SCHQ Offers Pure Treasury Focus While SPLB Yields More

The piece compares SPDR’s SPLB and Schwab’s SCHQ as long-duration fixed-income plays: SPLB (AUM ~$1.2B) carries a 0.04% expense ratio, ~1-year total return of 6.5% and a ~5.2% dividend yield, while SCHQ (AUM ~$925M) charges 0.03%, returned 3.6% over the last year with a ~4.5% yield and holds 98 U.S. Treasuries versus SPLB’s ~2,959 corporate holdings. SPLB’s broader corporate-credit exposure has delivered stronger returns, higher yield and a smaller 5-year max drawdown (−31.8% vs −38.5%), but both funds are long-duration and sensitive to interest-rate moves—positioning SPLB as the higher-yield, higher-credit-risk option if rates fall.

Analysis

Market structure: Long-duration credit (SPLB) is the winner if the market prices in Fed cuts or economic re-acceleration: SPLB yields ~100 bps more than SCHQ (5.2% vs 4.5%) and outperformed over 1y and 5y (1y +6.5% vs +3.6%; 5y drawdowns -31.8% vs -38.5%). Treasuries (SCHQ) retain crisis-valuation primacy and cheaper idiosyncratic volatility due to liquidity and sovereign status; fee difference (0.01%) is immaterial to investors. Liquidity/market-share favors broader corporate ETFs in bull phases but Treasuries dominate in stress.

Risk assessment: Key tail risks are a credit shock (IG spread widening >150–200bps) that would hit SPLB materially, or a faster-than-expected Fed hiking cycle that would pressure both (long-duration loss ~10–20% per 100bps move depending on duration). Near-term (days–weeks) performance will be driven by macro prints/Fed guidance; medium-term (3–12 months) by realized cuts/spread compression; long-term (1–3 years) by default cycle and fiscal supply. Hidden dependency: SPLB’s apparent diversification masks liquidity and sector concentration risks in corporate bond trading during stressed selloffs.

Trade implications: Base case (Fed cuts within 6–12 months) favors overweight SPLB vs SCHQ — implement a relative-value pair (long SPLB, short SCHQ) to isolate credit premium; target 6–12% gross return if cuts are 75–100bps and IG spreads compress 50–100bps. If worried about a credit event, buy 3–6 month put spreads on SPLB (5–10% OTM) or hedge with short-dated buy-write collars to monetize 5%+ yield while capping downside. Rotate modestly from long-duration Treasuries into IG long-term corporates for yield with strict spread-stop rules.

Contrarian angles: Consensus overweights credit for yield; what’s missed is liquidity risk and flight-to-quality asymmetry — in a surprise growth shock to recession, SCHQ could outperform despite lower yield. The market may be underpricing a scenario where corporate issuance re-accelerates supply and pushes IG spreads wider (negative for SPLB). Historical parallel: 2008/2020 episodes show corporate ETFs underperform Treasuries in stress despite IG labels. Unintended consequence: large flows into SPLB could amplify corporate bond volatility and widen bid-ask during redemptions.

Key Decisions for Investors

• Establish a tactical 2–3% portfolio long position in SPLB (SPDR Portfolio Long Term Corporate Bond ETF) and hedge duration with a 1–1 notional short in SCHQ to express preference for credit spread compression over the next 6–12 months; trim if SPLB outperforms by >8% or if IG OAS widens >150 bps.
• If you prefer unilateral exposure, buy SPLB outright (3–5% allocation) and implement a protective 3–6 month put spread (buy 7% OTM put, sell 3% OTM put) sized to cap a drawdown beyond ~12%—deploy if macro prints (CPI/PCE) re-accelerate or Fed signals delayed cuts.
• Sell 1–3 month covered calls on existing SPLB holdings (strike ~+3–4% above spot) to monetize the 5%+ dividend while retaining upside for a potential rate-cut rally; roll monthly and stop if ETF drops >10% in 30 days or IG spreads widen by >100 bps.
• Maintain a 1–2% defensive allocation to SCHQ as crisis insurance; increase to 3–5% within 48 hours if front-end Fed pricing signals fewer than two cuts in the next 12 months or if 10y Treasury yields rise >50 bps from current levels.