estimates such re-designations when actual information has not yet been reported.
(d) Investment Income:
Interest income is recorded as it accrues. Dividends and
distributions from portfolio securities and underlying funds are recorded on the date they are effective (the ex-dividend date), although the fund records certain foreign security dividends on the date the ex-dividend is confirmed. Any distributions
from underlying funds are recorded in accordance with the character of the distributions as designated by the underlying funds.
20
Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
Financial Notes
(continued)
2. Significant
Accounting Policies (continued):
(e)
Expenses:
Pursuant to the Amended and Restated
Advisory Agreement (Advisory Agreement) between CSIM and the trust, the investment adviser will pay the operating expenses of the fund, excluding taxes, any brokerage expenses, and extraordinary or non-routine expenses. Taxes, any brokerage expenses
and extraordinary or non-routine expenses that are specific to the fund are charged directly to the fund.
(f) Distributions to Shareholders:
The fund makes distributions from net investment income, if
any, quarterly and from net realized capital gains, if any, once a year.
(g) 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.
(h) Federal Income Taxes:
The fund intends to meet federal income and excise tax
requirements for regulated investment companies under subchapter M of the Internal Revenue Code, as amended. Accordingly, the fund distributes substantially all of its net investment income and net realized capital gains, if any, to its shareholders
each year. As long as the fund meets the tax requirements, it is not required to pay federal income tax.
(i) Indemnification:
Under the fund’s organizational documents, the
officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the fund. In addition, in the normal course of business the fund enters into contracts with its vendors and others that provide
general indemnifications. The fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the fund. However, based on experience, the fund expects the risk of loss attributable to
these arrangements to be remote.
3. Risk Factors:
Investing in the fund may involve
certain risks, as discussed in the fund’s prospectus, including, but not limited to, those described below. Any of these risks could cause an investor to lose money.
Market Risk. Financial markets
rise and fall in response to a variety of factors, sometimes rapidly and unpredictable. Markets may be impacted by economic, political, regulatory and other conditions, including economic sanctions and other government actions. In addition, the
occurrence of global events, such as war, terrorism, environmental disasters, natural disasters and epidemics, may also negatively affect the financial markets. As with any investment whose performance is tied to these markets, the value of an
investment in the fund will fluctuate, which means that an investor could lose money over short or long periods.
Investment Style Risk. The fund
is an index fund. Therefore, the fund follows the securities included in the index during upturns as well as downturns. Because of its indexing strategy, the fund does not take steps to reduce market exposure or to lessen the effects of a declining
market. In addition, because of the fund’s expenses, the fund’s performance may be below that of the index. Market disruptions could cause delays in the index’s rebalancing schedule which may result in the index and, in turn, the
fund experiencing returns different than those that would have been achieved under a normal rebalancing schedule.
Equity Risk. The prices of
equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to
fall over short or extended periods of time.
Market
Capitalization Risk. Securities issued by companies of different market capitalizations tend to go in and out of favor based on market and economic conditions. During a period when securities of a particular market
capitalization fall behind other types of investments, the fund’s performance could be impacted.
Large-Cap Company Risk.
Large-cap companies are generally more mature and the securities issued by these companies may not be able to reach the same levels of growth as the securities issued by small- or mid-cap companies.
21
Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
Financial Notes
(continued)
3. Risk
Factors (continued):
Mid-Cap Company Risk. Mid-cap companies may be more vulnerable to adverse business or economic events than larger, more established companies and the value of securities issued by these companies may move sharply.
Small-Cap Company Risk.
Securities issued by small-cap companies may be riskier than those issued by larger companies, and their prices may move sharply, especially during market upturns and downturns.
Real Estate Investment
Risk. Due to the composition of the index, the fund concentrates its investments in real estate companies and companies related to the real estate industry. As such, the fund is subject to risks associated with the
direct ownership of real estate securities and an investment in the fund will be closely linked to the performance of the real estate markets. These risks include, among others: declines in the value of real estate; risks related to general and
local economic conditions; possible lack of availability of mortgage funds or other limits to accessing the credit or capital markets; defaults by borrowers or tenants, particularly during an economic downturn; and changes in interest
rates.
REITs Risk. In addition to the risks associated with investing in securities of real estate companies and real estate related companies, REITs are subject to certain additional risks. Equity REITs may be affected by changes in the
value of the underlying properties owned by the trusts. Further, REITs are dependent upon specialized management skills and cash flows, and may have their investments in relatively few properties, or in a small geographic area or a single property
type. Failure of a company to qualify as a REIT under federal tax law may have adverse consequences to the fund. In addition, REITs have their own expenses, and the fund will bear a proportionate share of those expenses.
Tracking Error Risk. As an
index fund, the fund seeks to track the performance of its index, although it may not be successful in doing so. The divergence between the performance of the fund and the index, positive or negative, is called “tracking error.” Tracking
error can be caused by many factors and it may be significant.
Derivatives Risk. The
principal types of derivatives used by the fund are futures contracts. A future is an agreement to buy or sell a financial instrument at a specific price on a specific day. The fund’s use of derivatives that are 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.
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 liquidity risk, leverage risk and market risk, are discussed elsewhere in
this section. The fund’s use of derivatives is also subject to counterparty risk, lack of availability risk, valuation risk, correlation risk and tax risk. Counterparty risk is the risk that the counterparty to a derivatives transaction may
not fulfill its contractual obligations either because the financial condition of the counterparty declines, or because the counterparty is otherwise unable or unwilling to perform under the contract. Lack of availability risk is the risk that
suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the
value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause the fund to realize higher amounts of short-term capital gains. The fund’s use of
derivatives could reduce the fund’s performance, increase the fund’s volatility, and cause the fund to lose more than the initial amount invested.
Concentration Risk. To the
extent that the fund’s or the index’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector or asset class (including the real estate industry, as described above), the fund
may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more vulnerable to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of
industries, sector or asset class.
Liquidity
Risk. The fund may be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or the fund may have to sell them at a loss.
Leverage Risk. Certain fund
transactions, such as derivatives transactions, may give rise to a form of leverage and may expose the fund to greater risk. Leverage tends to magnify the effect of any decrease or increase in the value of the fund’s portfolio securities. The
use of leverage may cause the fund to liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its obligations.
Securities Lending Risk.
Securities lending involves the risk of loss of rights in, or delay in recovery of, the loaned securities if the borrower fails to return the security loaned or becomes insolvent.
22
Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
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.
Shares of the Fund May Trade at Prices Other Than NAV. Fund shares may be bought and sold in the secondary market at market prices. Although it is expected that the market price of the shares of the fund will approximate the fund’s NAV, there may be times when the
market price and the NAV vary significantly. An investor may pay more than NAV when buying shares of the fund in the secondary market, and an investor may receive less than NAV when selling those shares in the secondary market. The market price of
fund shares may deviate, sometimes significantly, from NAV during periods of market volatility.
Please refer to the fund’s prospectus for a more
complete description of the principal risks of investing in the fund.
4. Affiliates and Affiliated Transactions:
Investment Adviser
CSIM, a wholly owned subsidiary of The Charles Schwab
Corporation, serves as the fund’s investment adviser pursuant to the Advisory Agreement between CSIM and the trust.
For its advisory services to the fund, CSIM is entitled to
receive an annual management fee, payable monthly, equal to 0.07% of the fund’s average daily net assets.
Investment from Affiliates
Certain funds in the Fund Complex (for definition refer to
Trustees and Officers section) may own shares of other funds in the Fund Complex. The table below reflects the percentage of shares of the fund that are owned by other funds in the Fund Complex as of February 28, 2021.
| Schwab MarketTrack All Equity Portfolio | 0.8% |
| Schwab MarketTrack Balanced Portfolio | 0.4% |
| Schwab MarketTrack Conservative Portfolio | 0.1% |
| Schwab MarketTrack Growth Portfolio | 0.7% |
| Schwab VIT Balanced Portfolio | 0.1% |
| Schwab VIT Balanced with Growth Portfolio | 0.2% |
| Schwab VIT Growth Portfolio | 0.2% |
| Schwab Target 2010 Index Fund | 0.0%* |
| Schwab Target 2015 Index Fund | 0.0%* |
| Schwab Target 2020 Index Fund | 0.1% |
| Schwab Target 2025 Index Fund | 0.2% |
| Schwab Target 2030 Index Fund | 0.4% |
| Schwab Target 2035 Index Fund | 0.3% |
| Schwab Target 2040 Index Fund | 0.4% |
| Schwab Target 2045 Index Fund | 0.2% |
| Schwab Target 2050 Index Fund | 0.3% |
| Schwab Target 2055 Index Fund | 0.2% |
| Schwab Target 2060 Index Fund | 0.2% |
| Schwab Target 2065 Index Fund | 0.0%* |
| * | Less than 0.05% |
23
Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
Financial Notes
(continued)
4. Affiliates and
Affiliated Transactions (continued):
Interfund
Transactions
The fund may engage in direct transactions
with certain other funds in the Fund Complex in accordance with procedures adopted by the Board under Rule 17a-7 of the 1940 Act. When one fund is seeking to sell a security that another is seeking to buy, an interfund transaction can allow both
funds to benefit by reducing transaction costs. This practice is limited to funds that share the same investment adviser, trustees and/or officers. For the period ended February 28, 2021, the fund’s total aggregate security transactions with
other funds in the Fund Complex was $223,222,089 and includes realized losses of $78,019,161.
Interfund Borrowing and Lending
Pursuant to an exemptive order issued by the SEC, the fund may
enter into interfund borrowing and lending transactions with other funds in the Fund Complex. 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. The interfund lending facility is subject to the oversight and periodic review of the Board. The
fund 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 fund.
State Street Bank and Trust Company (State Street) serves as
the fund’s transfer agent. As part of these services, the transfer agent maintains records pertaining to the sale, redemption and transfer of the fund’s shares. The transfer agent is also responsible for the order-taking function for the
fund’s shares.
State Street also serves as
custodian and accountant for the fund. The custodian is responsible for the daily safekeeping of securities and cash held by the fund. The fund’s accountant maintains all books and records related to the fund’s 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.
7. Borrowing from Banks:
During the period, the fund
was a participant with other funds in the Fund Complex in a joint, syndicated, committed $750 million line of credit (the Syndicated Credit Facility), which matured on October 1, 2020. On October 1, 2020, the Syndicated Credit Facility was amended
to run for a new 364 day period with a line of credit of $850 million, maturing on September 30, 2021. Under the terms of the Syndicated Credit Facility, in addition to CSIM paying the interest charged on any borrowings by the fund, CSIM paid a
commitment fee of 0.15% per annum on the fund’s proportionate share of the unused portion of the Syndicated Credit Facility.
During the period, the fund was a participant with other funds
in the Fund Complex in a joint, unsecured, uncommitted $500 million line of credit (the Uncommitted Credit Facility), with State Street, which was scheduled to mature on November 27, 2020. However, on October 1, 2020, the Uncommitted Credit Facility
was amended to run for a new 364 day period with a line of credit of $400 million, maturing on September 30, 2021. Under the terms of the Uncommitted Credit Facility, CSIM pays interest on the amount the fund borrows. There were no borrowings from
either line of credit during the period.
The fund also
has access to custodian overdraft facilities. The fund may have utilized the overdraft facility and incurred an interest expense, which is paid by CSIM. The interest expense is determined based on a negotiated rate above the current Federal Funds
Rate.
8. Derivatives:
The fund entered into equity index
futures contracts during the report period. The fund invested in futures contracts to equitize available cash. The current value and variation margin for futures contracts held at February 28, 2021 are presented on the Portfolio Holdings and
Statement of Assets and Liabilities, respectively. The net realized and change in unrealized gains (losses) on futures
24
Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
Financial Notes
(continued)
8.
Derivatives (continued):
contracts are presented
on the Statement of Operations. Refer to financial note 2(b) for the fund’s accounting policies with respect to futures contracts and financial note 3 for disclosures concerning the risks of investing in futures contracts. During the period
ended February 28, 2021, the month-end average notional amounts of futures contracts held by the fund was $9,187,156 and the month-end average number of contracts held was 296.
9. Purchases and Sales of Investment Securities:
For
the period ended February 28, 2021, purchases and sales of securities (excluding in-kind transactions and short-term obligations) were as follows:
| Purchases
of Securities |
Sales
of Securities |
| $2,743,474,094 | $2,714,693,140 |
10. In-Kind Transactions:
The consideration for the
purchase of Creation Units of the fund often consists of the in-kind deposit of a designated portfolio of equity securities, which constitutes an optimized representation of the securities involved in a relevant fund’s underlying index, and an
amount of 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 February 28, 2021, were as follows:
| In-Kind
Purchases of Securities |
In-Kind
Sales of Securities |
| $1,319,725,658 | $1,646,015,717 |
For the period ended February 28,
2021, the fund realized net capital gains or losses resulting from in-kind redemptions of Creation Units. Because such gains or losses are not taxable to the fund 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 fund’s 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 February 28, 2021 are disclosed in the fund’s Statement of Operations.
11. Federal Income Taxes
As of February 28, 2021, the
tax basis cost of the fund’s investments and gross unrealized appreciation and depreciation were as follows:
| Tax cost | $4,743,322,173 |
| Gross unrealized appreciation | $459,173,164 |
| Gross unrealized depreciation | (314,947,751) |
| Net unrealized appreciation (depreciation) | $144,225,413 |
As of February 28, 2021, the
components of distributable earnings on a tax basis were as follows:
| Net unrealized appreciation (depreciation) on investments | $144,225,413 |
| Capital loss carryforwards and other losses | (940,738,566) |
| Total | ($796,513,153) |
25
Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
Financial Notes
(continued)
11. Federal Income
Taxes (continued):
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 and realization for tax purposes of unrealized appreciation or depreciation on futures contracts. The tax
cost of the fund’s investments, disclosed above, have been adjusted from its book amounts to reflect these unrealized appreciation or depreciation differences, as applicable.
Capital loss carryforwards may be used to offset future
realized capital gains for federal income tax purposes. As of February 28, 2021, the fund had capital loss carryforwards of $925,636,622 with no expiration available to offset future net capital gains.
For tax purposes, late-year ordinary losses may be deferred
and treated as occurring on the first day of the following fiscal year. For the fiscal year ended February 28, 2021, the fund had ordinary losses deferred of $15,101,944 and had no capital loss carryforwards utilized.
The tax basis components of distributions paid during the
current and prior fiscal years were:
| Current fiscal year end distributions | |
| Ordinary income | $134,110,850 |
| Prior fiscal year end distributions | |
| Ordinary income | $166,671,820 |
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 fund 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 February 28, 2021, 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 fund, and has determined that no provision for income tax is required in the
fund’s financial statements. The fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the period ended February 28, 2021, the fund did not incur any
interest or penalties.
12. Independent Registered Public Accounting Firm:
On
June 8, 2020, the Audit, Compliance and Valuation Committee of the Board approved, and on June 9, 2020, the Board approved, Deloitte & Touche LLP as the independent registered accounting firm of the Schwab Funds Complex for fiscal periods ending
after June 8, 2020.
On June 8, 2020,
PricewaterhouseCoopers LLP (the “Prior Auditor”) resigned as the independent registered public accounting firm of the Schwab Funds Complex. The Prior Auditor’s reports on the financial statements of the fund for the past two fiscal
years, the years ended February 28, 2019 and February 29, 2020, did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the last two fiscal
year-ends and through June 8, 2020, there were no (1) disagreements with the Prior Auditor on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to
the Prior Auditor’s satisfaction, would have caused it to make reference to that matter in connection with its reports on the fund’s financial statements for such periods; or (2) “reportable events,” as that term is defined
in Item 304 (a)(1)(v) of Regulation S-K under the Securities Exchange Act of 1934.
13. 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.
26
Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
Report of
Independent Registered Public Accounting Firm
To the Board of Trustees of Schwab Strategic Trust and
Shareholders of Schwab U.S. REIT ETF:
Opinion on the
Financial Statements and Financial Highlights
We have
audited the accompanying statement of assets and liabilities, including the portfolio holdings, of Schwab U.S. REIT ETF (the “Fund”), one of the funds constituting Schwab Strategic Trust, as of February 28, 2021, the related statement of
operations, statement of changes in net assets, and the financial highlights for the year then ended, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial
position of the Fund as of February 28, 2021, and the results of its operations, the changes in its net assets, and the financial highlights for the year then ended in conformity with accounting principles generally accepted in the United States of
America. The statement of changes in net assets for the year ended February 29, 2020 and the financial highlights for each of the four years in the period ended February 29, 2020 were audited by other auditors, whose report, dated April 16, 2020,
expressed an unqualified opinion on such statement of changes in net assets and financial highlights.
Basis for Opinion
These financial statements are the responsibility of the
Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements and financial highlights based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Fund is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of
material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements and financial highlights. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements and financial highlights. Our procedures included confirmation of securities owned as of February 28, 2021 by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing
procedures. We believe that our audit provides a reasonable basis for our opinion.
Deloitte & Touche LLP
Denver, Colorado
April 16, 2021
Denver, Colorado
April 16, 2021
We have served as the auditor of one or more investment
companies in the Schwab Funds Complex since 2020.
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Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
Other Federal
Tax Information (unaudited)
For the fiscal year ended February 28, 2021, the fund
designated $1,964,860 of the dividend distributions as qualified dividends for the purpose of the maximum rate under section 1(h)(ii) of the Internal Revenue Code. Shareholders will be notified in January 2022 via IRS Form 1099 of the amounts for
use in preparing their 2021 income tax return.
For the
fiscal year ended February 28, 2021, the fund designates $117,274,868 as dividends eligible for the 20% qualified business income deduction under section 199A of the Internal Revenue Code. Shareholders will be notified in January 2022 via IRS form
1099 of the amounts for use in preparing their 2021 income tax return.
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Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
Liquidity Risk
Management Program (Unaudited)
The Fund has adopted and implemented a liquidity risk
management program (the “program”) as required by Rule 22e-4 under the Investment Company Act of 1940, as amended. The Fund’s Board of Trustees (the “Board”) has designated the Fund’s investment adviser, Charles
Schwab Investment Management, Inc. (“CSIM”) as the administrator of the program. Personnel of CSIM or its affiliates conduct the day-to-day operation of the program.
Under the program, CSIM manages a Fund’s liquidity risk,
which is the risk that the Fund could not meet shareholder redemption requests without significant dilution of remaining shareholders’ interests in the Fund. The program is reasonably designed to assess and manage a Fund’s liquidity
risk, taking into consideration the Fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably foreseeable stressed conditions; its historical redemption history and shareholder concentrations; and
its cash holdings and access to other funding sources, including the custodian overdraft facility and lines of credit. CSIM’s process of determining the degree of liquidity of each Fund’s investments is supported by third-party liquidity
assessment vendors.
The Fund’s Board reviewed a
report at its meeting held on September 22, 2020 prepared by CSIM regarding the operation and effectiveness of the program for the period June 1, 2019, through May 31, 2020. No significant liquidity events impacting the Fund were noted in the
report. In addition, CSIM provided its assessment that the program had been operating effectively in managing the Fund’s liquidity risk.
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Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
Trustees and
Officers
The tables below give information about the trustees and
officers of Schwab Strategic Trust, which includes the fund 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 103 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) (investment management firm) and President, PIMCO Funds. | 103 | None |
| 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 (Oct. 1979 – present), The Hoover Institution at Stanford University (public policy think tank); Senior Fellow (2000 – present), Stanford Institute for Economic Policy Research; Professor of Public Policy (1994 – 2015), Stanford University. | 103 | Director (2005 – 2020), Gilead Sciences, Inc. |
| Nancy
F. Heller 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 2018) |
Retired. President and Chairman (2014 – 2016), TIAA Charitable (financial services); Senior Managing Director (2003 – 2016), TIAA (financial services). | 103 | 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. | 103 | Director
(2004 – present), Corcept Therapeutics Incorporated Director (2009 – present), Adamas Pharmaceuticals, Inc. Director (2003 – 2019), Symantec Corporation |
| Jane
P. Moncreiff 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 2019) |
Consultant (2018 – present), Fulham Advisers LLC (management consulting); Chief Investment Officer (2009 – 2017), CareGroup Healthcare System, Inc. (healthcare). | 103 | None |
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Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
| 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 (Dec. 2008 – Sept. 2013), Intuit, Inc. (financial software and services firm for consumers and small businesses). | 103 | Director (2008 – present), KLA-Tencor Corporation |
| 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 (2008 – present), Patmore Management Consulting (management consulting). | 103 | None |
| 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 (Oct. 2008 – present), The Charles Schwab Corporation; President and Chief Executive Officer (Oct. 2008 – present) and Director (May 2008 – present), Charles Schwab & Co., Inc.; Director (Apr. 2006 – present), Charles Schwab Bank, SSB; Director (Nov. 2017 – present), Charles Schwab Premier Bank, SSB; Director (July 2019 – present), Charles Schwab Trust Bank; Director (May 2008 – present) and President and Chief Executive Officer (Aug. 2017 – present), Schwab Holdings, Inc.; Director (Oct. 2020 – present), TD Ameritrade Holding Corporation; Director (July 2016 – present), Charles Schwab Investment Management, Inc. | 103 | Director (2008 – present), The Charles Schwab Corporation |
| 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) |
Chief Operating Officer (Feb. 2018 – present) and Senior Executive Vice President (July 2015 – Feb. 2018), The Charles Schwab Corporation; Senior Executive Vice President (July 2015 – present), Charles Schwab & Co., Inc.; Chief Financial Officer (July 2015 – Aug. 2017) and Executive Vice President and Chief Financial Officer (May 2007 – July 2015), The Charles Schwab Corporation and Charles Schwab & Co., Inc.; Director (May 2007 – present), Charles Schwab & Co., Inc.; Director (Apr. 2010 – present) and Chief Executive Officer (July 2013 – Apr. 2015), Charles Schwab Bank, SSB; Director (Nov. 2017 – present), Charles Schwab Premier Bank, SSB; Director (May 2007 – present), Chief Financial Officer (May 2007 – Aug. 2017), Senior Executive Vice President (Feb. 2016 – present), and Executive Vice President (May 2007 – Feb. 2016), Schwab Holdings, Inc.; Director (Oct. 2020 – present), TD Ameritrade Holding Corporation. | 103 | None |
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Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
| 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 |
| Jonathan
de St. Paer 1973 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 2018) |
Director (Apr. 2019 – present), President (Oct. 2018 – present), Chief Operating Officer (Jan. 2020 – present), and Chief Executive Officer (Apr. 2019 – Nov. 2019), Charles Schwab Investment Management, Inc.; Senior Vice President (June 2020 – present) and Chief Operating Officer (Jan. 2020 – present), Charles Schwab Investment Advisory, Inc.; Chief Executive Officer (Apr. 2019 – present), President (Nov. 2018 – present) and Trustee (Apr. 2019 – Dec. 2020), Schwab Funds, Laudus Funds and Schwab ETFs; Director (Apr. 2019 – present), Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited; Senior Vice President (Apr. 2019 – present), Senior Vice President – Strategy and Product Development (CSIM) (Jan. 2014 – Mar. 2019), and Vice President (Jan. 2009 – Dec. 2013), Charles Schwab & Co., Inc. |
| Mark
Fischer 1970 Treasurer, Chief Financial Officer and Chief Operating 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 (Jan. 2016 – present) and Chief Operating Officer (Dec. 2020 – present), Schwab Funds, Laudus Funds and Schwab ETFs; Assistant Treasurer (Dec. 2013 – Dec. 2015), Schwab Funds and Laudus Funds; Assistant Treasurer (Nov. 2013 – Dec. 2015), Schwab ETFs; Chief Financial Officer (Mar. 2020 – present) and Vice President (Oct. 2013 – present), Charles Schwab Investment Management, Inc.; Executive Director (Apr. 2011 – Sept. 2013), J.P. Morgan Investor Services; Assistant Treasurer (May 2005 – Mar. 2011), Massachusetts Financial Service Investment Management. |
| 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 (Apr. 2011 – present), Charles Schwab Investment Management, Inc.; Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies (June 2011 – present), Schwab Funds, Laudus Funds and Schwab ETFs; Head of the Portfolio Management Group and Vice President of Portfolio Management (May 2009 – Apr. 2011), Financial Engines, Inc. (investment management firm); Head of Quantitative Equity (July 2004 – Jan. 2009), ING Investment Management. |
| 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 (Apr. 2011 – present), Charles Schwab Investment Management, Inc.; Senior Vice President and Chief Investment Officer – Fixed Income (June 2011 – present), Schwab Funds, Laudus Funds and Schwab ETFs; Senior Managing Director and Global Head of Active Fixed-Income Strategies (Jan. 2008 – Oct. 2010), State Street Global Advisors; Director of Alpha Strategies (Apr. 2006 – Jan. 2008), Loomis, Sayles & Company (investment management firm). |
| 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) and Vice President (Mar. 2004 – Sept. 2011), Charles Schwab & Co., Inc.; Senior Vice President and Chief Counsel (Sept. 2011 – present) and 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 (Apr. 2011 – present), Laudus Funds; 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 (July 2005 – present), Charles Schwab & Co., Inc.; Vice President (Sept. 2005 – present), Charles Schwab Investment Management, Inc.; Vice President (Dec. 2005 – present) and 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 (Oct. 2009 – present), Schwab ETFs. |
| 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 and Mr. Martinetto are Interested Trustees. Mr. Bettinger is an Interested Trustee because he owns stock of The Charles Schwab Corporation (CSC), the parent company of Charles Schwab Investment Management, Inc. (CSIM), the investment adviser for the trusts in the Fund Complex, is an employee and director of Charles Schwab & Co., Inc. (CS&Co), the principal underwriter for The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust, and is a director of CSIM. Mr. Martinetto is an Interested Trustee because he owns stock of CSC and is an employee and director of CS&Co. |
| 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. |
32
Schwab U.S. REIT ETF | Annual Report
Schwab U.S. REIT ETF
Schwab
ETFs
Schwab ETFs are designed to serve as simple low-cost core
investment products for a diversified portfolio. These ETFs seek to provide consistent, repeatable performance through a variety of investment strategies that span the equity and fixed income spectrum. The list below shows all currently available
Schwab ETFs.
Investors should carefully consider
information contained in the prospectus, or if available, the summary prospectus, including investment objectives, risks, charges and expenses before investing. Please call 1-877-824-5615 for a prospectus 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.schwabfunds.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.schwabfunds.com/schwabetfs_prospectus or the SEC’s
website at www.sec.gov.
Schwab ETFs
| * | FUNDAMENTAL INDEX is a registered trademark of Research Affiliates LLC. |
Annual
Report | February 28, 2021
Schwab Fundamental Index* ETFs
| Schwab Fundamental U.S. Broad Market Index ETF | FNDB |
| Schwab Fundamental U.S. Large Company Index ETF | FNDX |
| Schwab Fundamental U.S. Small Company Index ETF | FNDA |
| Schwab Fundamental International Large Company Index ETF | FNDF |
| Schwab Fundamental International Small Company Index ETF | FNDC |
| Schwab Fundamental Emerging Markets Large Company Index ETF | FNDE |
| * | SCHWAB is a registered
trademark of Charles Schwab & Co., Inc. FUNDAMENTAL INDEX is a registered trademark of Research Affiliates LLC. |
This page is intentionally left blank.
In
This Report
Fund investment adviser: Charles Schwab Investment Management, Inc.
(CSIM)
Distributor: SEI Investments Distribution Co. (SIDCO)
The Sector/Industry classifications in this report use the
Global Industry Classification Standard (GICS) which was developed by and is the exclusive property of MSCI Inc. (MSCI) and Standard & Poor’s (S&P). GICS is a service mark of MSCI and S&P and has been licensed for use by
Charles Schwab & Co., Inc. The Industry classifications used in the schedules of Portfolio Holdings are sub-categories of Sector classifications.
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Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental Index
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.schwabfunds.com/schwabetfs_prospectus.
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.
The first index listed for each fund is the
fund’s primary benchmark, as shown in the prospectus. Additional indices shown are provided for comparative purposes.
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 or sale 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.
Index ownership — The Schwab Fundamental Index
ETFs are not in any way sponsored, endorsed, sold or promoted by Frank Russell Company (Russell), by the London Stock Exchange Group companies (LSEG), or by Research Affiliates LLC (RA) (collectively the Licensor Parties), and none of the Licensor
Parties make any warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the Russell RAFI™ Index Series (the Indices) or otherwise. The Indices are compiled and calculated by
Russell in conjunction with RA. None of the Licensor Parties shall be liable (whether in negligence or otherwise) to any person for any error in the Indices and none of the Licensor Parties shall be under any obligation to advise any person of any
error therein. “Russell®” is a trademark of Russell. The trade names “Research Affiliates®”, “Fundamental Index®” and
“RAFI®” are registered trademarks of RA. CSIM has obtained full license from Russell to use the Indices. For full disclaimer please see
the funds’ statement of additional information.
| * | The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes. |
| 1 | ETF performance must be shown based on both a market price and NAV basis. The fund’s per share 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 using the Official Closing Price on the primary stock exchange (generally, 4:00 p.m. Eastern time) and may not represent the returns you would receive if shares were traded at other times. 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. |
2
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental Index
ETFs
Past performance is no guarantee of future
results.
Diversification and asset allocation
strategies do not ensure a profit and cannot protect against losses in a declining market.
Management views may have changed since the report
date.
| * | The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes. |
3
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental Index
ETFs
The
Investment Environment
For the 12-month reporting period ended February 28, 2021,
U.S. and international equity markets generated strong returns amid historic volatility driven by the COVID-19 pandemic, which began impacting global economies in the week prior to the start of the reporting period, prompting dramatic social
distancing restrictions and shuttering businesses. As equity markets fell steeply in late February and March 2020, governments and central banks around the world began passing extensive emergency rescue and fiscal stimulus measures in an effort to
support their economies. The extraordinary response prompted a rally in global equity markets from their March lows, particularly in the U.S. Despite a resurgence of COVID-19 cases in the fall and into winter, markets were buoyed by the initial
distribution of COVID-19 vaccines in December 2020 and the expanded rollout in 2021. The COVID-19 vaccine rollout helped to fuel the early stages of a shift in the market towards cyclical sectors, beginning in November and December and continuing
through the remainder of the reporting period. Major market indices achieved repeated record highs over the second half of the reporting period. The U.S. dollar strengthened against a basket of foreign currencies in March when the COVID-19 pandemic
began before generally weakening throughout the remainder of the reporting period, generally enhancing the return of overseas investments in U.S. dollar terms. For the reporting period, the S&P 500® Index, a bellwether for the overall U.S. stock market, returned 31.29%. Small-cap stocks outperformed large-cap stocks, with the Russell 2000® Index and Russell RAFI™ US Small Company Index returning 51.00% and 42.76%, respectively, and the Russell RAFI™ US Large Company Index
returning 32.68%. International equities also posted strong gains. The MSCI EAFE® Index (Net)*, a broad measure of developed international equity
performance, and the Russell RAFI™ Developed ex US Large Company Index (Net)* returned 22.46% and 25.59%, respectively, and the MSCI Emerging Markets Index (Net)* and the Russell RAFI™ Emerging Markets Large Company Index (Net)* returned
36.05% and 20.02%, respectively.
In March 2020, amid the
fallout of the growing COVID-19 pandemic, the U.S. economy entered recessionary territory at record speed. Bolstered by the extensive emergency rescue and fiscal stimulus measures passed by the U.S. Federal Reserve (Fed) and U.S. Congress, the U.S.
economy has held up relatively well, especially given the intensity of the COVID-19 pandemic’s economic impact. After falling by an annualized rate of 31.4% in the second quarter of 2020, U.S. gross domestic product (GDP) jumped by an
annualized rate of 33.4% for the third quarter of 2020, reflecting
Asset
Class Performance Comparison % returns during the 12 months ended February 28, 2021
Index figures 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. Past performance is not an indication of future results.
For index definitions, please see the Glossary.
Data source: Index provider websites and CSIM.
Nothing in this report represents a recommendation of a security
by the investment adviser.
Management views may have
changed since the report date.
| * | The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes. |
4
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental Index
ETFs
The
Investment Environment (continued)
pent-up consumer demand and government support. GDP grew at an
annualized rate of 4.3% in the fourth quarter of 2020. For the full year of 2020, GDP decreased by 3.5%. Unemployment skyrocketed in April, rising to the highest level since the Great Depression, but declined over the remainder of the reporting
period, dropping below double digits beginning in August. Inflation remained well below the Fed’s traditional target of 2%, although inflation concerns rose toward the end of the reporting period when the yield on the 10-year U.S. Treasury
spiked to its highest level in more than a year.
Outside
the U.S., conditions were similar as global economies wrestled with dramatically slowing growth amid stay-at-home orders, supply chain disruptions, and broadly diminishing demand. Oil prices deteriorated early in the reporting period amid
significantly reduced demand, coupled with rising U.S. crude production and a price war between Russia and Saudi Arabia. Oil prices recovered by the end of the reporting period, ending the reporting period at a level unseen since prior to the onset
of the COVID-19 pandemic. For the first and second quarters of 2020, GDP contracted in most major economies, including the eurozone, the United Kingdom, and Japan. The eurozone and Japan subsequently recovered much of their losses, but the United
Kingdom, which has been particularly hard-hit by the COVID-19 pandemic, suffered its biggest slump in more than three centuries over the course of 2020, effectively wiping out its growth over the past seven years. Over 2020, China was the only major
economy to avoid contraction in the face of COVID-19-related shocks and maintained positive GDP growth in the last three quarters of 2020, approaching pre-pandemic growth rates on rising industrial output, strong manufacturing, and a robust real
estate market. India, after plunging into one of the worst recessions of any major economy, saw its first positive gain in GDP in the fourth quarter of 2020.
Central banks around the world, including the Fed, enacted or
maintained low—and for some international central banks, negative—interest rates in response to the COVID-19 pandemic. In the U.S., the Fed cut interest rates by 0.50% in early March and by 1.00% in mid-March, resulting in a federal
funds rate of 0.00% to 0.25%, which it upheld throughout the reporting period. In addition, the Fed also announced extensive emergency measures to support the economy in light of the COVID-19 pandemic, which remained in effect throughout the period,
including large purchases of U.S. Treasuries and other securities to support smooth market function, facilitating the flow of credit to municipalities, new financing for employers, consumers, and businesses, and the establishment of facilities to
support credit to businesses and consumers alike. In August, the Fed announced that it was shifting its interest rate policy approach to allow inflation to rise above its previous 2% target for periods of time, even in times of rising employment.
Outside the U.S., the European Central Bank held its policy rate at 0.00%, unchanged since March 2016, and maintained its asset purchase program to help counter the impact of the COVID-19 pandemic. The Bank of Japan upheld its short-term interest
rate target of -0.1%, also unchanged since 2016. The Bank of England maintained its key official bank rate at 0.10% and also reiterated its commitment to its bond-buying program. Central banks in key emerging market economies—including China,
India, Russia, and Thailand—also maintained low rates to counter the effects of the COVID-19 pandemic. Mexico reduced its benchmark interest rate by 0.25% in February.
5
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental Index
ETFs
Fund
Management
 |
Christopher Bliss, CFA, Vice President and Head of Passive Equity Strategies, leads the portfolio management team for Schwab’s passive equity mutual funds and ETFs. He also has overall responsibility for all aspects of the management of the funds. Before joining CSIM in 2016, Mr. Bliss spent 12 years at BlackRock (formerly Barclays Global Investors) managing and leading institutional index teams, most recently as a managing director and the head of the Americas institutional index team. Prior to BlackRock, he worked as an equity analyst and portfolio manager for Harris Bretall and before that, as a research analyst for JP Morgan. |
 |
Jeremy Brown, Portfolio Manager, is responsible for the day-to-day co-management of the Schwab Fundamental U.S. Broad Market Index ETF, Schwab Fundamental U.S. Large Company Index ETF, and Schwab Fundamental U.S. Small Company Index ETF. Prior to joining CSIM in 2017, Mr. Brown spent six years with ALPS Advisors, Inc. in Denver, most recently as a senior analyst on the ETF portfolio management and research team where he performed portfolio management, trading, and analytics/research functions for ALPS ETFs and passive funds. Additionally, Mr. Brown led a number of investment research, commentary, industry trend analysis, and sales and marketing support initiatives. |
 |
Chuck Craig, CFA, Senior Portfolio Manager, is responsible for the day-to-day co-management of the Schwab Fundamental International Large Company Index ETF, Schwab Fundamental International Small Company Index ETF, and Schwab Fundamental Emerging Markets Large Company Index ETF. Prior to joining CSIM in 2012, Mr. Craig worked at Guggenheim Funds (formerly Claymore Group), where he spent more than five years as a managing director of portfolio management and supervision, and three years as vice president of product research and development. Prior to that, he worked as an equity research analyst at First Trust Portfolios (formerly Niké Securities), and a trader and analyst at PMA Securities, Inc. |
 |
Ferian Juwono, CFA, Senior Portfolio Manager, is responsible for the day-to-day co-management of the Schwab Fundamental U.S. Broad Market Index ETF, Schwab Fundamental U.S. Large Company Index ETF, and Schwab Fundamental U.S. Small Company Index ETF. Prior to joining CSIM in 2010, Mr. Juwono worked at BlackRock (formerly Barclays Global Investors) where he spent more than three years as a portfolio manager, managing equity index funds for institutional clients, and two years as a senior business analyst. Prior to that, Mr. Juwono worked for more than four years as a senior financial analyst with Union Bank of California. |
 |
Jane Qin, Portfolio Manager, is responsible for the day-to-day co-management of the Schwab Fundamental International Large Company Index ETF, Schwab Fundamental International Small Company Index ETF, and Schwab Fundamental Emerging Markets Large Company Index ETF. Prior to joining CSIM in 2012, Ms. Qin spent more than four years at The Bank of New York Mellon Corporation. During that time, Ms. Qin spent more than two years as an associate equity portfolio manager and nearly two years as a performance analyst. She also worked at Wells Fargo Funds Management as a mutual fund analyst and at CIGNA Reinsurance in the risk management group as a risk analyst. |
 |
David Rios, Portfolio Manager, is responsible for the day-to-day co-management of the Schwab Fundamental International Large Company Index ETF, Schwab Fundamental International Small Company Index ETF, and Schwab Fundamental Emerging Markets Large Company Index ETF. Prior to this role, Mr. Rios was an associate portfolio manager on the Schwab equity index strategies team for four years. His first role with CSIM was as a trade operations specialist. Prior to joining CSIM in 2008, Mr. Rios was a senior fund accountant at Investors Bank & Trust (subsequently acquired by State Street Corporation). |
 |
Sabya Sinha, Portfolio Manager, is responsible for the day-to-day co-management of the Schwab Fundamental U.S. Broad Market Index ETF, Schwab Fundamental U.S. Large Company Index ETF, and Schwab Fundamental U.S. Small Company Index ETF. Prior to joining CSIM in 2015, Mr. Sinha spent a year at F-Squared Investments on the product development and analytics team. Prior to F-Squared, he worked at IndexIQ Advisors as a senior index portfolio manager for three years and for Bank of America’s Columbia Management subsidiary as a portfolio manager for three years. Mr. Sinha also spent time as a software consultant at DPM Mellon, LLC and an equity trader at Jane Street Capital. |
6
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental U.S. Broad
Market Index ETF as of February 28, 2021
The Schwab Fundamental U.S. Broad Market Index ETF (the fund) seeks to track as closely as possible, before fees and expenses, the total return of the Russell RAFITM US Index
(the index). The index measures the performance of the constituent companies by fundamental overall company scores, which are created using as the universe the U.S. companies in the FTSE Global Total Cap Index. To pursue its investment objective,
the fund invests in a representative sample of the securities included in the index which, when taken together, are expected to perform similarly to the index as a whole. Due to the use of sampling techniques, the fund may not hold all of the
securities in the index. For more information concerning the fund’s investment objective, strategies, and risks, please see the fund’s prospectus.
Market Highlights. For the
12-month reporting period ended February 28, 2021, U.S. and international equity markets generated strong returns amid historic volatility driven by the COVID-19 pandemic, which began impacting global economies in the week prior to the start of the
reporting period, prompting dramatic social distancing restrictions and shuttering businesses. As equity markets fell steeply in late February and March 2020, governments and central banks around the world began passing extensive emergency rescue
and fiscal stimulus measures in an effort to support their economies. The extraordinary response prompted a rally in global equity markets from their March lows, particularly in the U.S. Despite a resurgence of COVID-19 cases in the fall and into
winter, markets were buoyed by the initial distribution of COVID-19 vaccines in December 2020 and the expanded rollout in 2021. The COVID-19 vaccine rollout helped to fuel the early stages of a shift in the market towards cyclical sectors, beginning
in November and December and continuing through the remainder of the reporting period. Major market indices achieved repeated record highs over the second half of the reporting period.
Performance. For the 12-month
reporting period ended February 28, 2021, the fund generally tracked the index. The fund’s market price return was 32.62% and its NAV return was 33.35% (for an explanation of the market price and NAV returns, please refer to footnote 2 on the
following page). The index returned 33.61% during the same period.
Contributors and Detractors.
The information technology sector contributed the most to the total return of the fund. Stocks in the information technology sector represented an average weight of approximately 19% of the fund’s investments and returned approximately 51% for
the reporting period. One example from this sector is Apple Inc. The fund’s holdings of Apple Inc. represented an average weight of approximately 5% of the fund’s investments and returned approximately 79% for the reporting
period.
The consumer discretionary sector also
contributed to the total return of the fund, representing an average weight of approximately 11% of the fund’s investments and returning approximately 64% for the reporting period.
The utilities sector detracted the most from the total return
of the fund. Stocks in the utilities sector represented an average weight of approximately 4% of the fund’s investments and returned approximately -4% for the reporting period. One example from this sector is PG&E Corp., a natural gas and
electric service provider. The fund’s holdings of PG&E Corp. represented an average weight of less than 1% of the fund’s investments and returned approximately -32% for the reporting period.
The real estate sector also detracted from the total return of
the fund, representing an average weight of approximately 2% of the fund’s investments and returning approximately 8% for the reporting period.
Management views and portfolio holdings may have changed
since the report date.
7
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental U.S. Broad
Market Index ETF
Performance and Fund Facts as
of February 28, 2021
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.schwabfunds.com/schwabetfs_prospectus.
Performance
of Hypothetical $10,000 Investment (August 15, 2013 – February 28, 2021)1
Average Annual Total Returns1
| Fund and Inception Date | 1 Year | 5 Years | Since Inception* |
| Fund: Schwab Fundamental U.S. Broad Market Index ETF (8/15/13) | |||
| Market Price Return2 | 32.62% | 14.56% | 11.51% |
| NAV Return2 | 33.35% | 14.61% | 11.50% |
| Russell RAFITM US Index | 33.61% | 14.86% | 11.79% |
| Russell 3000® Index | 35.33% | 17.41% | 13.72% |
| ETF Category: Morningstar Large Value3 | 22.52% | 11.52% | N/A |
| Fund Expense Ratio4: 0.25% | |||
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.
The first index listed for the fund is the fund’s primary
benchmark, as shown in the prospectus. Additional indices shown are provided for comparative purposes.
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.
Index ownership — The Schwab Fundamental U.S. Broad Market
Index ETF is not in any way sponsored, endorsed, sold or promoted by Frank Russell Company (Russell), by the London Stock Exchange Group companies (LSEG), or by Research Affiliates LLC (RA) (collectively the Licensor Parties), and none of the
Licensor Parties make any warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the Russell RAFI™ US Index (the Index) or otherwise. The Index is compiled and calculated by
Russell in conjunction with RA. None of the Licensor Parties shall be liable (whether in negligence or otherwise) to any person for any error in the Index and none of the Licensor Parties shall be under any obligation to advise any person of any
error therein. “Russell®” is a trademark of Russell. The trade names “Research Affiliates®”, “Fundamental Index®” and
“RAFI®” are registered trademarks of RA. CSIM has obtained full license from Russell to use the Index. For full disclaimer please see
the fund’s statement of additional information.
| * | Inception (8/15/13) 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 or sale of fund shares. |
| 2 | ETF performance must be shown based on both a market price and NAV basis. The fund’s per share 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 using the Official Closing Price on the primary stock exchange (generally, 4:00 p.m. Eastern time) and may not represent the returns you would receive if shares were traded at other times. 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. |
8
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental U.S. Broad
Market Index ETF
Performance and Fund Facts as
of February 28, 2021 (continued)
Top Equity Holdings % of Net Assets4
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 trading and management costs incurred by the fund.
Source of Sector Classification: S& P and MSCI.
| 1 | Excludes derivatives. |
| 2 | Portfolio turnover rate excludes securities received or delivered from processing of in-kind creations or redemptions. |
| 3 | The percentage may differ from the Portfolio Holdings because the above calculation is based on a percentage of total investments, excluding derivatives, whereas the calculation in the Portfolio Holdings is based on a percentage of net assets. |
| 4 | This list is not a recommendation of any security by the investment adviser. |
9
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental U.S. Large
Company Index ETF as of February 28, 2021
The Schwab Fundamental U.S. Large Company Index ETF (the fund) seeks to track as closely as possible, before fees and expenses, the total return of the Russell RAFITM US Large
Company Index (the index). The index measures the performance of the large company size segment by fundamental overall company scores, which are created using as the universe the U.S. companies in the FTSE Global Total Cap Index. To pursue its
investment objective, the fund uses a replication investment approach and generally gives the same weight to a given stock as the index does. For more information concerning the fund’s investment objective, strategies, and risks, please see
the fund’s prospectus.
Market Highlights. U.S. large-cap stocks underperformed U.S. small-cap stocks over the reporting period. For the 12-month reporting period ended February 28, 2021, U.S. and international equity markets generated strong returns amid
historic volatility driven by the COVID-19 pandemic, which began impacting global economies in the week prior to the start of the reporting period, prompting dramatic social distancing restrictions and shuttering businesses. As equity markets fell
steeply in late February and March 2020, governments and central banks around the world began passing extensive emergency rescue and fiscal stimulus measures in an effort to support their economies. The extraordinary response prompted a rally in
global equity markets from their March lows, particularly in the U.S. Despite a resurgence of COVID-19 cases in the fall and into winter, markets were buoyed by the initial distribution of COVID-19 vaccines in December 2020 and the expanded rollout
in 2021. The COVID-19 vaccine rollout helped to fuel the early stages of a shift in the market towards cyclical sectors, beginning in November and December and continuing through the remainder of the reporting period. Major market indices achieved
repeated record highs over the second half of the reporting period.
Performance. For the 12-month
reporting period ended February 28, 2021, the fund generally tracked the index. The fund’s market price return was 32.06% and its NAV return was 32.40% (for an explanation of the market price and NAV returns, please refer to footnote 2 on the
following page). The index returned 32.68% 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 trading and management costs incurred by the fund and not the
index.
Contributors and Detractors. The utilities sector detracted from the total return of the fund. Stocks in the utilities sector represented an average weight of approximately 4% of the fund’s investments and returned approximately -5% for the
reporting period. One example from this sector is PG&E Corp., a natural gas and electric service provider. The fund’s holdings of PG&E Corp. represented an average weight of less than 1% of the fund’s investments and returned
approximately -32% for the reporting period.
While there were no additional sectors that detracted from the
total return of the fund over the reporting period, the real estate sector was the smallest contributor to the total return of the fund, representing an average weight of approximately 2% of the fund’s investments and returning 10% for the
reporting period.
The information technology sector
contributed the most to the total return of the fund. Stocks in the information technology sector represented an average weight of approximately 19% of the fund’s investments and returned approximately 51% for the reporting period. One example
from this sector is Apple Inc. The fund’s holdings of Apple Inc. represented an average weight of approximately 6% of the fund’s investments and returned approximately 79% for the reporting period.
The consumer discretionary sector also contributed to the
total return of the fund, representing an average weight of approximately 11% of the fund’s investments and returning approximately 62% for the reporting period.
Management views and portfolio holdings may have changed
since the report date.
10
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental U.S. Large
Company Index ETF
Performance and Fund Facts as
of February 28, 2021
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.schwabfunds.com/schwabetfs_prospectus.
Performance
of Hypothetical $10,000 Investment (August 15, 2013 – February 28, 2021)1
Average Annual Total Returns1
| Fund and Inception Date | 1 Year | 5 Years | Since Inception* |
| Fund: Schwab Fundamental U.S. Large Company Index ETF (8/15/13) | |||
| Market Price Return2 | 32.06% | 14.56% | 11.53% |
| NAV Return2 | 32.40% | 14.56% | 11.53% |
| Russell RAFITM US Large Company Index | 32.68% | 14.81% | 11.83% |
| Russell 1000® Index | 34.28% | 17.37% | 13.89% |
| ETF Category: Morningstar Large Value3 | 22.52% | 11.52% | N/A |
| Fund Expense Ratio4: 0.25% | |||
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.
The first index listed for the fund is the fund’s primary
benchmark, as shown in the prospectus. Additional indices shown are provided for comparative purposes.
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.
Index ownership — The Schwab Fundamental U.S. Large
Company Index ETF is not in any way sponsored, endorsed, sold or promoted by Frank Russell Company (Russell), by the London Stock Exchange Group companies (LSEG), or by Research Affiliates LLC (RA) (collectively the Licensor Parties), and none of
the Licensor Parties make any warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the Russell RAFI™ US Large Company Index (the Index) or otherwise. The Index is compiled and
calculated by Russell in conjunction with RA. None of the Licensor Parties shall be liable (whether in negligence or otherwise) to any person for any error in the Index and none of the Licensor Parties shall be under any obligation to advise any
person of any error therein. “Russell®” is a trademark of Russell. The trade names “Research Affiliates®”, “Fundamental Index®” and
“RAFI®” are registered trademarks of RA. CSIM has obtained full license from Russell to use the Index. For full disclaimer please see
the fund’s statement of additional information.
| * | Inception (8/15/13) 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 or sale of fund shares. |
| 2 | ETF performance must be shown based on both a market price and NAV basis. The fund’s per share 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 using the Official Closing Price on the primary stock exchange (generally, 4:00 p.m. Eastern time) and may not represent the returns you would receive if shares were traded at other times. 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. |
11
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental U.S. Large
Company Index ETF
Performance and Fund Facts as
of February 28, 2021 (continued)
Top Equity Holdings % of Net Assets4
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 trading and management costs incurred by the fund.
Source of Sector Classification: S& P and MSCI.
| 1 | Excludes derivatives. |
| 2 | Portfolio turnover rate excludes securities received or delivered from processing of in-kind creations or redemptions. |
| 3 | The percentage may differ from the Portfolio Holdings because the above calculation is based on a percentage of total investments, excluding derivatives, whereas the calculation in the Portfolio Holdings is based on a percentage of net assets. |
| 4 | This list is not a recommendation of any security by the investment adviser. |
12
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental U.S. Small
Company Index ETF as of February 28, 2021
The Schwab Fundamental U.S. Small Company Index ETF (the fund) seeks to track as closely as possible, before fees and expenses, the total return of the Russell RAFITM US Small
Company Index (the index). The index measures the performance of the small company size segment by fundamental overall company scores, which are created using as the universe the U.S. companies in the FTSE Global Total Cap Index. To pursue its
investment objective, the fund uses a replication investment approach and generally gives the same weight to a given stock as the index does. For more information concerning the fund’s investment objective, strategies, and risks, please see
the fund’s prospectus.
Market Highlights. U.S. small-cap stocks outperformed U.S. large-cap stocks over the reporting period. For the 12-month reporting period ended February 28, 2021, U.S. and international equity markets generated strong returns amid historic
volatility driven by the COVID-19 pandemic, which began impacting global economies in the week prior to the start of the reporting period, prompting dramatic social distancing restrictions and shuttering businesses. As equity markets fell steeply in
late February and March 2020, governments and central banks around the world began passing extensive emergency rescue and fiscal stimulus measures in an effort to support their economies. The extraordinary response prompted a rally in global equity
markets from their March lows, particularly in the U.S. Despite a resurgence of COVID-19 cases in the fall and into winter, markets were buoyed by the initial distribution of COVID-19 vaccines in December 2020 and the expanded rollout in 2021. The
COVID-19 vaccine rollout helped to fuel the early stages of a shift in the market towards cyclical sectors, beginning in November and December and continuing through the remainder of the reporting period. Major market indices achieved repeated
record highs over the second half of the reporting period.
Performance. For the 12-month
reporting period ended February 28, 2021, the fund generally tracked the index. The fund’s market price return was 42.80% and the fund’s NAV return was 42.73% (for an explanation of the market price and NAV returns, please refer to
footnote 2 on the following page). The index returned 42.76% during the same period.
Contributors and Detractors.
The consumer discretionary sector contributed the most to the total return of the fund. Stocks in the consumer discretionary sector represented an average weight of approximately 15% of the fund’s investments and returned approximately 74% for
the reporting period. One example from this sector is Tupperware Brands Corp. The fund’s holdings of Tupperware Brands Corp. represented an average weight of less than 1% of the fund’s investments and returned approximately 973% for the
reporting period.
The industrials sector also
contributed to the total return of the fund, representing an average weight of approximately 19% of the fund’s investments and returning approximately 44% for the reporting period.
The real estate sector detracted the most from the total
return of the fund. Stocks in the real estate sector represented an average weight of approximately 10% of the fund’s investments and returned approximately 2% for the reporting period. One example from this sector is Apple Hospitality REIT,
Inc., a REIT that owns a portfolio of upscale, select service hotels. The fund’s holdings of Apple Hospitality REIT, Inc. represented an average weight of less than 1% of the fund’s investments and returned approximately -59% for the
reporting period.
The utilities sector also detracted
from the total return of the fund, representing an average weight of approximately 3% of the fund’s investments and returning approximately -1% for the reporting period.
Management views and portfolio holdings may have changed
since the report date.
13
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental U.S. Small
Company Index ETF
Performance and Fund Facts as
of February 28, 2021
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.schwabfunds.com/schwabetfs_prospectus.
Performance
of Hypothetical $10,000 Investment (August 15, 2013 – February 28, 2021)1
Average Annual Total Returns1
| Fund and Inception Date | 1 Year | 5 Years | Since Inception* |
| Fund: Schwab Fundamental U.S. Small Company Index ETF (8/15/13) | |||
| Market Price Return2 | 42.80% | 14.67% | 10.79% |
| NAV Return2 | 42.73% | 14.64% | 10.78% |
| Russell RAFITM US Small Company Index | 42.76% | 14.84% | 11.02% |
| Russell 2000® Index | 51.00% | 17.92% | 11.85% |
| ETF Category: Morningstar Small Blend3 | 41.65% | 14.46% | N/A |
| Fund Expense Ratio4: 0.25% | |||
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.
The first index listed for the fund is the fund’s primary
benchmark, as shown in the prospectus. Additional indices shown are provided for comparative purposes.
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.
Small-company stocks may be subject to greater volatility than
many other asset classes.
Index ownership — The
Schwab Fundamental U.S. Small Company Index ETF is not in any way sponsored, endorsed, sold or promoted by Frank Russell Company (Russell), by the London Stock Exchange Group companies (LSEG), or by Research Affiliates LLC (RA) (collectively the
Licensor Parties), and none of the Licensor Parties make any warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the Russell RAFI™ US Small Company Index (the Index) or
otherwise. The Index is compiled and calculated by Russell in conjunction with RA. None of the Licensor Parties shall be liable (whether in negligence or otherwise) to any person for any error in the Index and none of the Licensor Parties shall be
under any obligation to advise any person of any error therein. “Russell®” is a trademark of Russell. The trade names “Research
Affiliates®”, “Fundamental
Index®” and “RAFI®” are
registered trademarks of RA. CSIM has obtained full license from Russell to use the Index. For full disclaimer please see the fund’s statement of additional information.
| * | Inception (8/15/13) 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 or sale of fund shares. |
| 2 | ETF performance must be shown based on both a market price and NAV basis. The fund’s per share 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 using the Official Closing Price on the primary stock exchange (generally, 4:00 p.m. Eastern time) and may not represent the returns you would receive if shares were traded at other times. 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. |
14
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental U.S. Small
Company Index ETF
Performance and Fund Facts as
of February 28, 2021 (continued)
Top Equity Holdings % of Net Assets4
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 trading and management costs incurred by the fund.
Source of Sector Classification: S& P and MSCI.
| 1 | Excludes derivatives. |
| 2 | Portfolio turnover rate excludes securities received or delivered from processing of in-kind creations or redemptions. |
| 3 | The percentage may differ from the Portfolio Holdings because the above calculation is based on a percentage of total investments, excluding derivatives, whereas the calculation in the Portfolio Holdings is based on a percentage of net assets. |
| 4 | This list is not a recommendation of any security by the investment adviser. |
15
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental
International Large Company Index ETF as of February 28, 2021
The Schwab Fundamental International Large Company Index ETF (the fund) seeks to track as closely as possible, before fees and expenses, the total return of the Russell RAFITM
Developed ex US Large Company Index (the index). The index measures the performance of the large company size segment by fundamental overall company scores, which are created using as the universe the developed ex U.S. companies in the FTSE Total
Global Cap Index. To pursue its investment objective, the fund invests in a representative sample of the securities included in the index which, when taken together, are expected to perform similarly to the index as a whole. Due to the use of
sampling techniques, the fund may not hold all of the securities in the index. For more information concerning the fund’s investment objective, strategies, and risks, please see the fund’s prospectus.
Market Highlights. Overall,
stocks of large companies in developed international markets generated positive returns for the reporting period. For the 12-month reporting period ended February 28, 2021, U.S. and international equity markets generated strong returns amid historic
volatility driven by the COVID-19 pandemic, which began impacting global economies in the week prior to the start of the reporting period, prompting dramatic social distancing restrictions and shuttering businesses. As equity markets fell steeply in
late February and March 2020, governments and central banks around the world began passing extensive emergency rescue and fiscal stimulus measures in an effort to support their economies. The extraordinary response prompted a rally in global equity
markets from their March lows, particularly in the U.S. Despite a resurgence of COVID-19 cases in the fall and into winter, markets were buoyed by the initial distribution of COVID-19 vaccines in December 2020 and the expanded rollout in 2021. The
COVID-19 vaccine rollout helped to fuel the early stages of a shift in the market towards cyclical sectors, beginning in November and December and continuing through the remainder of the reporting period. Major market indices achieved repeated
record highs over the second half of the reporting period. International equities also posted strong gains. The U.S. dollar strengthened against a basket of foreign currencies in March when the COVID-19 pandemic began before generally weakening
throughout the remainder of the reporting period, generally enhancing the return of overseas investments in U.S. dollar terms.
Performance. For the 12-month
reporting period ended February 28, 2021, the fund’s market price return was 25.49% and its NAV return was 25.47% (for an explanation of the market price and NAV returns, please refer to footnote 2 on the following page). The index returned
25.59%1 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
trading and management costs incurred by the fund and not the index.
Contributors and Detractors.
Stocks from Singapore detracted from the total return of the fund. Stocks from Singapore represented an average weight of less than 1% of the fund’s investments and returned approximately 7% in U.S. dollar terms for the reporting period. One
example from this market is Singapore Telecommunications Ltd., a telecommunications company that offers a diverse range of services including fixed, mobile, data, internet, TV, and digital solutions. The fund’s holdings of Singapore
Telecommunications Ltd. represented less than 1% of the fund’s investments and returned approximately -14% in U.S. dollar terms for the reporting period.
While there we no additional countries that detracted from the
total return of the fund over the reporting period, stocks from Ireland contributed the least to the total return of the fund, representing an average weight of less than 1% of the fund’s investments and returning approximately 12% in U.S.
dollar terms for the reporting period.
Stocks from Japan
contributed the most to the total return of the fund. Japanese stocks represented an average weight of 25% of the fund’s investments and returned approximately 24% in U.S. dollar terms for the reporting period. One example from this market is
SoftBank Group Corp., a multinational conglomerate holding company. The fund’s holdings of SoftBank Group Corp. represented an average weight of less than 1% of the fund’s investments and returned approximately 102% in U.S. dollar terms
for the reporting period.
Stocks from South Korea also
contributed to the total return of the fund, representing an average weight of approximately 7% of the fund’s investments and returning approximately 72% in U.S. dollar terms for the reporting period.
Management views and
portfolio holdings may have changed since the report date.
| 1 | The total return cited for the index is calculated net of foreign withholding taxes. |
16
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental
International Large Company Index ETF
Performance and Fund Facts as
of February 28, 2021
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.schwabfunds.com/schwabetfs_prospectus.
Performance of Hypothetical $10,000 Investment (August 15, 2013
– February 28, 2021)1
Average Annual Total Returns1
| Fund and Inception Date | 1 Year | 5 Years | Since Inception* |
| Fund: Schwab Fundamental International Large Company Index ETF (8/15/13) | |||
| Market Price Return2 | 25.49% | 10.05% | 5.27% |
| NAV Return2 | 25.47% | 9.93% | 5.26% |
| Russell RAFITM Developed ex US Large Company Index (Net)3 | 25.59% | 9.98% | 5.38% |
| MSCI EAFE® Index (Net)3 | 22.46% | 9.73% | 5.37% |
| ETF Category: Morningstar Foreign Large Value4 | 17.86% | 7.68% | N/A |
| Fund Expense Ratio5: 0.25% | |||
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.
The first index listed for the fund is the fund’s primary
benchmark, as shown in the prospectus. Additional indices shown are provided for comparative purposes.
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.
International investing may involve risk of capital loss from
unfavorable fluctuations in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations.
Index ownership — The Schwab Fundamental International
Large Company Index ETF is not in any way sponsored, endorsed, sold or promoted by Frank Russell Company (Russell), by the London Stock Exchange Group companies (LSEG), or by Research Affiliates LLC (RA) (collectively the Licensor Parties), and none
of the Licensor Parties make any warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the Russell RAFI™ Developed ex US Large Company Index (the Index) or otherwise. The Index
is compiled and calculated by Russell in conjunction with RA. None of the Licensor Parties shall be liable (whether in negligence or otherwise) to any person for any error in the Index and none of the Licensor Parties shall be under any obligation
to advise any person of any error therein. “Russell®” is a trademark of Russell. The trade names “Research Affiliates®”, “Fundamental Index®” and
“RAFI®” are registered trademarks of RA. CSIM has obtained full license from Russell to use the Index. For full disclaimer please see
the fund’s statement of additional information.
| * | Inception (8/15/13) 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 or sale of fund shares. |
| 2 | ETF performance must be shown based on both a market price and NAV basis. The fund’s per share 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 using the Official Closing Price on the primary stock exchange (generally, 4:00 p.m. Eastern time) and may not represent the returns you would receive if shares were traded at other times. 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 | The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes. |
| 4 | 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. |
| 5 | As stated in the prospectus. |
17
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental
International Large Company Index ETF
Performance and Fund Facts as
of February 28, 2021 (continued)
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 trading and management costs incurred by the fund.
Source of Sector Classification: S&P and
MSCI.
| 1 | Excludes derivatives. |
| 2 | Portfolio turnover rate excludes securities received or delivered from processing of in-kind creations or redemptions. |
| 3 | This list is not a recommendation of any security by the investment adviser. |
| 4 | The percentage may differ from the Portfolio Holdings because the above calculation is based on a percentage of total investments, excluding derivatives, whereas the calculation in the Portfolio Holdings is based on a percentage of net assets. |
18
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental
International Small Company Index ETF as of February 28, 2021
The Schwab Fundamental International Small Company Index ETF (the fund) seeks to track as closely as possible, before fees and expenses, the total return of the Russell RAFITM
Developed ex US Small Company Index (the index). The index measures the performance of the small company size segment by fundamental overall company scores, which are created using as the universe the developed ex U.S. companies in the FTSE Global
Total Cap Index. To pursue its investment objective, the fund invests in a representative sample of the securities included in the index which, when taken together, are expected to perform similarly to the index as a whole. Due to the use of
sampling techniques, the fund may not hold all of the securities in the index. For more information concerning the fund’s investment objective, strategies, and risks, please see the fund’s prospectus.
Market Highlights. Overall,
stocks of small companies in developed international markets generated positive returns for the reporting period. For the 12-month reporting period ended February 28, 2021, U.S. and international equity markets generated strong returns amid historic
volatility driven by the COVID-19 pandemic, which began impacting global economies in the week prior to the start of the reporting period, prompting dramatic social distancing restrictions and shuttering businesses. As equity markets fell steeply in
late February and March 2020, governments and central banks around the world began passing extensive emergency rescue and fiscal stimulus measures in an effort to support their economies. The extraordinary response prompted a rally in global equity
markets from their March lows, particularly in the U.S. Despite a resurgence of COVID-19 cases in the fall and into winter, markets were buoyed by the initial distribution of COVID-19 vaccines in December 2020 and the expanded rollout in 2021. The
COVID-19 vaccine rollout helped to fuel the early stages of a shift in the market towards cyclical sectors, beginning in November and December and continuing through the remainder of the reporting period. Major market indices achieved repeated
record highs over the second half of the reporting period. International equities also posted strong gains. The U.S. dollar strengthened against a basket of foreign currencies in March when the COVID-19 pandemic began before generally weakening
throughout the remainder of the reporting period, generally enhancing the return of overseas investments in U.S. dollar terms.
Performance. For the 12-month
reporting period ended February 28, 2021, the fund’s market price return was 29.54% and its NAV return was 28.97% (for an explanation of the market price and NAV returns, please refer to footnote 2 on the following page). The index returned
29.22%1 during the same period.
Contributors and Detractors.
Stocks from Japan contributed the most to the total return of the fund. Japanese stocks represented an average weight of approximately 34% of the fund’s investments and returned approximately 22% in U.S. dollar terms for the reporting period.
One example from this market is Ibiden Co., Ltd., an electronics company. The fund’s holdings of Ibiden, Co., Ltd. represented an average weight of less than 1% of the fund’s investments and returned approximately 149% in U.S. dollar
terms for the reporting period.
Stocks from South
Korea also contributed to the total return of the fund, representing an average weight of approximately 6% of the fund’s investments and returning approximately 73% in U.S. dollar terms for the reporting period.
Stocks from Singapore detracted from the total return of the
fund. Stocks from Singapore represented an average weight of approximately 2% of the fund’s investments and returned approximately 6% in U.S. dollar terms for the reporting period. One example from this market is Sembcorp Marine Ltd., a global
marine and offshore engineering group. The fund’s holdings of Sembcorp Marine Ltd. represented an average weight of less than 1% of the fund’s investments and returned approximately -77% in U.S. dollar terms for the reporting
period.
While there were no additional countries that
detracted from the total return of the fund over the reporting period, stocks from Israel contributed the least to the total return of the fund, representing an average weight of approximately 1% of the fund’s investments and returning
approximately 8% in U.S. dollar terms for the reporting period.
Management views and portfolio holdings may have changed
since the report date.
| 1 | The total return cited for the index is calculated net of foreign withholding taxes. |
19
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental
International Small Company Index ETF
Performance and Fund Facts as
of February 28, 2021
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.schwabfunds.com/schwabetfs_prospectus.
Performance of Hypothetical $10,000 Investment (August 15, 2013
– February 28, 2021)1
Average Annual Total Returns1
| Fund and Inception Date | 1 Year | 5 Years | Since Inception* |
| Fund: Schwab Fundamental International Small Company Index ETF (8/15/13) | |||
| Market Price Return2 | 29.54% | 10.36% | 6.96% |
| NAV Return2 | 28.97% | 10.22% | 6.96% |
| Russell RAFITM Developed ex US Small Company Index (Net)3 | 29.22% | 10.44% | 7.33% |
| S&P Developed ex-U.S. Small Cap Index (Net)3 | 33.68% | 11.61% | 8.04% |
| ETF Category: Morningstar Foreign Small/Mid Blend4 | 29.18% | 10.22% | N/A |
| Fund Expense Ratio5: 0.39% | |||
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.
The first index listed for the fund is the fund’s primary
benchmark, as shown in the prospectus. Additional indices shown are provided for comparative purposes.
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.
International investing may involve risk of capital loss from
unfavorable fluctuations in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations.
Small-company stocks may be subject to greater volatility than
many other asset classes.
Index ownership — The
Schwab Fundamental International Small Company Index ETF is not in any way sponsored, endorsed, sold or promoted by Frank Russell Company (Russell), by the London Stock Exchange Group companies (LSEG), or by Research Affiliates LLC (RA)
(collectively the Licensor Parties), and none of the Licensor Parties make any warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the Russell RAFI™ Developed ex US Small
Company Index (the Index) or otherwise. The Index is compiled and calculated by Russell in conjunction with RA. None of the Licensor Parties shall be liable (whether in negligence or otherwise) to any person for any error in the Index and none of
the Licensor Parties shall be under any obligation to advise any person of any error therein. “Russell®” is a trademark of Russell. The
trade names “Research Affiliates®”, “Fundamental Index®” and “RAFI®” are registered
trademarks of RA. CSIM has obtained full license from Russell to use the Index. For full disclaimer please see the fund’s statement of additional information.
| * | Inception (8/15/13) 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 or sale of fund shares. |
| 2 | ETF performance must be shown based on both a market price and NAV basis. The fund’s per share 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 using the Official Closing Price on the primary stock exchange (generally, 4:00 p.m. Eastern time) and may not represent the returns you would receive if shares were traded at other times. 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 | The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes. |
| 4 | 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. |
| 5 | As stated in the prospectus. |
20
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental
International Small Company Index ETF
Performance and Fund Facts as
of February 28, 2021 (continued)
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 trading and management costs incurred by the fund.
Source of Sector Classification: S&P and
MSCI.
| 1 | Excludes derivatives. |
| 2 | Portfolio turnover rate excludes securities received or delivered from processing of in-kind creations or redemptions. |
| 3 | This list is not a recommendation of any security by the investment adviser. |
| 4 | The percentage may differ from the Portfolio Holdings because the above calculation is based on a percentage of total investments, excluding derivatives, whereas the calculation in the Portfolio Holdings is based on a percentage of net assets. |
21
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental Emerging
Markets Large Company Index ETF as of February 28, 2021
The Schwab Fundamental Emerging Markets Large Company Index ETF (the fund) seeks to track as closely as possible, before fees and expenses, the total return of the Russell RAFITM Emerging
Markets Large Company Index (the index). The index measures the performance of the large company size segment by fundamental overall company scores, which are created using as the universe the emerging markets companies in the FTSE Global Total Cap
Index. To pursue its investment objective, the fund invests in a representative sample of the securities included in the index which, when taken together, are expected to perform similarly to the index as a whole. Due to the use of sampling
techniques, the fund may not hold all of the securities in the index. For more information concerning the fund’s investment objective, strategies, and risks, please see the fund’s prospectus.
Market Highlights. Stocks in
emerging markets produced positive returns for the reporting period. For the 12-month reporting period ended February 28, 2021, U.S. and international equity markets generated strong returns amid historic volatility driven by the COVID-19 pandemic,
which began impacting global economies in the week prior to the start of the reporting period, prompting dramatic social distancing restrictions and shuttering businesses. As equity markets fell steeply in late February and March 2020, governments
and central banks around the world began passing extensive emergency rescue and fiscal stimulus measures in an effort to support their economies. The extraordinary response prompted a rally in global equity markets from their March lows,
particularly in the U.S. Despite a resurgence of COVID-19 cases in the fall and into winter, markets were buoyed by the initial distribution of COVID-19 vaccines in December 2020 and the expanded rollout in 2021. The COVID-19 vaccine rollout helped
to fuel the early stages of a shift in the market towards cyclical sectors, beginning in November and December and continuing through the remainder of the reporting period. Major market indices achieved repeated record highs over the second half of
the reporting period. International equities also posted strong gains. The U.S. dollar strengthened against a basket of foreign currencies in March when the COVID-19 pandemic began before generally weakening throughout the remainder of the reporting
period, generally enhancing the return of overseas investments in U.S. dollar terms.
Performance. For the 12-month
reporting period ended February 28, 2021, the fund’s market price return was 18.38% and its NAV return was 19.12% (for an explanation of the market price and NAV returns, please refer to footnote 2 on the following page). The index returned
20.02%1 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
trading and management costs incurred by the fund and not the index.
Contributors and Detractors.
Stocks from Brazil detracted the most from the total return of the fund. Brazilian stocks represented an average weight of approximately 9% of the fund’s investments and returned approximately -16% in U.S. dollar terms for the reporting
period. One example from this market is Itau Unibanco Holding S.A., a financial products and services company. The fund’s holdings of Itau Unibanco Holdings S.A. represented an average weight of approximately 1% of the fund’s investments
and returned approximately -34% in U.S. dollar terms for the reporting period.
Stocks from Greece also detracted from the total return of the
fund, representing an average weight of less than 1% of the fund’s investments and returning approximately -29% in U.S. dollar terms for the reporting period.
Stocks from Taiwan contributed the most to the total return of
the fund. Taiwanese stocks represented an average weight of approximately 20% of the fund’s investments and returned approximately 68% in U.S. dollar terms for the reporting period. One example from this market is Taiwan Semiconductor
Manufacturing Co., Ltd. The fund’s holdings of Taiwan Semiconductor Manufacturing Co., Ltd. represented an average weight of approximately 5% of the fund’s investments and returned approximately 114% in U.S. dollar terms for the
reporting period.
Stocks from China also contributed to
the total return of the fund, representing an average weight of approximately 30% of the fund’s investments and returning approximately 15% in U.S. dollar terms for the reporting period.
Management views and portfolio holdings may have changed
since the report date.
| 1 | The total return cited for the index is calculated net of foreign withholding taxes. |
22
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental Emerging
Markets Large Company Index ETF
Performance and Fund Facts as
of February 28, 2021
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.schwabfunds.com/schwabetfs_prospectus.
Performance of Hypothetical $10,000 Investment (August 15, 2013
– February 28, 2021)1
Average Annual Total Returns1
| Fund and Inception Date | 1 Year | 5 Years | Since Inception* |
| Fund: Schwab Fundamental Emerging Markets Large Company Index ETF (8/15/13) | |||
| Market Price Return2 | 18.38% | 13.55% | 4.48% |
| NAV Return2 | 19.12% | 13.65% | 4.52% |
| Russell RAFITM Emerging Markets Large Company Index (Net)3 | 20.02% | 14.32% | 5.15% |
| MSCI Emerging Markets Index (Net)3 | 36.05% | 15.24% | 6.83% |
| ETF Category: Morningstar Diversified Emerging Markets4 | 34.85% | 14.19% | N/A |
| Fund Expense Ratio5: 0.39% | |||
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.
The first index listed for the fund is the fund’s primary
benchmark, as shown in the prospectus. Additional indices shown are provided for comparative purposes.
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.
International investing may involve risk of capital loss from
unfavorable fluctuations in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations.
Emerging markets involve heightened risks related to the same
factors as international investing, as well as increased volatility and lower trading volume.
Index ownership — The Schwab Fundamental Emerging Markets
Large Company Index ETF is not in any way sponsored, endorsed, sold or promoted by Frank Russell Company (Russell), by the London Stock Exchange Group companies (LSEG), or by Research Affiliates LLC (RA) (collectively the Licensor Parties), and none
of the Licensor Parties make any warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the Russell RAFI™ Emerging Markets Large Company Index (the Index) or otherwise. The Index
is compiled and calculated by Russell in conjunction with RA. None of the Licensor Parties shall be liable (whether in negligence or otherwise) to any person for any error in the Index and none of the Licensor Parties shall be under any obligation
to advise any person of any error therein. “Russell®” is a trademark of Russell. The trade names “Research Affiliates®”, “Fundamental Index®” and
“RAFI®” are registered trademarks of RA. CSIM has obtained full license from Russell to use the Index. For full disclaimer please see
the fund’s statement of additional information.
| * | Inception (8/15/13) 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 or sale of fund shares. |
| 2 | ETF performance must be shown based on both a market price and NAV basis. The fund’s per share 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 using the Official Closing Price on the primary stock exchange (generally, 4:00 p.m. Eastern time) and may not represent the returns you would receive if shares were traded at other times. 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 | The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes. |
| 4 | 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. |
| 5 | As stated in the prospectus. |
23
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental Emerging
Markets Large Company Index ETF
Performance and Fund Facts as
of February 28, 2021 (continued)
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 trading and management costs incurred by the fund.
Source of Sector Classification: S&P and
MSCI.
| 1 | Excludes derivatives. |
| 2 | Portfolio turnover rate excludes securities received or delivered from processing of in-kind creations or redemptions. |
| 3 | This list is not a recommendation of any security by the investment adviser. |
| 4 | The percentage may differ from the Portfolio Holdings because the above calculation is based on a percentage of total investments, excluding derivatives, whereas the calculation in the Portfolio Holdings is based on a percentage of net assets. |
24
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental Index
ETFs
Fund
Expenses (Unaudited)
Examples for a $1,000 Investment
| Expense
Ratio (Annualized)1 |
Beginning
Account Value at 9/1/20 |
Ending
Account Value (Net of Expenses) at 2/28/21 |
Expenses
Paid During Period 9/1/20-2/28/212 | |
| Schwab Fundamental U.S. Broad Market Index ETF | ||||
| Actual Return | 0.25% | $1,000.00 | $1,225.60 | $1.38 |
| Hypothetical 5% Return | 0.25% | $1,000.00 | $1,023.56 | $1.25 |
| Schwab Fundamental U.S. Large Company Index ETF | ||||
| Actual Return | 0.25% | $1,000.00 | $1,209.60 | $1.37 |
| Hypothetical 5% Return | 0.25% | $1,000.00 | $1,023.56 | $1.25 |
| Schwab Fundamental U.S. Small Company Index ETF | ||||
| Actual Return | 0.25% | $1,000.00 | $1,413.70 | $1.50 |
| Hypothetical 5% Return | 0.25% | $1,000.00 | $1,023.56 | $1.25 |
| Schwab Fundamental International Large Company Index ETF | ||||
| Actual Return | 0.25% | $1,000.00 | $1,234.60 | $1.39 |
| Hypothetical 5% Return | 0.25% | $1,000.00 | $1,023.56 | $1.25 |
| Schwab Fundamental International Small Company Index ETF | ||||
| Actual Return | 0.39% | $1,000.00 | $1,211.40 | $2.14 |
| Hypothetical 5% Return | 0.39% | $1,000.00 | $1,022.87 | $1.96 |
| Schwab Fundamental Emerging Markets Large Company Index ETF | ||||
| Actual Return | 0.39% | $1,000.00 | $1,236.80 | $2.16 |
| Hypothetical 5% Return | 0.39% | $1,000.00 | $1,022.87 | $1.96 |
| 1 | Based on the most recent six-month expense ratio. |
| 2 | Expenses for each fund are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 181 days of the period, and divided by 365 days of the fiscal year. |
25
Schwab Fundamental Index ETFs | Annual Report
Schwab Fundamental U.S. Broad
Market Index ETF
Financial Statements
Financial
Highlights
| 3/1/20–
2/28/21 |
3/1/19–
2/29/20 |
3/1/18–
2/28/19 |
3/1/17–
2/28/18 |
3/1/16–
2/28/17 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $37.17 | $37.60 | $36.95 | $33.82 | $27.37 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss)1 | 0.92 | 0.94 | 0.84 | 0.75 | 0.67 | |
| Net realized and unrealized gains (losses) | 11.13 | (0.43) | 0.62 | 3.09 | 6.45 | |
| Total from investment operations | 12.05 | 0.51 | 1.46 | 3.84 | 7.12 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.96) | (0.94) | (0.81) | (0.71) | (0.67) | |
| Net asset value at end of period | $48.26 | $37.17 | $37.60 | $36.95 | $33.82 | |
| Total return | 33.35% | 1.25% | 3.98% | 11.51% | 26.32% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Total expenses | 0.25% | 0.25% | 0.25% | 0.25% | 0.32% | |
| Net investment income (loss) | 2.36% | 2.38% | 2.26% | 2.14% | 2.17% | |
| Portfolio turnover rate2 | 14% | 13% | 11% | 10% | 10% | |
| Net assets, end of period (x 1,000) | $284,726 | $262,018 | $276,382 | $260,469 | $263,785 | |
1
Calculated based on the average shares outstanding during
the period.
2
Portfolio turnover rate excludes securities received or
delivered from processing of in-kind creations or redemptions.
26
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Broad
Market Index ETF
Portfolio Holdings as of
February 28, 2021
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 U.S. Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-PORT Part F. The fund’s Form N-PORT Part F is available on the SEC’s website at
www.sec.gov. You can also obtain this information at no cost on the fund’s website at www.schwabfunds.com/schwabetfs_prospectus, by calling
1-866-414-6349, or by sending an email request to orders@mysummaryprospectus.com. The fund also makes available its complete schedule of portfolio holdings on a daily basis on
the fund’s website.
27
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Broad
Market Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
28
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Broad
Market Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
29
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Broad
Market Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
30
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Broad
Market Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
31
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Broad
Market Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
32
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Broad
Market Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
33
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Broad
Market Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
34
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Broad
Market Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
35
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Broad
Market Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
36
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Broad
Market Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
37
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Broad
Market Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
38
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Broad
Market Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
39
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Broad
Market Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
The fund owns shares of an affiliate, The Charles
Schwab Corp., since that company is included in its index. Below is the summary of investment activities involving The Charles Schwab Corp. shares owned by the fund during the period ended February 28, 2021:
|
Value at 2/29/20 |
Gross
Purchases |
Gross
Sales |
Realized
Gains(Losses) |
Net
change in unrealized appreciation (depreciation) |
Value at 2/28/21 |
Balance
of Shares Held at 2/28/21 |
Dividends
Received | |
| The Charles Schwab Corp. | $159,373 | $117,673 | ($34,080) | $5,208 | $122,393 | $370,567 | 6,004 | $3,538 |
The following is a summary of the inputs used to
value the fund’s investments as of February 28, 2021 (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 | |
| Assets | |||||
| Common Stock1 | $269,914,474 | $— | $— | $269,914,474 | |
| Pharmaceuticals, Biotechnology & Life Sciences | 13,992,606 | — | 12,693 | 14,005,299 | |
| Other Investment Companies1 | 2,370,224 | — | — | 2,370,224 | |
| Liabilities | |||||
| Futures Contracts2 | (12,884) | — | — | (12,884) | |
| Total | $286,264,420 | $— | $12,693 | $286,277,113 |
| 1 | As categorized in Portfolio Holdings. |
| 2 | Futures contracts are valued at unrealized appreciation or depreciation. |
Fund investments in mutual funds and ETFs are
classified as Level 1, without consideration to the classification level of the underlying securities held by the mutual funds and ETFs, which could be Level 1, Level 2 or Level 3.
40
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Broad
Market Index ETF
Statement of Assets and Liabilities
As of February 28, 2021
| Assets | ||
| Investments in affiliated issuer, at value (cost $224,086) | $370,567 | |
| Investments in unaffiliated issuers, at value (cost $213,887,683) including securities on loan of $1,688,800 | 284,077,830 | |
| Collateral invested for securities on loan, at value (cost $1,841,600) | 1,841,600 | |
| Deposit with broker for futures contracts | 44,000 | |
| Receivables: | ||
| Investments sold | 26,099 | |
| Dividends | 579,032 | |
| Income from securities on loan | + | 4,525 |
| Total assets | 286,943,653 | |
| Liabilities | ||
| Collateral held for securities on loan | 1,841,600 | |
| Payables: | ||
| Investments bought | 319,245 | |
| Management fees | 54,247 | |
| Variation margin on futures contracts | + | 2,820 |
| Total liabilities | 2,217,912 | |
| Net Assets | ||
| Total assets | 286,943,653 | |
| Total liabilities | – | 2,217,912 |
| Net assets | $284,725,741 | |
| Net Assets by Source | ||
| Capital received from investors | 227,396,481 | |
| Total distributable earnings | 57,329,260 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $284,725,741 | 5,900,000 | $48.26 | ||
41
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Broad
Market Index ETF
Statement of Operations
For the period March 1, 2020 through February 28, 2021
| Investment Income | ||
| Dividends received from affiliated issuer | $3,538 | |
| Dividends received from unaffiliated issuers (net of foreign withholding tax of $983) | 6,195,919 | |
| Securities on loan, net | + | 89,351 |
| Total investment income | 6,288,808 | |
| Expenses | ||
| Management fees | 600,045 | |
| Total expenses | – | 600,045 |
| Net investment income | 5,688,763 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized losses on affiliated issuer | (2,120) | |
| Net realized losses on unaffiliated issuers | (7,798,906) | |
| Net realized gains on in-kind redemptions on affiliated issuer | 7,328 | |
| Net realized gains on in-kind redemptions on unaffiliated issuers | 21,887,954 | |
| Net realized gains on futures contracts | + | 17,863 |
| Net realized gains | 14,112,119 | |
| Net change in unrealized appreciation (depreciation) on affiliated issuer | 122,393 | |
| Net change in unrealized appreciation (depreciation) on unaffiliated issuers | 48,048,436 | |
| Net change in unrealized appreciation (depreciation) on futures contracts | + | 65,694 |
| Net change in unrealized appreciation (depreciation) | + | 48,236,523 |
| Net realized and unrealized gains | 62,348,642 | |
| Increase in net assets resulting from operations | $68,037,405 | |
42
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Broad
Market Index ETF
Statement of Changes in Net Assets
For the current and prior report periods
| Operations | ||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||
| Net investment income | $5,688,763 | $6,810,274 | ||
| Net realized gains | 14,112,119 | 8,716,290 | ||
| Net change in unrealized appreciation (depreciation) | + | 48,236,523 | (10,833,909) | |
| Increase in net assets resulting from operations | 68,037,405 | 4,692,655 | ||
| Distributions to Shareholders | ||||
| Total distributions | ($6,024,890) | ($6,831,860) | ||
| Transactions in Fund Shares | ||||||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 500,000 | $20,303,160 | 450,000 | $17,693,623 | ||||
| Shares redeemed | + | (1,650,000) | (59,607,587) | (750,000) | (29,918,728) | |||
| Net transactions in fund shares | (1,150,000) | ($39,304,427) | (300,000) | ($12,225,105) | ||||
| Shares Outstanding and Net Assets | ||||||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 7,050,000 | $262,017,653 | 7,350,000 | $276,381,963 | ||||
| Total increase (decrease) | + | (1,150,000) | 22,708,088 | (300,000) | (14,364,310) | |||
| End of period | 5,900,000 | $284,725,741 | 7,050,000 | $262,017,653 | ||||
43
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Large
Company Index ETF
Financial Statements
Financial
Highlights
| 3/1/20–
2/28/21 |
3/1/19–
2/29/20 |
3/1/18–
2/28/19 |
3/1/17–
2/28/18 |
3/1/16–
2/28/17 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $37.67 | $37.83 | $37.20 | $33.91 | $27.57 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss)1 | 0.98 | 0.99 | 0.87 | 0.78 | 0.70 | |
| Net realized and unrealized gains (losses) | 10.88 | (0.20) | 0.57 | 3.21 | 6.29 | |
| Total from investment operations | 11.86 | 0.79 | 1.44 | 3.99 | 6.99 | |
| Less distributions: | ||||||
| Distributions from net investment income | (1.04) | (0.95) | (0.81) | (0.70) | (0.65) | |
| Net asset value at end of period | $48.49 | $37.67 | $37.83 | $37.20 | $33.91 | |
| Total return | 32.40% | 1.98% | 3.92% | 11.91% | 25.66% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Total expenses | 0.25% | 0.25% | 0.25% | 0.25% | 0.32% | |
| Net investment income (loss) | 2.49% | 2.47% | 2.33% | 2.22% | 2.26% | |
| Portfolio turnover rate2 | 13% | 12% | 11% | 9% | 10% | |
| Net assets, end of period (x 1,000) | $5,862,523 | $5,557,983 | $4,596,260 | $4,016,040 | $2,197,623 | |
1
Calculated based on the average shares outstanding during
the period.
2
Portfolio turnover rate excludes securities received or
delivered from processing of in-kind creations or redemptions.
44
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Large
Company Index ETF
Portfolio Holdings as of
February 28, 2021
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 U.S. Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-PORT Part F. The fund’s Form N-PORT Part F is available on the SEC’s website at
www.sec.gov. You can also obtain this information at no cost on the fund’s website at www.schwabfunds.com/schwabetfs_prospectus, by calling
1-866-414-6349, or by sending an email request to orders@mysummaryprospectus.com. The fund also makes available its complete schedule of portfolio holdings on a daily basis on
the fund’s website.
45
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Large
Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
46
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Large
Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
47
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Large
Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
48
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Large
Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
49
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Large
Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
50
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Large
Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
The fund owns shares of an affiliate, The Charles
Schwab Corp., since that company is included in its index. Below is the summary of investment activities involving The Charles Schwab Corp. shares owned by the fund during the period ended February 28, 2021:
|
Value at 2/29/20 |
Gross
Purchases |
Gross
Sales |
Realized
Gains(Losses) |
Net
change in unrealized appreciation (depreciation) |
Value at 2/28/21 |
Balance
of Shares Held at 2/28/21 |
Dividends
Received | |
| The Charles Schwab Corp. | $3,669,008 | $3,251,948 | ($1,335,246) | $160,562 | $2,656,906 | $8,403,178 | 136,150 | $80,906 |
The following is a summary of the inputs used to
value the fund’s investments as of February 28, 2021 (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 | |
| Assets | |||||
| Common Stock1 | $5,851,751,349 | $— | $— | $5,851,751,349 | |
| Other Investment Companies1 | 47,657,818 | — | — | 47,657,818 | |
| Liabilities | |||||
| Futures Contracts2 | (276,776) | — | — | (276,776) | |
| Total | $5,899,132,391 | $— | $— | $5,899,132,391 |
| 1 | As categorized in Portfolio Holdings. |
| 2 | Futures contracts are valued at unrealized appreciation or depreciation. |
Fund investments in mutual funds are classified as
Level 1, without consideration to the classification level of the underlying securities held by the mutual funds, which could be Level 1, Level 2 or Level 3.
51
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Large
Company Index ETF
Statement of Assets and Liabilities
As of February 28, 2021
| Assets | ||
| Investments in affiliated issuer, at value (cost $5,703,867) | $8,403,178 | |
| Investments in unaffiliated issuers, at value (cost $4,730,156,754) including securities on loan of $37,922,275 | 5,849,676,064 | |
| Collateral invested for securities on loan, at value (cost $41,329,925) | 41,329,925 | |
| Deposit with broker for futures contracts | 583,000 | |
| Receivables: | ||
| Investments sold | 19,160,593 | |
| Fund shares sold | 17,017,544 | |
| Dividends | 12,659,841 | |
| Income from securities on loan | + | 79,978 |
| Total assets | 5,948,910,123 | |
| Liabilities | ||
| Collateral held for securities on loan | 41,329,925 | |
| Payables: | ||
| Investments bought | 19,420,843 | |
| Management fees | 1,113,091 | |
| Fund shares redeemed | 24,474,415 | |
| Variation margin on futures contracts | + | 49,007 |
| Total liabilities | 86,387,281 | |
| Net Assets | ||
| Total assets | 5,948,910,123 | |
| Total liabilities | – | 86,387,281 |
| Net assets | $5,862,522,842 | |
| Net Assets by Source | ||
| Capital received from investors | 4,976,150,110 | |
| Total distributable earnings | 886,372,732 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $5,862,522,842 | 120,900,000 | $48.49 | ||
52
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Large
Company Index ETF
Statement of Operations
For the period March 1, 2020 through February 28, 2021
| Investment Income | ||
| Dividends received from affiliated issuer | $80,906 | |
| Dividends received from unaffiliated issuers (net of foreign withholding tax of $10,540) | 137,729,032 | |
| Securities on loan, net | + | 1,532,323 |
| Total investment income | 139,342,261 | |
| Expenses | ||
| Management fees | 12,688,961 | |
| Total expenses | – | 12,688,961 |
| Net investment income | 126,653,300 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized losses on affiliated issuer | (38,377) | |
| Net realized losses on unaffiliated issuers | (181,804,642) | |
| Net realized gains on in-kind redemptions on affiliated issuer | 198,939 | |
| Net realized gains on in-kind redemptions on unaffiliated issuers | 603,643,345 | |
| Net realized gains on futures contracts | + | 934,942 |
| Net realized gains | 422,934,207 | |
| Net change in unrealized appreciation (depreciation) on affiliated issuer | 2,656,906 | |
| Net change in unrealized appreciation (depreciation) on unaffiliated issuers | 879,117,545 | |
| Net change in unrealized appreciation (depreciation) on futures contracts | + | 1,694,146 |
| Net change in unrealized appreciation (depreciation) | + | 883,468,597 |
| Net realized and unrealized gains | 1,306,402,804 | |
| Increase in net assets resulting from operations | $1,433,056,104 | |
53
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Large
Company Index ETF
Statement of Changes in Net Assets
For the current and prior report periods
| Operations | ||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||
| Net investment income | $126,653,300 | $134,103,915 | ||
| Net realized gains | 422,934,207 | 75,878,897 | ||
| Net change in unrealized appreciation (depreciation) | + | 883,468,597 | (161,320,173) | |
| Increase in net assets resulting from operations | 1,433,056,104 | 48,662,639 | ||
| Distributions to Shareholders | ||||
| Total distributions | ($134,608,220) | ($128,120,700) | ||
| Transactions in Fund Shares | ||||||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 30,500,000 | $1,133,770,691 | 38,750,000 | $1,543,661,840 | ||||
| Shares redeemed | + | (57,150,000) | (2,127,678,557) | (12,700,000) | (502,481,171) | |||
| Net transactions in fund shares | (26,650,000) | ($993,907,866) | 26,050,000 | $1,041,180,669 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 147,550,000 | $5,557,982,824 | 121,500,000 | $4,596,260,216 | ||||
| Total increase (decrease) | + | (26,650,000) | 304,540,018 | 26,050,000 | 961,722,608 | |||
| End of period | 120,900,000 | $5,862,522,842 | 147,550,000 | $5,557,982,824 | ||||
54
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Small
Company Index ETF
Financial Statements
Financial
Highlights
| 3/1/20–
2/28/21 |
3/1/19–
2/29/20 |
3/1/18–
2/28/19 |
3/1/17–
2/28/18 |
3/1/16–
2/28/17 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $34.73 | $38.08 | $36.90 | $34.89 | $26.47 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss)1 | 0.49 | 0.55 | 0.59 | 0.52 | 0.45 | |
| Net realized and unrealized gains (losses) | 14.09 | (3.34) | 1.14 | 1.98 | 8.37 | |
| Total from investment operations | 14.58 | (2.79) | 1.73 | 2.50 | 8.82 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.56) | (0.56) | (0.55) | (0.49) | (0.40) | |
| Net asset value at end of period | $48.75 | $34.73 | $38.08 | $36.90 | $34.89 | |
| Total return | 42.73% | (7.46%) | 4.69% | 7.22% | 33.56% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Total expenses | 0.25% | 0.25% | 0.25% | 0.25% | 0.32% | |
| Net investment income (loss) | 1.40% | 1.43% | 1.53% | 1.45% | 1.43% | |
| Portfolio turnover rate2 | 24% | 26% | 23% | 21% | 23% | |
| Net assets, end of period (x 1,000) | $4,085,618 | $3,424,710 | $3,402,783 | $2,782,002 | $1,568,402 | |
1
Calculated based on the average shares outstanding during
the period.
2
Portfolio turnover rate excludes securities received or
delivered from processing of in-kind creations or redemptions.
55
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Small
Company Index ETF
Portfolio Holdings as of
February 28, 2021
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 U.S. Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-PORT Part F. The fund’s Form N-PORT Part F is available on the SEC’s website at
www.sec.gov. You can also obtain this information at no cost on the fund’s website at www.schwabfunds.com/schwabetfs_prospectus, by calling
1-866-414-6349, or by sending an email request to orders@mysummaryprospectus.com. The fund also makes available its complete schedule of portfolio holdings on a daily basis on
the fund’s website.
56
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Small
Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
57
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Small
Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
58
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Small
Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
59
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Small
Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
60
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Small
Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
61
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Small
Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
62
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Small
Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
63
Schwab Fundamental Index ETFs | Annual Report
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Schwab Fundamental U.S. Small
Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
| Number
of Contracts |
Notional
Amount ($) |
Current
Value/ Unrealized Depreciation ($) | ||||
| Futures Contracts | ||||||
| Long | ||||||
| Russell 2000 Index, e-mini, expires 03/19/21 | 40 | 4,398,400 | (74,680) | |||
| * | Non-income producing security. |
| (a) | All or a portion of this security is on loan. Securities on loan were valued at $16,139,000. |
| (b) | Fair-valued by management using significant unobservable inputs in accordance with procedures approved by the fund’s Board of Trustees. |
| (c) | The rate shown is the 7-day yield. |
| REIT — | Real Estate Investment Trust |
The following is a summary of the inputs used to value the
fund’s investments as of February 28, 2021 (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 | |
| Assets | |||||
| Common Stock1 | $4,004,630,938 | $— | $— | $4,004,630,938 | |
| Pharmaceuticals, Biotechnology & Life Sciences | 75,041,900 | — | 2,033,608 | 77,075,508 | |
| Other Investment Companies1 | 18,593,207 | — | — | 18,593,207 | |
| Liabilities | |||||
| Futures Contracts2 | (74,680) | — | — | (74,680) | |
| Total | $4,098,191,365 | $— | $2,033,608 | $4,100,224,973 |
| 1 | As categorized in Portfolio Holdings. |
| 2 | Futures contracts are valued at unrealized appreciation or depreciation. |
Fund investments in mutual funds are classified as Level 1,
without consideration to the classification level of the underlying securities held by the mutual funds, which could be Level 1, Level 2 or Level 3.
64
Schwab Fundamental Index ETFs | Annual Report
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Schwab Fundamental U.S. Small
Company Index ETF
Statement of Assets and Liabilities
As of February 28, 2021
| Assets | ||
| Investments in unaffiliated issuers, at value (cost $3,187,762,977) including securities on loan of $16,139,000 | $4,083,087,823 | |
| Collateral invested for securities on loan, at value (cost $17,211,830) | 17,211,830 | |
| Deposit with broker for futures contracts | 642,000 | |
| Receivables: | ||
| Investments sold | 41,847,914 | |
| Fund shares sold | 4,875,441 | |
| Dividends | 2,942,495 | |
| Income from securities on loan | 43,398 | |
| Variation margin on futures contracts | + | 856 |
| Total assets | 4,150,651,757 | |
| Liabilities | ||
| Collateral held for securities on loan | 17,211,830 | |
| Payables: | ||
| Investments bought | 15,238,904 | |
| Management fees | 787,363 | |
| Fund shares redeemed | + | 31,795,249 |
| Total liabilities | 65,033,346 | |
| Net Assets | ||
| Total assets | 4,150,651,757 | |
| Total liabilities | – | 65,033,346 |
| Net assets | $4,085,618,411 | |
| Net Assets by Source | ||
| Capital received from investors | 3,680,225,275 | |
| Total distributable earnings | 405,393,136 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $4,085,618,411 | 83,800,000 | $48.75 | ||
65
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental U.S. Small
Company Index ETF
Statement of Operations
For the period March 1, 2020 through February 28, 2021
| Investment Income | ||
| Dividends received from unaffiliated issuers (net of foreign withholding tax of $96,380) | $49,467,831 | |
| Securities on loan, net | + | 4,389,339 |
| Total investment income | 53,857,170 | |
| Expenses | ||
| Management fees | 8,141,286 | |
| Total expenses | – | 8,141,286 |
| Net investment income | 45,715,884 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized losses on unaffiliated issuers | (340,381,105) | |
| Net realized gains on in-kind redemptions on unaffiliated issuers | 414,516,200 | |
| Net realized gains on futures contracts | + | 228,597 |
| Net realized gains | 74,363,692 | |
| Net change in unrealized appreciation (depreciation) on unaffiliated issuers | 1,137,880,398 | |
| Net change in unrealized appreciation (depreciation) on futures contracts | + | 620,009 |
| Net change in unrealized appreciation (depreciation) | + | 1,138,500,407 |
| Net realized and unrealized gains | 1,212,864,099 | |
| Increase in net assets resulting from operations | $1,258,579,983 | |
66
Schwab Fundamental Index ETFs | Annual Report
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Schwab Fundamental U.S. Small
Company Index ETF
Statement of Changes in Net Assets
For the current and prior report periods
| Operations | ||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||
| Net investment income | $45,715,884 | $50,275,344 | ||
| Net realized gains | 74,363,692 | 111,141,879 | ||
| Net change in unrealized appreciation (depreciation) | + | 1,138,500,407 | (444,489,381) | |
| Increase (decrease) in net assets resulting from operations | 1,258,579,983 | (283,072,158) | ||
| Distributions to Shareholders | ||||
| Total distributions | ($51,561,985) | ($50,954,980) | ||
| Transactions in Fund Shares | ||||||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 30,900,000 | $953,673,482 | 27,150,000 | $1,041,018,392 | ||||
| Shares redeemed | + | (45,700,000) | (1,499,782,894) | (17,900,000) | (685,064,295) | |||
| Net transactions in fund shares | (14,800,000) | ($546,109,412) | 9,250,000 | $355,954,097 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 98,600,000 | $3,424,709,825 | 89,350,000 | $3,402,782,866 | ||||
| Total increase (decrease) | + | (14,800,000) | 660,908,586 | 9,250,000 | 21,926,959 | |||
| End of period | 83,800,000 | $4,085,618,411 | 98,600,000 | $3,424,709,825 | ||||
67
Schwab Fundamental Index ETFs | Annual Report
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Schwab Fundamental
International Large Company Index ETF
Financial Statements
Financial
Highlights
| 3/1/20–
2/28/21 |
3/1/19–
2/29/20 |
3/1/18–
2/28/19 |
3/1/17–
2/28/18 |
3/1/16–
2/28/17 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $25.24 | $27.54 | $30.28 | $26.00 | $22.08 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss)1 | 0.70 | 0.91 | 0.94 | 0.80 | 0.74 | |
| Net realized and unrealized gains (losses) | 5.64 | (2.29) | (2.81) | 4.19 | 3.79 | |
| Total from investment operations | 6.34 | (1.38) | (1.87) | 4.99 | 4.53 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.64) | (0.92) | (0.87) | (0.71) | (0.61) | |
| Net asset value at end of period | $30.94 | $25.24 | $27.54 | $30.28 | $26.00 | |
| Total return | 25.47% | (5.32%) | (6.00%) | 19.19% | 20.62% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Total expenses | 0.25% | 0.25% | 0.25% | 0.25% | 0.32% | |
| Net investment income (loss) | 2.74% | 3.27% | 3.29% | 2.76% | 2.98% | |
| Portfolio turnover rate2 | 15% | 20% | 14% | 10% | 11% | |
| Net assets, end of period (x 1,000) | $5,721,053 | $4,416,696 | $4,083,580 | $3,630,569 | $1,928,861 | |
1
Calculated based on the average shares outstanding during
the period.
2
Portfolio turnover rate excludes securities received or
delivered from processing of in-kind creations or redemptions.
68
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental
International Large Company Index ETF
Portfolio Holdings as of
February 28, 2021
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 U.S. Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-PORT Part F. The fund’s Form N-PORT Part F is available on the SEC’s website at
www.sec.gov. You can also obtain this information at no cost on the fund’s website at www.schwabfunds.com/schwabetfs_prospectus, by calling
1-866-414-6349, or by sending an email request to orders@mysummaryprospectus.com. The fund also makes available its complete schedule of portfolio holdings on a daily basis on
the fund’s website.
69
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental
International Large Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
70
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental
International Large Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
71
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental
International Large Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
72
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental
International Large Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
73
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental
International Large Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
74
Schwab Fundamental Index ETFs | Annual Report
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Schwab Fundamental
International Large Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
75
Schwab Fundamental Index ETFs | Annual Report
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Schwab Fundamental
International Large Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
76
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental
International Large Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
The following is a summary of the inputs used to
value the fund’s investments as of February 28, 2021 (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 | |
| Assets | |||||
| Common Stock1 | $5,530,765,007 | $— | $— | $5,530,765,007 | |
| Hong Kong | 98,430,847 | — | 609,951 | 99,040,798 | |
| Preferred Stock1 | 68,111,192 | — | — | 68,111,192 | |
| Rights 1 | |||||
| Republic of Korea1 | — | — | 590,405 | 590,405 | |
| Other Investment Companies1 | 22,521,346 | — | — | 22,521,346 | |
| Liabilities | |||||
| Futures Contracts2 | (357,873) | — | — | (357,873) | |
| Total | $5,719,470,519 | $— | $1,200,356 | $5,720,670,875 |
| 1 | As categorized in Portfolio Holdings. |
| 2 | Futures contracts are valued at unrealized appreciation or depreciation. |
Fund investments in mutual funds are classified as
Level 1, without consideration to the classification level of the underlying securities held by the mutual funds, which could be Level 1, Level 2 or Level 3.
77
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental
International Large Company Index ETF
Statement of Assets and Liabilities
As of February 28, 2021
| Assets | ||
| Investments in unaffiliated issuers, at value (cost $4,973,919,402) including securities on loan of $13,534,062 | $5,706,501,070 | |
| Collateral invested for securities on loan, at value (cost $14,527,678) | 14,527,678 | |
| Deposit with broker for futures contracts | 1,910,304 | |
| Foreign currency, at value (cost $6,117,783) | 6,066,713 | |
| Receivables: | ||
| Dividends | 14,749,760 | |
| Foreign tax reclaims | 2,868,050 | |
| Income from securities on loan | + | 81,088 |
| Total assets | 5,746,704,663 | |
| Liabilities | ||
| Collateral held for securities on loan | 14,527,678 | |
| Payables: | ||
| Investments bought | 9,756,851 | |
| Management fees | 1,092,243 | |
| Variation margin on futures contracts | + | 275,025 |
| Total liabilities | 25,651,797 | |
| Net Assets | ||
| Total assets | 5,746,704,663 | |
| Total liabilities | – | 25,651,797 |
| Net assets | $5,721,052,866 | |
| Net Assets by Source | ||
| Capital received from investors | 5,194,194,272 | |
| Total distributable earnings | 526,858,594 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $5,721,052,866 | 184,900,000 | $30.94 | ||
78
Schwab Fundamental Index ETFs | Annual Report
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Schwab Fundamental
International Large Company Index ETF
Statement of Operations
For the period March 1, 2020 through February 28, 2021
| Investment Income | ||
| Dividends received from unaffiliated issuers (net of foreign withholding tax of $14,105,004) | $124,388,872 | |
| Income from non-cash dividends | 8,686,417 | |
| Securities on loan, net | + | 1,224,984 |
| Total investment income | 134,300,273 | |
| Expenses | ||
| Management fees | 11,183,146 | |
| Professional fees | + | 70,423* |
| Total expenses | 11,253,569 | |
| Expense reduction by CSIM | - | 70,423* |
| Net expenses | – | 11,183,146 |
| Net investment income | 123,117,127 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized losses on unaffiliated issuers | (94,735,736) | |
| Net realized gains on in-kind redemptions on unaffiliated issuers | 147,230,489 | |
| Net realized gains on futures contracts | 4,565,531 | |
| Net realized gains on foreign currency transactions | + | 232,313 |
| Net realized gains | 57,292,597 | |
| Net change in unrealized appreciation (depreciation) on unaffiliated issuers | 977,945,572 | |
| Net change in unrealized appreciation (depreciation) on futures contracts | 1,422,549 | |
| Net change in unrealized appreciation (depreciation) on foreign currency translations | + | 85,566 |
| Net change in unrealized appreciation (depreciation) | + | 979,453,687 |
| Net realized and unrealized gains | 1,036,746,284 | |
| Increase in net assets resulting from operations | $1,159,863,411 | |
| * | Professional fees associated with the filing of tax claims in the European Union deemed to be non-routine expenses of the fund. See financial notes 2 (d) and 4 for additional information. |
79
Schwab Fundamental Index ETFs | Annual Report
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Schwab Fundamental
International Large Company Index ETF
Statement of Changes in Net Assets
For the current and prior report periods
| Operations | ||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||
| Net investment income | $123,117,127 | $145,349,722 | ||
| Net realized gains (losses) | 57,292,597 | (6,382,488) | ||
| Net change in unrealized appreciation (depreciation) | + | 979,453,687 | (402,664,183) | |
| Increase (decrease) in net assets resulting from operations | 1,159,863,411 | (263,696,949) | ||
| Distributions to Shareholders | ||||
| Total distributions | ($114,361,960) | ($150,746,760) | ||
| Transactions in Fund Shares | ||||||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 40,300,000 | $981,805,769 | 28,200,000 | $790,856,322 | ||||
| Shares redeemed | + | (30,400,000) | (722,949,976) | (1,500,000) | (43,296,950) | |||
| Net transactions in fund shares | 9,900,000 | $258,855,793 | 26,700,000 | $747,559,372 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 175,000,000 | $4,416,695,622 | 148,300,000 | $4,083,579,959 | ||||
| Total increase | + | 9,900,000 | 1,304,357,244 | 26,700,000 | 333,115,663 | |||
| End of period | 184,900,000 | $5,721,052,866 | 175,000,000 | $4,416,695,622 | ||||
80
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental
International Small Company Index ETF
Financial Statements
Financial
Highlights
| 3/1/20–
2/28/21 |
3/1/19–
2/29/20 |
3/1/18–
2/28/19 |
3/1/17–
2/28/18 |
3/1/16–
2/28/17 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $28.53 | $31.23 | $36.02 | $29.99 | $24.81 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss)1 | 0.53 | 0.80 | 0.79 | 0.62 | 0.55 | |
| Net realized and unrealized gains (losses) | 7.66 | (2.60) | (4.82) | 6.11 | 5.18 | |
| Total from investment operations | 8.19 | (1.80) | (4.03) | 6.73 | 5.73 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.61) | (0.90) | (0.76) | (0.70) | (0.55) | |
| Net asset value at end of period | $36.11 | $28.53 | $31.23 | $36.02 | $29.99 | |
| Total return | 28.97% | (6.06%) | (11.06%) | 22.47% | 23.26% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Total expenses | 0.39% | 0.39% | 0.39% | 0.39% | 0.46% | |
| Net investment income (loss) | 1.78% | 2.54% | 2.38% | 1.83% | 1.94% | |
| Portfolio turnover rate2 | 24% | 31% | 25% | 18% | 25% | |
| Net assets, end of period (x 1,000) | $2,292,915 | $1,900,303 | $1,842,568 | $1,811,898 | $866,749 | |
1
Calculated based on the average shares outstanding during
the period.
2
Portfolio turnover rate excludes securities received or
delivered from processing of in-kind creations or redemptions.
81
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental
International Small Company Index ETF
Portfolio Holdings as of
February 28, 2021
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 U.S. Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-PORT Part F. The fund’s Form N-PORT Part F is available on the SEC’s website at
www.sec.gov. You can also obtain this information at no cost on the fund’s website at www.schwabfunds.com/schwabetfs_prospectus, by calling
1-866-414-6349, or by sending an email request to orders@mysummaryprospectus.com. The fund also makes available its complete schedule of portfolio holdings on a daily basis on
the fund’s website.
82
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental
International Small Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
83
Schwab Fundamental Index ETFs | Annual Report
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Schwab Fundamental
International Small Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
84
Schwab Fundamental Index ETFs | Annual Report
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Schwab Fundamental
International Small Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
85
Schwab Fundamental Index ETFs | Annual Report
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Schwab Fundamental
International Small Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
86
Schwab Fundamental Index ETFs | Annual Report
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Schwab Fundamental
International Small Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
87
Schwab Fundamental Index ETFs | Annual Report
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Schwab Fundamental
International Small Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
88
Schwab Fundamental Index ETFs | Annual Report
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Schwab Fundamental
International Small Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
89
Schwab Fundamental Index ETFs | Annual Report
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Schwab Fundamental
International Small Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
90
Schwab Fundamental Index ETFs | Annual Report
See financial notes
Schwab Fundamental
International Small Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
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Schwab Fundamental
International Small Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
92
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Schwab Fundamental
International Small Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
93
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Schwab Fundamental
International Small Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
94
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Schwab Fundamental
International Small Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
95
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Schwab Fundamental
International Small Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
The
following is a summary of the inputs used to value the fund’s investments as of February 28, 2021 (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 | |
| Assets | |||||
| Common Stock1 | $1,701,940,636 | $— | $— | $1,701,940,636 | |
| Australia | 132,869,668 | — | 1,072,788 | 133,942,456 | |
| Hong Kong | 96,956,509 | — | — * | 96,956,509 | |
| Italy | 54,728,407 | — | 10,946 | 54,739,353 | |
| Luxembourg | — | — | — * | — | |
| Portugal | 7,771,832 | — | — * | 7,771,832 | |
| Spain | 31,332,465 | — | 724,418 | 32,056,883 | |
| United Kingdom | 248,467,963 | — | 87,946 | 248,555,909 | |
| Preferred Stock1 | 7,642,656 | — | — | 7,642,656 | |
| Rights 1 | |||||
| United Kingdom | — | — | 255,558 | 255,558 | |
| Other Investment Companies1 | 35,528,849 | — | — | 35,528,849 | |
| Liabilities | |||||
| Futures Contracts2 | (202,115) | — | — | (202,115) | |
| Total | $2,317,036,870 | $— | $2,151,656 | $2,319,188,526 |
| * | Level 3 amount shown includes securities determined to have no value at February 28, 2021. |
| 1 | As categorized in Portfolio Holdings. |
| 2 | Futures contracts are valued at unrealized appreciation or depreciation. |
Fund investments in mutual funds are classified as Level 1,
without consideration to the classification level of the underlying securities held by the mutual funds, which could be Level 1, Level 2 or Level 3.
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Schwab Fundamental
International Small Company Index ETF
Statement of Assets and Liabilities
As of February 28, 2021
| Assets | ||
| Investments in unaffiliated issuers, at value (cost $1,943,830,370) including securities on loan of $30,840,773 | $2,286,094,049 | |
| Collateral invested for securities on loan, at value (cost $33,296,592) | 33,296,592 | |
| Deposit with broker for futures contracts | 1,293,600 | |
| Foreign currency, at value (cost $2,989,918) | 2,978,225 | |
| Receivables: | ||
| Investments sold | 9,671 | |
| Dividends | 3,945,027 | |
| Foreign tax reclaims | 1,216,670 | |
| Income from securities on loan | 210,232 | |
| Other assets | + | 645 |
| Total assets | 2,329,044,711 | |
| Liabilities | ||
| Collateral held for securities on loan | 33,296,592 | |
| Payables: | ||
| Investments bought | 2,047,312 | |
| Management fees | 684,041 | |
| Variation margin on futures contracts | + | 101,409 |
| Total liabilities | 36,129,354 | |
| Net Assets | ||
| Total assets | 2,329,044,711 | |
| Total liabilities | – | 36,129,354 |
| Net assets | $2,292,915,357 | |
| Net Assets by Source | ||
| Capital received from investors | 2,124,175,830 | |
| Total distributable earnings | 168,739,527 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $2,292,915,357 | 63,500,000 | $36.11 | ||
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Schwab Fundamental
International Small Company Index ETF
Statement of Operations
For the period March 1, 2020 through February 28, 2021
| Investment Income | ||
| Dividends received from unaffiliated issuers (net of foreign withholding tax of $4,786,283) | $38,629,693 | |
| Securities on loan, net | + | 2,384,712 |
| Total investment income | 41,014,405 | |
| Expenses | ||
| Management fees | 7,350,837 | |
| Professional fees | + | 9,705* |
| Total expenses | 7,360,542 | |
| Expense reduction by CSIM | - | 9,705* |
| Net expenses | – | 7,350,837 |
| Net investment income | 33,663,568 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized losses on unaffiliated issuers | (89,628,657) | |
| Net realized gains on in-kind redemptions on unaffiliated issuers | 74,321,628 | |
| Net realized gains on futures contracts | 1,604,897 | |
| Net realized gains on foreign currency transactions | + | 136,682 |
| Net realized losses | (13,565,450) | |
| Net change in unrealized appreciation (depreciation) on unaffiliated issuers | 486,819,222 | |
| Net change in unrealized appreciation (depreciation) on futures contracts | 205,433 | |
| Net change in unrealized appreciation (depreciation) on foreign currency translations | + | 92,425 |
| Net change in unrealized appreciation (depreciation) | + | 487,117,080 |
| Net realized and unrealized gains | 473,551,630 | |
| Increase in net assets resulting from operations | $507,215,198 | |
| * | Professional fees associated with the filing of tax claims in the European Union deemed to be non-routine expenses of the fund. See financial notes 2 (d) and 4 for additional information. |
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Schwab Fundamental
International Small Company Index ETF
Statement of Changes in Net Assets
For the current and prior report periods
| Operations | ||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||
| Net investment income | $33,663,568 | $50,482,401 | ||
| Net realized losses | (13,565,450) | (10,362,944) | ||
| Net change in unrealized appreciation (depreciation) | + | 487,117,080 | (164,889,280) | |
| Increase (decrease) in net assets resulting from operations | 507,215,198 | (124,769,823) | ||
| Distributions to Shareholders | ||||
| Total distributions | ($38,178,680) | ($57,727,940) | ||
| Transactions in Fund Shares | ||||||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 5,400,000 | $162,294,485 | 8,500,000 | $269,184,367 | ||||
| Shares redeemed | + | (8,500,000) | (238,718,494) | (900,000) | (28,952,009) | |||
| Net transactions in fund shares | (3,100,000) | ($76,424,009) | 7,600,000 | $240,232,358 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 66,600,000 | $1,900,302,848 | 59,000,000 | $1,842,568,253 | ||||
| Total increase (decrease) | + | (3,100,000) | 392,612,509 | 7,600,000 | 57,734,595 | |||
| End of period | 63,500,000 | $2,292,915,357 | 66,600,000 | $1,900,302,848 | ||||
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Schwab Fundamental Emerging
Markets Large Company Index ETF
Financial Statements
Financial
Highlights
| 3/1/20–
2/28/21 |
3/1/19–
2/29/20 |
3/1/18–
2/28/19 |
3/1/17–
2/28/18 |
3/1/16–
2/28/17 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $25.54 | $28.08 | $31.22 | $26.06 | $17.78 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss)1 | 0.79 | 1.02 | 0.85 | 0.71 | 0.49 | |
| Net realized and unrealized gains (losses) | 4.02 | (2.53) | (3.20) | 5.06 | 8.18 | |
| Total from investment operations | 4.81 | (1.51) | (2.35) | 5.77 | 8.67 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.71) | (1.03) | (0.79) | (0.61) | (0.39) | |
| Net asset value at end of period | $29.64 | $25.54 | $28.08 | $31.22 | $26.06 | |
| Total return | 19.12% | (5.74%) | (7.36%) | 22.32% | 49.03% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Total expenses | 0.39% | 0.39% | 0.39% | 0.39% | 0.46% | |
| Net investment income (loss) | 3.11% | 3.61% | 2.99% | 2.48% | 2.14% | |
| Portfolio turnover rate2 | 25% | 32% | 33% | 14% | 14% | |
| Net assets, end of period (x 1,000) | $3,805,524 | $2,574,297 | $2,341,576 | $2,200,763 | $1,011,273 | |
1
Calculated based on the average shares outstanding during
the period.
2
Portfolio turnover rate excludes securities received or
delivered from processing of in-kind creations or redemptions.
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Schwab Fundamental Emerging
Markets Large Company Index ETF
Portfolio Holdings as of
February 28, 2021
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 U.S. Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-PORT Part F. The fund’s Form N-PORT Part F is available on the SEC’s website at
www.sec.gov. You can also obtain this information at no cost on the fund’s website at www.schwabfunds.com/schwabetfs_prospectus, by calling
1-866-414-6349, or by sending an email request to orders@mysummaryprospectus.com. The fund also makes available its complete schedule of portfolio holdings on a daily basis on
the fund’s website.
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Schwab Fundamental Emerging
Markets Large Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
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Schwab Fundamental Emerging
Markets Large Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
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Schwab Fundamental Emerging
Markets Large Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
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Schwab Fundamental Emerging
Markets Large Company Index ETF
Portfolio Holdings as of
February 28, 2021 (continued)
The
following is a summary of the inputs used to value the fund’s investments as of February 28, 2021 (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 | |
| Assets | |||||
| Common Stock1 | $3,625,686,040 | $— | $— | $3,625,686,040 | |
| Philippines | — | — | 9,276,866 | 9,276,866 | |
| Preferred Stock1 | 167,591,687 | — | — | 167,591,687 | |
| Other Investment Company1 | 13,393,049 | — | — | 13,393,049 | |
| Liabilities | |||||
| Futures Contracts2 | (104,320) | — | — | (104,320) | |
| Total | $3,806,566,456 | $— | $9,276,866 | $3,815,843,322 |
| 1 | As categorized in Portfolio Holdings. |
| 2 | Futures contracts are valued at unrealized appreciation or depreciation. |
Fund investments in mutual funds are classified as Level 1,
without consideration to the classification level of the underlying securities held by the mutual funds, which could be Level 1, Level 2 or Level 3.
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Schwab Fundamental Emerging
Markets Large Company Index ETF
Statement of Assets and Liabilities
As of February 28, 2021
| Assets | ||
| Investments in unaffiliated issuers, at value (cost $3,173,782,710) | $3,815,947,642 | |
| Deposit with broker for futures contracts | 515,160 | |
| Foreign currency, at value (cost $1,475,209) | 1,463,749 | |
| Receivables: | ||
| Dividends | 2,455,538 | |
| Income from securities on loan | + | 527 |
| Total assets | 3,820,382,616 | |
| Liabilities | ||
| Payables: | ||
| Management fees | 1,155,264 | |
| Foreign capital gains tax | 13,654,914 | |
| Variation margin on futures contracts | + | 48,200 |
| Total liabilities | 14,858,378 | |
| Net Assets | ||
| Total assets | 3,820,382,616 | |
| Total liabilities | – | 14,858,378 |
| Net assets | $3,805,524,238 | |
| Net Assets by Source | ||
| Capital received from investors | 3,386,797,569 | |
| Total distributable earnings | 418,726,669 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $3,805,524,238 | 128,400,000 | $29.64 | ||
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Schwab Fundamental Emerging
Markets Large Company Index ETF
Statement of Operations
For the period March 1, 2020 through February 28, 2021
| Investment Income | ||
| Dividends received from unaffiliated issuers (net of foreign withholding tax of $15,175,575) | $103,423,258 | |
| Securities on loan, net | + | 94,898 |
| Total investment income | 103,518,156 | |
| Expenses | ||
| Management fees | 11,500,249 | |
| Professional fees | + | 11,464* |
| Total expenses | 11,511,713 | |
| Expense reduction by CSIM | - | 11,464* |
| Net expenses | – | 11,500,249 |
| Net investment income | 92,017,907 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized losses on unaffiliated issuers (net of foreign capital gains tax of $8,706) | (121,866,337) | |
| Net realized gains on in-kind redemptions on unaffiliated issuers | 4,010,997 | |
| Net realized gains on futures contracts | 3,918,931 | |
| Net realized losses on foreign currency transactions | + | (1,705,853) |
| Net realized losses | (115,642,262) | |
| Net change in unrealized appreciation (depreciation) on unaffiliated issuers (net of change in foreign capital gains tax of $13,654,914) | 652,121,840 | |
| Net change in unrealized appreciation (depreciation) on futures contracts | 473,784 | |
| Net change in unrealized appreciation (depreciation) on foreign currency translations | + | 148,752 |
| Net change in unrealized appreciation (depreciation) | + | 652,744,376 |
| Net realized and unrealized gains | 537,102,114 | |
| Increase in net assets resulting from operations | $629,120,021 | |
| * | Professional fees associated with the filing of tax claims in the European Union deemed to be non-routine expenses of the fund. See financial notes 2 (d) and 4 for additional information. |
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Schwab Fundamental Emerging
Markets Large Company Index ETF
Statement of Changes in Net Assets
For the current and prior report periods
| Operations | ||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||
| Net investment income | $92,017,907 | $92,667,381 | ||
| Net realized gains (losses) | (115,642,262) | 11,066,853 | ||
| Net change in unrealized appreciation (depreciation) | + | 652,744,376 | (270,561,241) | |
| Increase (decrease) in net assets resulting from operations | 629,120,021 | (166,827,007) | ||
| Distributions to Shareholders | ||||
| Total distributions | ($87,400,780) | ($99,031,790) | ||
| Transactions in Fund Shares | ||||||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 31,300,000 | $765,612,459 | 24,000,000 | $683,687,511 | ||||
| Shares redeemed | + | (3,700,000) | (76,104,258) | (6,600,000) | (185,107,560) | |||
| Net transactions in fund shares | 27,600,000 | $689,508,201 | 17,400,000 | $498,579,951 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 3/1/20-2/28/21 | 3/1/19-2/29/20 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 100,800,000 | $2,574,296,796 | 83,400,000 | $2,341,575,642 | ||||
| Total increase | + | 27,600,000 | 1,231,227,442 | 17,400,000 | 232,721,154 | |||
| End of period | 128,400,000 | $3,805,524,238 | 100,800,000 | $2,574,296,796 | ||||
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See financial notes
Schwab Fundamental Index
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 Fundamental U.S. Broad Market Index ETF | Schwab U.S. Dividend Equity ETF |
| Schwab Fundamental U.S. Large Company Index ETF | Schwab U.S. REIT ETF |
| Schwab Fundamental U.S. Small Company Index ETF | Schwab International Equity ETF |
| Schwab Fundamental International Large Company Index ETF | Schwab International Small-Cap Equity ETF |
| Schwab Fundamental International Small Company Index ETF | Schwab Emerging Markets Equity ETF |
| Schwab Fundamental Emerging Markets Large Company Index ETF | Schwab U.S. TIPS ETF |
| Schwab U.S. Broad Market ETF | Schwab Short-Term U.S. Treasury ETF |
| Schwab 1000 Index® ETF | Schwab Intermediate-Term U.S. Treasury ETF |
| Schwab U.S. Large-Cap ETF | Schwab Long-Term U.S. Treasury ETF |
| Schwab U.S. Large-Cap Growth ETF | Schwab U.S. Aggregate Bond ETF |
| Schwab U.S. Large-Cap Value ETF | Schwab 1-5 Year Corporate Bond ETF |
| Schwab U.S. Mid-Cap ETF | Schwab 5-10 Year Corporate Bond ETF |
| Schwab U.S. Small-Cap 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 institutional investors who
have entered into an authorized participant agreement 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). A chart showing the frequency at which each fund’s daily closing market price was at a discount or premium to each fund’s NAV can be found at www.schwabfunds.com.
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 (FASB) 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 mutual funds and
exchange-traded funds (ETFs) referred to as “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) and available on the SEC’s website at www.sec.gov.
(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 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:
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Schwab Fundamental Index
ETFs
Financial Notes
(continued)
2. Significant
Accounting Policies (continued):
•
Securities traded on an exchange or over-the-counter: Traded securities are valued at the closing value for the day, or, on days when no closing value has been reported, at the mean of the most recent bid
and ask quotes. Securities that are primarily traded on foreign exchanges are valued at the official closing price or the last sales price on the exchange where the securities are principally traded with these values then translated into U.S.
dollars at the current exchange rate, unless these securities are fair valued as discussed below.
•
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 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.
• Futures contracts: Futures contracts are valued at their settlement prices as of the close of their exchanges.
• Mutual 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, mutual funds, ETFs and futures contracts. Investments in mutual funds are valued daily at
their NAVs, and investments in ETFs are valued daily at the last reported sale price or the official closing price, which are classified as Level 1 prices, without consideration to the classification level of the underlying securities 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.
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Schwab Fundamental Index
ETFs
Financial Notes
(continued)
2. Significant
Accounting Policies (continued):
The inputs or
methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The levels associated with valuing the funds’
investments as of February 28, 2021 are disclosed in the Portfolio Holdings.
(b) Accounting Policies for certain Portfolio Investments
(if held):
Futures Contracts: Futures contracts are instruments that represent an agreement between two parties that obligates one party to buy, and the other party to sell, specific instruments at an agreed upon price on a stipulated future date. A
fund must give the broker a deposit of cash and/or securities (initial margin) whenever it enters into a futures contract. The amount of the deposit may vary from one contract to another. Subsequent payments (variation margin) are made or received
by a fund depending on the daily fluctuations in the value of the futures contract and are accounted for as unrealized appreciation or depreciation until the contract is closed, at which time the gains or losses are realized. Futures contracts are
traded publicly on exchanges, and their fair value may change daily.
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 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 pursuant to Rule 2a-7 under the 1940 Act. Each fund bears the risk of loss with respect to the investment of cash collateral. The terms of the securities lending agreement
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 fair 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. Securities lending fees paid to the unaffiliated lending agents start at 10% of gross lending revenue, with
subsequent breakpoints to a low of 7.5%. In this context, the gross lending revenue equals the income received from the investment of cash collateral and fees paid by borrowers less any rebates paid to the borrowers. Any expenses charged by the cash
collateral fund are in addition to these fees. All remaining revenue is retained by the fund, as applicable. No portion of lending revenue is paid to or retained by Charles Schwab Investment Management, Inc. (CSIM or the investment adviser) or any
affiliate of CSIM.
As of February 28, 2021,
Schwab Fundamental U.S Broad Market Index ETF, Schwab Fundamental U.S. Large Company Index ETF, Schwab Fundamental U.S. Small Company Index ETF, Schwab Fundamental International Large Company Index ETF and Schwab Fundamental International Small
Company Index ETF had securities on loan, all of which were classified as common stocks. The value of the securities on loan and the related collateral as of February 28, 2021, are disclosed in each fund’s Portfolio Holdings and Statement of
Assets and Liabilities.
Passive Foreign Investment
Companies: Certain funds may own shares in certain foreign corporations that meet the Internal Revenue Code definition of a passive foreign investment company (PFIC). The funds may elect for tax purposes to
mark-to-market annually the shares of each PFIC lot held and would be required to distribute as ordinary income to shareholders any such marked-to-market gains (as well as any gains realized on sale).
(c) Security Transactions:
Security transactions are recorded as of the date the order
to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved.
Assets and liabilities denominated in foreign currencies
are reported in U.S. dollars. For assets and liabilities held on a given date, the dollar value is based on market exchange rates in effect on that date. Transactions involving foreign currencies, including purchases, sales, income receipts and
expense payments, are calculated using exchange rates in effect on the transaction date. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on
securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange appreciation or
depreciation arises from changes in foreign exchange rates on foreign denominated assets and liabilities other than
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(continued)
2. Significant
Accounting Policies (continued):
investments in
securities held at the end of the reporting period. These realized and unrealized foreign exchange gains or losses are reported in foreign currency transactions or translations on the Statement of Operations. The funds do not isolate the portion of
the fluctuations on investments resulting from changes in foreign currency exchange rates from the fluctuations in market prices of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from
investments.
Gains realized by the funds on the sale
of securities in certain foreign countries may be subject to non-U.S. taxes. In those instances, the funds record a liability based on unrealized gains to provide for potential non-U.S. taxes payable upon the sale of these securities.
When a fund closes out a futures contract position, it
calculates the difference between the value of the position at the beginning and at the end of the contract, and records a realized gain or loss accordingly.
(d) Investment Income:
Interest income is recorded as it accrues. Dividends, in
the form of cash or non-cash income such as in the form of additional securities, and distributions from portfolio securities and underlying funds are recorded on the date they are effective (the ex-dividend date), although the funds record certain
foreign security dividends on the date the ex-dividend is confirmed. Any distributions from underlying funds are recorded in accordance with the character of the distributions as designated by the underlying funds.
Income received from foreign sources may result in
withholding tax. Withholding taxes are accrued at the same time as the related income if the tax rate is fixed and known, unless a tax withheld is reclaimable from the local tax authorities in which case it is recorded as receivable. If the tax rate
is not known or estimable, such expense or reclaim receivable is recorded when the net proceeds are received.
The Schwab Fundamental International Large Company Index
ETF, Schwab Fundamental International Small Company Index ETF and Schwab Fundamental Emerging Markets Large Company Index ETF filed claims to recover taxes previously withheld in certain European Union countries on the basis that those countries had
purportedly violated certain provisions in the Treaty on the Functioning of the European Union. These filings are subject to various administrative and judicial proceedings within these countries, and all professional fees associated with these
filings have been paid by the investment adviser. For additional details see Affiliates and Affiliated Transactions in financial note 4, Other Affiliated Transactions.
(e) Expenses:
Pursuant to the Amended and Restated Advisory Agreement
(Advisory Agreement) between CSIM and the trust, the investment adviser will pay the operating expenses of each fund, excluding taxes, any brokerage expenses, and extraordinary or non-routine expenses. Taxes, any brokerage expenses and extraordinary
or non-routine expenses that are specific to a fund are charged directly to the fund.
(f) Distributions to Shareholders:
Schwab Fundamental U.S. Broad Market Index ETF, Schwab
Fundamental U.S. Large Company Index ETF, and Schwab Fundamental U.S. Small Company Index ETF generally make distributions from net investment income, if any, quarterly. Schwab Fundamental International Large Company Index ETF, Schwab Fundamental
International Small Company Index ETF, and Schwab Fundamental Emerging Markets Large Company Index ETF generally make distributions from net investment income, if any, semiannually. All funds generally make distributions from net realized capital
gains, if any, once a year.
(g) 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.
(h) 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.
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(continued)
2. Significant
Accounting Policies (continued):
(i) Foreign
Taxes:
The funds may be subject to foreign taxes (a
portion of which may be reclaimable) on income, corporate events, foreign currency exchanges and capital gains on investments. All foreign taxes are recorded in accordance with the applicable foreign tax regulations and rates that exist in foreign
markets in which the funds invest. These foreign taxes, if any, are paid by the funds and are disclosed in the Statement of Operations. Foreign taxes accrued as of February 28, 2021, if any, are reflected in each fund’s Statement of Assets and
Liabilities.
(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. Financial markets
rise and fall in response to a variety of factors, sometimes rapidly and unpredictably. Markets may be impacted by economic, political, regulatory and other conditions, including economic sanctions and other government actions. In addition, the
occurrence of global events, such as war, terrorism, environmental disasters, natural disasters and epidemics, may also negatively affect the financial markets. As with any investment whose performance is tied to these markets, the value of an
investment in a fund will fluctuate, which means that an investor could lose money over short or long periods.
Investment Style Risk. The
funds are index funds. Therefore, each fund follows the securities included in its respective index during upturns as well as downturns. Because of their indexing strategies, the funds do not take steps to reduce market exposure or to lessen the
effects of a declining market. In addition, because of the funds’ expenses, the funds’ performance may be below that of their respective index. Market disruptions could cause delays in the index’s rebalancing schedule which may
result in the index and, in turn, the fund experiencing returns different than those that would have been achieved under a normal rebalancing schedule.
Equity Risk. The prices of
equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to
fall over short or extended periods of time.
Market
Capitalization Risk. Securities issued by companies of different market capitalizations tend to go in and out of favor based on market and economic conditions. During a period when securities of a particular market
capitalization fall behind other types of investments, a fund’s performance could be impacted.
Large-Cap Company Risk. Certain
funds invest in large-cap company stocks. Large-cap companies are generally more mature and the securities issued by these companies may not be able to reach the same levels of growth as the securities issued by small- or mid-cap
companies.
Mid-Cap Company Risk. Certain funds invest in mid-cap company stocks. Mid-cap companies may be more vulnerable to adverse business or economic events than larger, more established companies and the value of securities issued by these
companies may move sharply.
Small-Cap Company Risk. Certain funds invest in small-cap company stocks. Securities issued by small-cap companies may be riskier than those issued by larger companies, and their prices may move sharply, especially during market upturns and
downturns.
Foreign Investment Risk. Certain funds invest in foreign issuers. A fund’s investments in securities of foreign issuers involve certain risks that may be 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; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); 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 negatively impact the
value or liquidity of a fund’s investments, and could impair the fund’s ability to meet its investment objective or invest in accordance with its investment strategy. There is a risk that investments in securities denominated in, and/or
receiving revenues in, foreign currencies will decline in value relative to
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Financial Notes
(continued)
3. Risk
Factors (continued):
the U.S. dollar. Foreign
securities also include American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs) and European Depositary Receipts (EDRs), which may be less liquid than the underlying shares in their primary trading market and GDRs, many of which are
issued by companies in emerging markets, may be more volatile. To the extent a fund’s investments in a single country or a limited number of countries represent a large percentage of the fund’s assets, the fund’s performance may be
adversely affected by the economic, political, regulatory and social conditions in those countries, and the fund’s price may be more volatile than the price of a fund that is geographically diversified.
Emerging Markets Risk.
Certain funds invest in emerging markets. Emerging market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less
uniformity in accounting, auditing, financial reporting and record keeping requirements and greater risk associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries
may be more precarious than in developed countries. As a result, there may be an increased risk of illiquidity and price volatility associated with a fund’s investments in emerging market countries, which may be magnified by currency
fluctuations relative to the U.S. dollar, and, at times, it may be difficult to value such investments.
Sampling Index Tracking Risk. Certain funds may not fully replicate the index and may hold securities not included in the index. As a result, a fund is subject to the risk that the investment adviser’s investment management strategy, the
implementation of which is subject to a number of constraints, may not produce the intended results. Because certain funds utilize a sampling approach they may not track the return of their respective index as well as they would if the funds
purchased all of the securities in their respective index.
Tracking Error Risk. As
index funds, each fund seeks to track the performance of its respective index, although it 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.
Derivatives Risk. Each fund
may use derivatives to enhance returns or hedge against market declines. Examples of derivatives are options, futures, options on futures and swaps. An option is the right, but not the obligation, to buy or sell an instrument at a specific price on
or before a specific date. A future is an agreement to buy or sell a financial instrument at a specific price on a specific day. A swap is an agreement whereby two parties agree to exchange payment streams calculated in relation to a rate, index,
instrument or certain securities and a predetermined amount. A fund’s use of derivatives that are 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.
A
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 liquidity risk,
leverage risk and market risk, are discussed elsewhere in this section. A fund’s use of derivatives is also subject to counterparty risk, lack of availability risk, valuation risk, correlation risk and tax risk. Counterparty risk is the risk
that the counterparty to a derivatives transaction may not fulfill its contractual obligations either because the financial condition of the counterparty declines, or because the counterparty is otherwise unable or unwilling to perform under the
contract. Lack of availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Valuation risk is the risk that a particular derivative may be valued incorrectly.
Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause the fund to realize higher amounts of
short-term capital gains. A fund’s use of derivatives could reduce the fund’s performance, increase the fund’s volatility, and could cause the fund to lose more than the initial amount invested.
Liquidity Risk. A fund may
be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or the fund may have to sell them at a loss.
Leverage Risk. Certain fund
transactions, such as derivatives transactions, may give rise to a form of leverage and may expose a fund to greater risk. Leverage tends to magnify the effect of any decrease or increase in the value of a fund’s portfolio securities. The use
of leverage may cause a fund to liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its obligations.
Securities Lending Risk.
Securities lending involves the risk of loss of rights in, or delay in recovery of, the loaned securities if the borrower fails to return the security loaned or becomes insolvent.
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Financial Notes
(continued)
3. Risk
Factors (continued):
Concentration Risk. To the extent that a fund’s or an index’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector, country or asset class, the fund may be
adversely affected by the performance of those securities, may be subject to increased price volatility and may be more vulnerable to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries,
sector, country or asset class.
Market Trading
Risk. Although fund shares are listed on national securities exchanges, there can be no assurance that an active trading market for fund shares will develop or be maintained. If an active market is not maintained,
investors may find it difficult to buy or sell fund shares.
Shares of the Fund May Trade at Prices Other Than NAV. Fund shares may be bought and sold in the secondary market at market prices. Although it is expected that the market price of the shares of a fund will approximate the fund’s NAV, there may be times when the
market price and the NAV vary significantly. An investor may pay more than NAV when buying shares of a fund in the secondary market, and an investor may receive less than NAV when selling those shares in the secondary market. The market price of
fund shares may deviate, sometimes significantly, from NAV during periods of market volatility or market disruption, or as a result of other factors impacting foreign securities, including liquidity, irregular trading activity and timing differences
between foreign markets where securities trade and the secondary market where fund shares are sold.
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:
Investment Adviser
CSIM, a wholly owned subsidiary of The Charles Schwab
Corporation, serves as each fund’s investment adviser pursuant to the Advisory Agreement between CSIM and the trust.
For its advisory services to the funds, CSIM is entitled to
receive an annual management fee, payable monthly, based on a percentage of each fund’s average daily net assets as follows:
| Schwab
Fundamental U.S. Broad Market Index ETF |
Schwab
Fundamental U.S. Large Company Index ETF |
Schwab
Fundamental U.S. Small Company Index ETF |
Schwab
Fundamental International Large Company Index ETF |
Schwab
Fundamental International Small Company Index ETF |
Schwab
Fundamental Emerging Markets Large Company Index ETF |
| 0.25% | 0.25% | 0.25% | 0.25% | 0.39% | 0.39% |
Other Affiliated Transactions
The professional fees related to foreign withholding tax claims
discussed in financial note 2 were non-routine expenses. The investment adviser agreed to pay these professional fees on behalf of the funds, subject to reimbursement to the extent the funds are able to successfully recover taxes withheld in the
future.
The professional fees incurred by the Schwab
Fundamental International Large Company Index ETT, Schwab Fundamental International Small Company Index ETF and Schwab Fundamental Emerging Markets Large Company Index ETF were $70,423, $9,705, $11,464 respectively. There were no reimbursements made
by the funds to the investment adviser during the period ended February 28, 2021.
As of February 28, 2021, the balance of professional fees
related to foreign withholding tax subject to future reimbursement by the fund to the investment adviser was $84,879 for Schwab Fundamental International Large Company Index ETF, $9,705 for Schwab Fundamental International Small Company Index ETF
and $11,464 for Schwab Fundamental Emerging Markets Large Company Index ETF.
No other amounts for additional tax reclaims are reflected in
the financial statements due to the uncertainty surrounding the ultimate resolution of proceedings, the likelihood of receipt of these claims, and the potential timing of payment.
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Financial Notes
(continued)
4. Affiliates and
Affiliated Transactions (continued):
Interfund
Transactions
The funds may engage in direct
transactions with certain other funds in the Fund Complex in accordance with procedures adopted by the Board under Rule 17a-7 of the 1940 Act. When one fund is seeking to sell a security that another is seeking to buy, an interfund transaction can
allow both funds to benefit by reducing transaction costs. This practice is limited to funds that share the same investment adviser, trustees and/or officers. For the period ended February 28, 2021, each fund’s total aggregate security
transactions with other funds in the Fund Complex as well as any realized gains (losses) were as follows:
| Total Aggregate Transactions | Realized Gains (Losses) | |
| Schwab Fundamental U.S. Broad Market Index ETF | $14,804,180 | ($729,058) |
| Schwab Fundamental U.S. Large Company Index ETF | 330,776,542 | (23,702,948) |
| Schwab Fundamental U.S. Small Company Index ETF | 154,188,895 | (3,926,024) |
| Schwab Fundamental International Large Company Index ETF | 118,097,814 | (19,095,575) |
| Schwab Fundamental International Small Company Index ETF | 96,739,923 | (9,040,283) |
| Schwab Fundamental Emerging Markets Large Company Index ETF | 47,105,476 | 219,763 |
Interfund Borrowing and
Lending
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. 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. 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. The transfer agent is also responsible for the order-taking function for 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.
7. Borrowing from Banks:
During the period, the funds
were participants with other funds in the Fund Complex in a joint, syndicated, committed $750 million line of credit (the Syndicated Credit Facility), which matured on October 1, 2020. On October 1, 2020, the Syndicated Credit Facility was amended
to run for a new 364 day period with a line of credit of $850 million, maturing on September 30, 2021. Under the terms of the Syndicated Credit Facility, in addition to CSIM paying the interest charged on any borrowings by a fund, CSIM paid a
commitment fee of 0.15% per annum on the funds’ proportionate share of the unused portion of the Syndicated Credit Facility.
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(continued)
7. Borrowing from
Banks (continued):
During the period, the funds
were participants with other funds in the Fund Complex in a joint, unsecured, uncommitted $500 million line of credit (the Uncommitted Credit Facility), with State Street, which was scheduled to mature on November 27, 2020. However, on October 1,
2020, the Uncommitted Credit Facility was amended to run for a new 364 day period with a line of credit of $400 million, maturing on September 30, 2021. Under the terms of the Uncommitted Credit Facility, CSIM pays interest on the amount a fund
borrows. There were no borrowings from either 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 paid by CSIM. The interest expense is determined based on a negotiated rate above the current Federal Funds Rate.
8. Derivatives:
Certain funds entered into equity
index futures contracts during the report period. The funds invested in futures contracts to equitize available cash. The current value and variation margin for futures contracts held at February 28, 2021 are presented on the Portfolio Holdings and
Statement of Assets and Liabilities, respectively. The net realized and change in unrealized gains (losses) on futures contracts are presented on the Statement of Operations. Refer to financial note 2(b) for the funds’ accounting policies with
respect to futures contracts and financial note 3 for disclosures concerning the risks of investing in futures contracts. During the period ended February 28, 2021, the month-end average notional amounts of futures contracts held by the funds and
the month-end average number of contracts held were as follows:
| Notional Amounts | Number of Contracts | |
| Schwab Fundamental U.S. Broad Market Index ETF | $475,497 | 3 |
| Schwab Fundamental U.S. Large Company Index ETF | 10,059,889 | 62 |
| Schwab Fundamental U.S. Small Company Index ETF | 5,714,700 | 74 |
| Schwab Fundamental International Large Company Index ETF | 23,689,268 | 260 |
| Schwab Fundamental International Small Company Index ETF | 8,886,733 | 99 |
| Schwab Fundamental Emerging Markets Large Company Index ETF | 11,021,202 | 208 |
9. Purchases and Sales of Investment Securities:
For
the period ended February 28, 2021, purchases and sales of securities (excluding in-kind transactions and short-term obligations) were as follows:
| Purchases
of Securities |
Sales
of Securities | |
| Schwab Fundamental U.S. Broad Market Index ETF | $33,540,318 | $33,926,080 |
| Schwab Fundamental U.S. Large Company Index ETF | 673,271,031 | 680,559,137 |
| Schwab Fundamental U.S. Small Company Index ETF | 845,107,957 | 780,504,768 |
| Schwab Fundamental International Large Company Index ETF | 726,459,317 | 682,447,916 |
| Schwab Fundamental International Small Company Index ETF | 454,404,766 | 458,700,265 |
| Schwab Fundamental Emerging Markets Large Company Index ETF | 1,322,150,165 | 743,740,781 |
10. 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 equity securities, which constitutes an optimized representation of the securities involved in a relevant fund’s underlying index, and an
amount of 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 a fund.
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Financial Notes
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10. In-Kind
Transactions (continued):
The in-kind
transactions for the period ended February 28, 2021, were as follows:
| In-Kind
Purchases of Securities |
In-Kind
Sales of Securities | |
| Schwab Fundamental U.S. Broad Market Index ETF | $19,595,084 | $57,575,066 |
| Schwab Fundamental U.S. Large Company Index ETF | 985,983,649 | 1,960,470,271 |
| Schwab Fundamental U.S. Small Company Index ETF | 802,107,199 | 1,341,927,946 |
| Schwab Fundamental International Large Company Index ETF | 880,123,871 | 661,677,153 |
| Schwab Fundamental International Small Company Index ETF | 146,363,317 | 222,088,441 |
| Schwab Fundamental Emerging Markets Large Company Index ETF | 143,510,394 | 35,983,758 |
For the period ended February 28,
2021, where applicable, the funds 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 February 28, 2021 are disclosed in the funds’ Statements of Operations, if any.
11. Federal Income Taxes
As of February 28, 2021, the
tax basis cost of the funds’ investments and gross unrealized appreciation and depreciation were as follows:
| Schwab
Fundamental U.S. Broad Market Index ETF |
Schwab
Fundamental U.S. Large Company Index ETF |
Schwab
Fundamental U.S. Small Company Index ETF |
Schwab
Fundamental International Large Company Index ETF |
Schwab
Fundamental International Small Company Index ETF |
Schwab
Fundamental Emerging Markets Large Company Index ETF | ||||||
| Tax cost | $217,985,435 | $4,823,252,514 | $3,238,010,535 | $5,084,003,032 | $2,036,649,975 | $3,278,582,014 | |||||
| Gross unrealized appreciation | $83,675,089 | $1,348,131,468 | $1,073,605,391 | $1,155,307,583 | $503,696,925 | $888,908,068 | |||||
| Gross unrealized depreciation | (15,383,411) | (272,251,591) | (211,390,953) | (518,639,740) | (221,158,374) | (351,646,760) | |||||
| Net unrealized appreciation (depreciation) | $68,291,678 | $1,075,879,877 | $862,214,438 | $636,667,843 | $282,538,551 | $537,261,308 |
As of February 28, 2021, the
components of distributable earnings on a tax basis were as follows:
| Schwab
Fundamental U.S. Broad Market Index ETF |
Schwab
Fundamental U.S. Large Company Index ETF |
Schwab
Fundamental U.S. Small Company Index ETF |
Schwab
Fundamental International Large Company Index ETF |
Schwab
Fundamental International Small Company Index ETF |
Schwab
Fundamental Emerging Markets Large Company Index ETF | ||||||
| Undistributed ordinary income | $835,373 | $18,040,278 | $— | $34,968,627 | $14,170,433 | $15,292,072 | |||||
| Net unrealized appreciation (depreciation) on investments | 68,291,678 | 1,075,879,877 | 862,214,438 | 636,667,843 | 282,538,551 | 537,261,308 | |||||
| Net other unrealized appreciation (depreciation) | — | — | — | (61,566) | 24,703 | (13,726,583) | |||||
| Capital loss carryforwards and other losses | (11,797,791) | (207,547,423) | (456,821,302) | (144,716,310) | (127,994,160) | (120,100,128) | |||||
| Total | $57,329,260 | $886,372,732 | $405,393,136 | $526,858,594 | $168,739,527 | $418,726,669 |
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, realization for tax purposes of unrealized appreciation or depreciation on futures contracts and the realization for
tax purposes of unrealized appreciation on investments in Passive Foreign Investment Companies “PFIC”, and partnership investments. The tax cost of the funds’ investments, disclosed above, have been adjusted from their book amounts
to reflect these unrealized appreciation or depreciation differences, as applicable.
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Schwab Fundamental Index
ETFs
Financial Notes
(continued)
11. Federal Income
Taxes (continued):
Capital loss carryforwards
may be used to offset future realized capital gains for federal income tax purposes. As of February 28, 2021, the funds had capital loss carryforwards available to offset future net capital gains as follows:
| Expiration Date | Schwab
Fundamental U.S. Broad Market Index ETF |
Schwab
Fundamental U.S. Large Company Index ETF |
Schwab
Fundamental U.S. Small Company Index ETF |
Schwab
Fundamental International Large Company Index ETF |
Schwab
Fundamental International Small Company Index ETF |
Schwab
Fundamental Emerging Markets Large Company Index ETF | |||||
| No expiration | $11,797,791 | $207,547,423 | $456,594,093 | $144,716,310 | $127,994,160 | $120,100,128 | |||||
| Total | $11,797,791 | $207,547,423 | $456,594,093 | $144,716,310 | $127,994,160 | $120,100,128 |
For tax purposes, late-year ordinary
losses may be deferred and treated as occurring on the first day of the following fiscal year. For the fiscal year ended February 28, 2021, Schwab Fundamental U.S. Small Company Index ETF had ordinary losses deferred of $227,209 and had no capital
loss carryforwards utilized.
The tax basis components of
distributions paid during the current and prior fiscal years were:
| Schwab
Fundamental U.S. Broad Market Index ETF |
Schwab
Fundamental U.S. Large Company Index ETF |
Schwab
Fundamental U.S. Small Company Index ETF |
Schwab
Fundamental International Large Company Index ETF |
Schwab
Fundamental International Small Company Index ETF |
Schwab
Fundamental Emerging Markets Large Company Index ETF | |
| Current fiscal year end distributions | ||||||
| Ordinary income | $6,024,890 | $134,608,220 | $51,561,985 | $114,361,960 | $38,178,680 | $87,400,780 |
| Prior fiscal year end distributions | ||||||
| Ordinary income | $6,831,860 | $128,120,700 | $50,954,980 | $150,746,760 | $57,727,940 | $99,031,790 |
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 February 28, 2021, 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 fiscal year ended February 28, 2021, the funds did not incur
any interest or penalties.
12. Independent Registered Public Accounting Firm:
On
June 8, 2020, the Audit, Compliance and Valuation Committee of the Board approved, and on June 9, 2020, the Board approved, Deloitte & Touche LLP as the independent registered accounting firm of the Schwab Funds Complex for fiscal periods ending
after June 8, 2020.
On June 8, 2020,
PricewaterhouseCoopers LLP (the “Prior Auditor”) resigned as the independent registered public accounting firm of the Schwab Funds Complex. The Prior Auditor’s reports on the financial statements of the funds for the past two
fiscal years, the years ended February 28, 2019 and February 29, 2020, did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the last two
fiscal year-ends and through June 8, 2020, there were no (1) disagreements with the Prior Auditor on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not
resolved to the Prior Auditor’s satisfaction, would have caused it to make reference to that matter in connection with its reports on the funds’ financial statements for such periods; or (2) “reportable events,” as that term
is defined in Item 304 (a)(1)(v) of Regulation S-K under the Securities Exchange Act of 1934.
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ETFs
Financial Notes
(continued)
13.
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 Fundamental Index
ETFs
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Schwab Strategic Trust and
Shareholders of Schwab Fundamental U.S. Broad Market Index ETF, Schwab Fundamental U.S. Large Company Index ETF, Schwab Fundamental U.S. Small Company Index ETF, Schwab Fundamental International Large Company Index ETF, Schwab Fundamental
International Small Company Index ETF, and Schwab Fundamental Emerging Markets Large Company Index ETF:
Opinion on the Financial Statements and Financial
Highlights
We have audited the accompanying statements of
assets and liabilities, including the portfolio holdings, of Schwab Fundamental U.S. Broad Market Index ETF, Schwab Fundamental U.S. Large Company Index ETF, Schwab Fundamental U.S. Small Company Index ETF, Schwab Fundamental International Large
Company Index ETF, Schwab Fundamental International Small Company Index ETF, and Schwab Fundamental Emerging Markets Large Company Index ETF (the “Funds”), six of the funds constituting Schwab Strategic Trust, as of February 28, 2021,
and the related statements of operations, statements of changes in net assets, and the financial highlights for the year then ended, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all
material respects, the financial position of each of the Funds as of February 28, 2021, and the results of their operations, the changes in their net assets, and the financial highlights for the year then ended in conformity with accounting
principles generally accepted in the United States of America. The statements of changes in net assets for the year ended February 29, 2020 and the financial highlights for each of the four years in the period ended February 29, 2020 were audited by
other auditors, whose report, dated April 16, 2020, expressed an unqualified opinion on such statements of changes in net assets and financial highlights.
Basis for Opinions
These financial statements and financial highlights are the
responsibility of the Funds’ management. Our responsibility is to express an opinion on the Funds’ financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Funds in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud.
The Funds are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Funds’ internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks
of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements and financial highlights. Our procedures included confirmation of securities owned as of February 28, 2021, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing
procedures. We believe that our audits provide a reasonable basis for our opinion.
Deloitte & Touche LLP
Denver, Colorado
April 16, 2021
Denver, Colorado
April 16, 2021
We have served as the auditor of one or more investment
companies in the Schwab Funds Complex since 2020.
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Schwab Fundamental Index
ETFs
Other Federal Tax Information (unaudited)
The funds may elect to pass on the benefits of the foreign tax
credit to its shareholders for the fiscal year ended February 28, 2021, and the respective foreign source income on the funds as follows:
| Foreign Tax Credit | Foreign Source Income | |
| Schwab Fundamental U.S. Broad Market Index ETF | $— | $— |
| Schwab Fundamental U.S. Large Company Index ETF | — | — |
| Schwab Fundamental U.S. Small Company Index ETF | — | — |
| Schwab Fundamental International Large Company Index ETF | 12,887,060 | 147,419,207 |
| Schwab Fundamental International Small Company Index ETF | 3,887,970 | 43,521,248 |
| Schwab Fundamental Emerging Markets Large Company Index ETF | 14,672,297 | 118,610,243 |
For corporate shareholders, the
following percentage of the funds’ dividend distributions paid during the fiscal year ended February 28, 2021 qualify for the corporate dividends received deduction:
| Schwab Fundamental U.S. Broad Market Index ETF | 96.97% |
| Schwab Fundamental U.S. Large Company Index ETF | 96.53% |
| Schwab Fundamental U.S. Small Company Index ETF | 81.60% |
| Schwab Fundamental International Large Company Index ETF | —% |
| Schwab Fundamental International Small Company Index ETF | —% |
| Schwab Fundamental Emerging Markets Large Company Index ETF | —% |
For the fiscal year ended February
28, 2021, the funds designated the following amounts of the dividend distributions as qualified dividends for the purpose of the maximum rate under section 1(h)(ii) of the Internal Revenue Code. Shareholders will be notified in January 2022 via IRS
form 1099 of the amount for use in preparing their 2021 income tax return.
| Schwab Fundamental U.S. Broad Market Index ETF | $6,024,890 |
| Schwab Fundamental U.S. Large Company Index ETF | 134,608,220 |
| Schwab Fundamental U.S. Small Company Index ETF | 43,507,710 |
| Schwab Fundamental International Large Company Index ETF | 102,851,751 |
| Schwab Fundamental International Small Company Index ETF | 28,945,834 |
| Schwab Fundamental Emerging Markets Large Company Index ETF | 67,531,658 |
For the fiscal year ended February
28, 2021, Schwab Fundamental U.S. Small Company Inde ETF designates $8,054,275 as dividends eligible for the 20% qualified business income deduction under section 199A of the Internal Revenue Code. Shareholders will be notified in January 2022 via
IRS form 1099 of the amounts for use in preparing their 2021 income tax return.
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Schwab Fundamental Index
ETFs
Liquidity Risk Management Program (Unaudited)
The Funds have adopted and implemented a liquidity risk
management program (the “program”) as required by Rule 22e-4 under the Investment Company Act of 1940, as amended. The Funds’ Board of Trustees (the “Board”) has designated the Funds’ investment adviser, Charles
Schwab Investment Management, Inc. (“CSIM”) as the administrator of the program. Personnel of CSIM or its affiliates conduct the day-to-day operation of the program.
Under the program, CSIM manages a Fund’s liquidity risk,
which is the risk that the Fund could not meet shareholder redemption requests without significant dilution of remaining shareholders’ interests in the Fund. The program is reasonably designed to assess and manage a Fund’s liquidity
risk, taking into consideration the Fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably foreseeable stressed conditions; its historical redemption history and shareholder concentrations; and
its cash holdings and access to other funding sources, including the custodian overdraft facility and lines of credit. CSIM’s process of determining the degree of liquidity of each Fund’s investments is supported by third-party liquidity
assessment vendors.
The Funds’ Board reviewed a
report at its meeting held on September 22, 2020 prepared by CSIM regarding the operation and effectiveness of the program for the period June 1, 2019, through May 31, 2020. No significant liquidity events impacting any of the Funds were noted in
the report. In addition, CSIM provided its assessment that the program had been operating effectively in managing each Fund’s liquidity risk.
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Schwab Fundamental Index
ETFs
Trustees and Officers
The tables below give information about the trustees and
officers of 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 103 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) (investment management firm) and President, PIMCO Funds. | 103 | None |
| 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 (Oct. 1979 – present), The Hoover Institution at Stanford University (public policy think tank); Senior Fellow (2000 – present), Stanford Institute for Economic Policy Research; Professor of Public Policy (1994 – 2015), Stanford University. | 103 | Director (2005 – 2020), Gilead Sciences, Inc. |
| Nancy
F. Heller 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 2018) |
Retired. President and Chairman (2014 – 2016), TIAA Charitable (financial services); Senior Managing Director (2003 – 2016), TIAA (financial services). | 103 | 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. | 103 | Director
(2004 – present), Corcept Therapeutics Incorporated Director (2009 – present), Adamas Pharmaceuticals, Inc. Director (2003 – 2019), Symantec Corporation |
| Jane
P. Moncreiff 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 2019) |
Consultant (2018 – present), Fulham Advisers LLC (management consulting); Chief Investment Officer (2009 – 2017), CareGroup Healthcare System, Inc. (healthcare). | 103 | None |
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Schwab Fundamental Index
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 (Dec. 2008 – Sept. 2013), Intuit, Inc. (financial software and services firm for consumers and small businesses). | 103 | Director (2008 – present), KLA-Tencor Corporation |
| 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 (2008 – present), Patmore Management Consulting (management consulting). | 103 | None |
| 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 (Oct. 2008 – present), The Charles Schwab Corporation; President and Chief Executive Officer (Oct. 2008 – present) and Director (May 2008 – present), Charles Schwab & Co., Inc.; Director (Apr. 2006 – present), Charles Schwab Bank, SSB; Director (Nov. 2017 – present), Charles Schwab Premier Bank, SSB; Director (July 2019 – present), Charles Schwab Trust Bank; Director (May 2008 – present) and President and Chief Executive Officer (Aug. 2017 – present), Schwab Holdings, Inc.; Director (Oct. 2020 – present), TD Ameritrade Holding Corporation; Director (July 2016 – present), Charles Schwab Investment Management, Inc. | 103 | Director (2008 – present), The Charles Schwab Corporation |
| 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) |
Chief Operating Officer (Feb. 2018 – present) and Senior Executive Vice President (July 2015 – Feb. 2018), The Charles Schwab Corporation; Senior Executive Vice President (July 2015 – present), Charles Schwab & Co., Inc.; Chief Financial Officer (July 2015 – Aug. 2017) and Executive Vice President and Chief Financial Officer (May 2007 – July 2015), The Charles Schwab Corporation and Charles Schwab & Co., Inc.; Director (May 2007 – present), Charles Schwab & Co., Inc.; Director (Apr. 2010 – present) and Chief Executive Officer (July 2013 – Apr. 2015), Charles Schwab Bank, SSB; Director (Nov. 2017 – present), Charles Schwab Premier Bank, SSB; Director (May 2007 – present), Chief Financial Officer (May 2007 – Aug. 2017), Senior Executive Vice President (Feb. 2016 – present), and Executive Vice President (May 2007 – Feb. 2016), Schwab Holdings, Inc.; Director (Oct. 2020 – present), TD Ameritrade Holding Corporation. | 103 | None |
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ETFs
| 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 |
| Jonathan
de St. Paer 1973 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 2018) |
Director (Apr. 2019 – present), President (Oct. 2018 – present), Chief Operating Officer (Jan. 2020 – present), and Chief Executive Officer (Apr. 2019 – Nov. 2019), Charles Schwab Investment Management, Inc.; Senior Vice President (June 2020 – present) and Chief Operating Officer (Jan. 2020 – present), Charles Schwab Investment Advisory, Inc.; Chief Executive Officer (Apr. 2019 – present), President (Nov. 2018 – present) and Trustee (Apr. 2019 – Dec. 2020), Schwab Funds, Laudus Funds and Schwab ETFs; Director (Apr. 2019 – present), Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited; Senior Vice President (Apr. 2019 – present), Senior Vice President – Strategy and Product Development (CSIM) (Jan. 2014 – Mar. 2019), and Vice President (Jan. 2009 – Dec. 2013), Charles Schwab & Co., Inc. |
| Mark
Fischer 1970 Treasurer, Chief Financial Officer and Chief Operating 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 (Jan. 2016 – present) and Chief Operating Officer (Dec. 2020 – present), Schwab Funds, Laudus Funds and Schwab ETFs; Assistant Treasurer (Dec. 2013 – Dec. 2015), Schwab Funds and Laudus Funds; Assistant Treasurer (Nov. 2013 – Dec. 2015), Schwab ETFs; Chief Financial Officer (Mar. 2020 – present) and Vice President (Oct. 2013 – present), Charles Schwab Investment Management, Inc.; Executive Director (Apr. 2011 – Sept. 2013), J.P. Morgan Investor Services; Assistant Treasurer (May 2005 – Mar. 2011), Massachusetts Financial Service Investment Management. |
| 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 (Apr. 2011 – present), Charles Schwab Investment Management, Inc.; Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies (June 2011 – present), Schwab Funds, Laudus Funds and Schwab ETFs; Head of the Portfolio Management Group and Vice President of Portfolio Management (May 2009 – Apr. 2011), Financial Engines, Inc. (investment management firm); Head of Quantitative Equity (July 2004 – Jan. 2009), ING Investment Management. |
| 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 (Apr. 2011 – present), Charles Schwab Investment Management, Inc.; Senior Vice President and Chief Investment Officer – Fixed Income (June 2011 – present), Schwab Funds, Laudus Funds and Schwab ETFs; Senior Managing Director and Global Head of Active Fixed-Income Strategies (Jan. 2008 – Oct. 2010), State Street Global Advisors; Director of Alpha Strategies (Apr. 2006 – Jan. 2008), Loomis, Sayles & Company (investment management firm). |
| 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) and Vice President (Mar. 2004 – Sept. 2011), Charles Schwab & Co., Inc.; Senior Vice President and Chief Counsel (Sept. 2011 – present) and 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 (Apr. 2011 – present), Laudus Funds; 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 (July 2005 – present), Charles Schwab & Co., Inc.; Vice President (Sept. 2005 – present), Charles Schwab Investment Management, Inc.; Vice President (Dec. 2005 – present) and 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 (Oct. 2009 – present), Schwab ETFs. |
| 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 and Mr. Martinetto are Interested Trustees. Mr. Bettinger is an Interested Trustee because he owns stock of The Charles Schwab Corporation (CSC), the parent company of Charles Schwab Investment Management, Inc. (CSIM), the investment adviser for the trusts in the Fund Complex, is an employee and director of Charles Schwab & Co., Inc. (CS&Co), the principal underwriter for The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust, and is a director of CSIM. Mr. Martinetto is an Interested Trustee because he owns stock of CSC and is an employee and director of CS&Co. |
| 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 Fundamental Index
ETFs
Schwab ETFs
Schwab ETFs are designed to serve as simple low-cost core
investment products for a diversified portfolio. These ETFs seek to provide consistent, repeatable performance through a variety of investment strategies that span the equity and fixed income spectrum. The list below shows all currently available
Schwab ETFs.
Investors should carefully consider
information contained in the prospectus, or if available, the summary prospectus, including investment objectives, risks, charges and expenses before investing. Please call 1-877-824-5615 for a prospectus 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.schwabfunds.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.schwabfunds.com/schwabetfs_prospectus or the SEC’s
website at www.sec.gov.
Schwab ETFs
| * | FUNDAMENTAL INDEX is a registered trademark of Research Affiliates LLC. |
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 13(a)(1) of Form N-CSR. |
Item 3: Audit Committee Financial Expert.
Registrant’s Board of Trustees has determined that Kiran M. Patel 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 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-five operational series. Seven series have a fiscal year-end of the last day of February, whose annual financial statements are reported in Item 1, eleven series have a fiscal year-end of August 31and seven series have a fiscal year-end of December 31. Principal accountant fees disclosed in Items 4(a)-(d) and 4(g) include fees billed for services rendered to each of the twenty-five operational series during 2020/2021 and 2019/2020, based on their respective 2020/2021 and 2019/2020 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:
| (a) Audit Fees |
(b)Audit-Related Fees | (c) Tax Fees1 | (d) All Other Fees | |||||||||||||||||||||||||
| Fiscal Year |
Fiscal Year 2019/2020 |
Fiscal Year 2020/2021 |
Fiscal Year 2019/2020 |
Fiscal Year 2020/2021 |
Fiscal Year 2019/2020 |
Fiscal Year 2020/2021 |
Fiscal Year 2019/2020 |
|||||||||||||||||||||
| $450,900 | $ | 563,669 | $ | 0 | $ | 0 | $ | 77,500 | $ | 104,429 | $ | 0 | $ | 0 | ||||||||||||||
| 1 | The nature of the services includes tax compliance, tax advice and tax planning. |
(e) (1) Registrant’s audit, compliance and valuation 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, compliance and valuation committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X) that were approved by Registrant’s audit, compliance and valuation 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.
2019/2020: $4,326,956 2018/2019:$104,429
(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, compliance and valuation 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, compliance and valuation committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Registrant’s audit, compliance and valuation committee members are Kiran M. Patel, John F. Cogan, Nancy F. Heller and Kimberly S. Patmore.
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, Jonathan de St. Paer 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 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: Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.
Not applicable.
Item 13: Exhibits.
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 – Schwab U.S. REIT ETF and Schwab Fundamental Index ETFs
| By: | /s/ Jonathan de St. Paer | |
| Jonathan de St. Paer | ||
| Chief Executive Officer | ||
| Date: | April 16, 2021 | |
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/ Jonathan de St. Paer | |
| Jonathan de St. Paer | ||
| Chief Executive Officer | ||
| Date: | April 16, 2021 | |
| By: | /s/ Mark Fischer | |
| Mark Fischer | ||
| Chief Financial Officer | ||
| Date: | April 16, 2021 | |