UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

Schwab Strategic Trust

(Exact name of registrant as specified in charter)

(Address of principal executive offices) (Zip code)

Marie Chandoha
Schwab Strategic Trust
211 Main Street, San Francisco, California 94105

(Name and address of agent for service)

Registrant’s telephone number, including area code: (415) 636-7000

Date of fiscal year end: August 31

Date of reporting period: August 31, 2012

 

 

Item 1:		Report(s) to Shareholders.

Annual report dated August 31, 2012, enclosed.

 

 

Schwab U.S. ETFs

 

Schwab U.S. Broad Market ETF^tm

 

Schwab U.S. Large-Cap ETF^tm

 

Schwab U.S. Large-Cap

Growth ETF^tm

 

Schwab U.S. Large-Cap

Value ETF^tm

 

Schwab U.S. Mid-Cap ETF^tm

 

Schwab U.S. Small-Cap ETF^tm

 

Schwab U.S. Dividend

Equity ETF^tm

 

 

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This wrapper is not part of the shareholder report.

 

Schwab U.S. ETFs

 

Annual Report

August 31, 2012

 

 

Schwab U.S. Broad Market ETF^tm

 

Schwab U.S. Large-Cap ETF^tm

 

Schwab U.S. Large-Cap

Growth ETF^tm

 

Schwab U.S. Large-Cap

Value ETF^tm

 

Schwab U.S. Mid-Cap ETF^tm

 

Schwab U.S. Small-Cap ETF^tm

 

Schwab U.S. Dividend

Equity ETF^tm

 

 

 

 

This page is intentionally left blank.

 

 

 

In This Report

 

Performance at a Glance		2
From the President		3
Fund Management		5
Performance and Fund Facts
Schwab U.S. Broad Market ETF™		6
Schwab U.S. Large-Cap ETF™		8
Schwab U.S. Large-Cap Growth ETF™		10
Schwab U.S. Large-Cap Value ETF™		12
Schwab U.S. Mid-Cap ETF™		14
Schwab U.S. Small-Cap ETF™		16
Schwab U.S. Dividend Equity ETF™		18
Fund Expenses		20
Financial Statements and Portfolio Holdings
Schwab U.S. Broad Market ETF™		21
Schwab U.S. Large-Cap ETF™		43
Schwab U.S. Large-Cap Growth ETF™		56
Schwab U.S. Large-Cap Value ETF™		66
Schwab U.S. Mid-Cap ETF™		75
Schwab U.S. Small-Cap ETF™		85
Schwab U.S. Dividend Equity ETF™		106
Financial Notes		113
Report of Independent Registered Public Accounting Firm		123
Other Federal Tax Information		124
Other Information		125
Investment Advisory Agreement Approval		126
Trustees and Officers		128
Glossary		131
EX-99.CODEETH
EX-99.CERT
EX-99.906CERT

 

 

 

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 Morgan Stanley Capital International 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.

 

 

 

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.schwabetfs.com.

 

 

 

All fund and index figures 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 you cannot invest in them directly. Performance results less than one year are not annualized. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.

 

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price (not NAV). Brokerage commissions will reduce returns.

 

Index ownership—“Standard & Poor’s” and “S&P” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and “Dow Jones” is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and its affiliates and sublicensed for certain purposes by Charles Schwab Investment Management, Inc. (CSIM). The Dow Jones Indexes are a product of S&P Dow Jones Indices LLC or its affiliates, and have been licensed for use by CSIM. The Schwab U.S. ETFs, based on their respective Dow Jones Indexes, are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, nor their respective affiliates make any representation regarding the advisability of investing in such product.

 

 

 

 

2 Schwab U.S. ETFs

 

From the President

 

 

Marie Chandoha is President and CEO of Charles Schwab Investment Management, Inc. and the funds covered in this report.

 

Dear Shareholder,

 

As President and CEO of Charles Schwab Investment Management, Inc., I’d like to thank you for trusting us to help you meet your investment objectives, and for reading this important report concerning the Schwab U.S. ETFs. In spite of muted economic growth and international headwinds during the 12 months ended August 31, 2012, U.S. stocks generated double-digit returns, supported by intermittent signs of progress in Europe and active efforts by the Federal Reserve (Fed) to support a faster economic recovery.

 

U.S. economic growth slowed over the period, while the euro zone’s credit crisis continued, and corporate profits generally rose. The U.S. unemployment rate remained stubbornly high, finishing at 8.1% in August, and economic activity tapered off after the final quarter of 2011. Focused on propping up the U.S. economy, the Fed kept short-term interest rates historically low and implemented a variety of monetary policies. Companies generally grew their earnings faster than estimates, even as conditions proved less promising than had been hoped as 2011 wound to a close.

 

Shares of large-cap companies solidly outperformed shares of mid- and small-cap firms for the 12 months. Illustrating the performance of large-, mid-, and small-cap stocks, the Dow Jones U.S. Large-Cap Total Stock Market Index returned 17.4%, handily outpacing the 13.5% return of the Dow Jones U.S. Mid-Cap Total Stock Market Index, and 14.5% return of the Dow Jones U.S. Small-Cap Total Stock Market Index. Value-oriented stocks modestly outperformed growth shares for the report period, a trend that generally reversed in 2012 as Europe’s crisis began to seem more manageable.

 Asset Class Performance Comparison % returns during the report period

 

This graph compares the performance of various asset classes during the report period. Final performance figures for the period are in the key below.

 

These figures assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and you cannot invest in them directly. Remember that past performance is not an indication of future results.

 

Data source: Index provider websites and Charles Schwab Investment Management, Inc.

 

Nothing in this report represents a recommendation of a security by the investment adviser.

 

Manager views and portfolio holdings may have changed since the report date.

 

 

 

Schwab U.S. ETFs 3

 

From the President continued

 

In spite of muted economic growth and international headwinds during the 12 months ended August 31, 2012, U.S. stocks generated double-digit returns.

 

Thank you for investing in the Schwab U.S. ETFs. As you may be aware, we recently announced that effective September 20, 2012, we reduced the operating expense ratios (OERs) on our entire suite of ETFs. As a result, Schwab ETFs now have some of the lowest OERs in their respective Lipper categories.*

 

We encourage you to review your investment portfolio regularly to ensure that it meets your current financial plan. For answers to frequently asked questions or for more information about the Schwab U.S. ETFs, please visit www.schwabetfs.com. We are also happy to hear from you at 1-800-435-4000.

 

Sincerely,

 

 

Indices are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. Index return figures assume dividends and distributions were reinvested.

 

 

 

 

4 Schwab U.S. ETFs

 

 

 

 

Schwab U.S. ETFs 5

 

 

The Schwab U.S. Broad Market ETF (the fund) seeks to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Broad Stock Market Index^SM (the index). The index includes the largest 2,500 publicly traded U.S. companies for which pricing information is readily available. The index is a float-adjusted market capitalization-weighted index that reflects the shares of securities actually available to investors in the marketplace. The fund invests in a representative sample of securities included in the index that collectively has a similar investment profile to the index. Due to the use of representative sampling, the fund may not hold all of the securities in the index.

 

During the 12-month period that ended August 31, 2012, the fund closely tracked the index. The fund’s market price return was 17.27% and its NAV return was 17.07% (for an explanation of the market price and NAV returns, please refer to footnote 2 on the following page). The index returned 17.13% during the same period. Because the return of the index does not include operational and transactional costs, the return of the fund tends to differ from that of the index.

 

Market Highlights. U.S. stocks overcame global headwinds to generate impressive returns for the 12-month report period, with all sectors of the index registering gains. Equities started out on rocky footing, as the euro zone’s sovereign debt crisis and a subsequent sharp increase in financial market volatility pushed investors toward U.S. Treasuries and other perceived safe havens. As meaningful progress in Europe emerged and the Federal Reserve continued to support an economic recovery in the U.S., investors shifted into potentially higher-yielding assets like stocks. This helped pave the way for a remarkable overall rally by equities—particularly during the fourth quarter of 2011 and first quarter of 2012—in spite of intermittent performance swings.

 

Contributors and Detractors. The Information Technology sector was the biggest contributor to the index’s return, and to the return of the fund. The large average weight of this sector reflected part of the reason for this contribution, with Information Technology stocks comprising more than 19% of the fund. Information Technology stocks returned nearly 24%. One example from this sector was Apple, which designs, manufactures, and markets personal computing and mobile communication devices. The fund’s Apple holdings surged nearly 74% over the 12 months as the underlying company enjoyed robust product sales and corresponding revenue growth.

 

The Consumer Discretionary sector, which represented an average weight of nearly 12% of the index and fund, also provided meaningful contributions. The fund’s Consumer Discretionary stocks returned approximately 22%, reflecting the overall performance of companies involved in retailing, consumer services, media, and other activities. One example from this sector was Home Depot. The fund’s Home Depot holdings surged approximately 74%, as the global home-improvement chain benefited from factors such as impressive operational results amid emerging signs of a turnaround in the U.S. housing sector.

 

The Materials sector generated positive returns for the index and fund, but was one of the weakest contributors due to the sector’s performance compared with other sectors. The Materials sector represented an average weight of approximately 4% of the fund, and returned approximately 5%. One example from this sector was Praxair, which distributes, sells, and produces atmospheric gasses. The fund’s Praxair holdings returned approximately 9%, as the underlying company experienced slowing demand for industrial gas in Europe and some emerging markets.

 

As of 08/31/12:

 

 Statistics

 

 Sector Weightings % of Investments

 

 Top Equity Holdings % of Net Assets²

 

Manager views and portfolio holdings may have changed since the report date.

 

An index is a statistical composite of a specified financial market or sector. Unlike the fund, an index does not actually hold a portfolio of securities and its return is not inclusive of operational and transaction costs incurred by the fund.

 

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF.

 

Source of Sector Classification: S&P and MSCI.

 

 

 

 

6 Schwab U.S. ETFs

 

 Schwab U.S. Broad Market ETF^tm

 

Performance and Fund Facts as of 08/31/12

 

 

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.schwabetfs.com.

 

November 3, 2009 – August 31, 2012
Performance of Hypothetical
$10,000 Investment1

 

 

 Average Annual Total Returns¹

 

 

Fund Expense Ratio⁴: 0.06%

 

 

All total returns on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

 

Index ownership—“Standard & Poor’s” and “S&P” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and “Dow Jones” is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and its affiliates and sublicensed for certain purposes by Charles Schwab Investment Management, Inc. (CSIM). The “Dow Jones U.S. Broad Stock Market Index” is a product of S&P Dow Jones Indices LLC or its affiliates, and has been licensed for use by CSIM. The Schwab U.S. Broad Market ETF is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, nor their respective affiliates make any representation regarding the advisability of investing in such product.

 

 

 

 

Schwab U.S. ETFs 7

 

 

The Schwab U.S. Large-Cap ETF (the fund) seeks to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Large-Cap Total Stock Market Index^SM (the index). The index includes the large-cap portion of the Dow Jones U.S. Total Stock Market Index^SM actually available to investors in the marketplace. The Dow Jones U.S. Large-Cap Total Stock Market Index^SM includes the components ranked 1-750 by full market capitalization. The fund will generally give the same weight to a given stock as does the index.

 

During the 12-month period that ended August 31, 2012, the fund closely tracked the index. The fund’s market price return was 17.32% and its NAV return was 17.36% (for an explanation of the market price and NAV returns, please refer to footnote 2 on the following page). The index returned 17.44% during the same period. Because the return of the index does not include operational and transactional costs, the return of the fund tends to differ from that of the index.

 

Market Highlights. U.S. large-cap stocks overcame global headwinds to generate impressive returns for the 12-month report period, with all sectors of the index registering gains. Equities started out on rocky footing, as the euro zone’s sovereign debt crisis and a correspondingly sharp increase in financial market volatility pushed investors toward U.S. Treasuries and other perceived safe havens. As meaningful progress in Europe emerged and as the Federal Reserve continued to support an economic recovery in the U.S., investors shifted to potentially higher-yielding assets like stocks. This helped pave the way for a remarkable overall rally by equities—particularly during the fourth quarter of 2011 and first quarter of 2012—in spite of intermittent performance swings, while earnings for large-cap U.S. companies generally rose.

 

Contributors and Detractors. The Information Technology sector was the biggest contributor to the index’s return, and to the return of the fund. The large average weight of this sector reflected part of the reason for this contribution, with Information Technology stocks comprising more than 19% of the fund. Information Technology stocks returned roughly 25%. One example from this sector was Apple, which designs, manufactures, and markets personal computing and mobile communication devices. The fund’s Apple holdings surged nearly 74% over the 12 months as the underlying company enjoyed robust product sales and corresponding revenue growth.

 

Consumer Discretionary stocks, which represented an average weight of approximately 12% of the index and fund, also provided meaningful contributions. The fund’s Consumer Discretionary holdings returned approximately 22%, reflecting the overall performance of companies involved in retailing, consumer services, media, and other activities. Shares of Home Depot provided one example of this sector’s performance. The fund’s Home Depot holdings surged approximately 74%, as the global home-improvement chain benefited from factors such as respectable operational results amid emerging signs of a turnaround in the U.S. housing sector.

 

The Materials sector generated positive returns for the index and fund, but was one of the weakest contributors due to the sector’s performance compared with other sectors. The Materials sector represented an average weight of approximately 4% of the fund, and returned approximately 4%. One example from this sector was Praxair, which distributes, sells, and produces atmospheric gasses. The fund’s Praxair holdings returned approximately 9%, as the underlying company experienced slowing demand for industrial gas in Europe and some emerging markets.

 

As of 08/31/12:

 

 Statistics

 

 Sector Weightings % of Investments

 

 Top Equity Holdings % of Net Assets²

 

Manager views and portfolio holdings may have changed since the report date.

 

An index is a statistical composite of a specified financial market or sector. Unlike the fund, an index does not actually hold a portfolio of securities and its return is not inclusive of operational and transaction costs incurred by the fund.

 

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF.

 

Source of Sector Classification: S&P and MSCI.

 

 

 

 

8 Schwab U.S. ETFs

 

 Schwab U.S. Large-Cap ETF^tm

 

Performance and Fund Facts as of 08/31/12

 

 

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.schwabetfs.com.

 

November 3, 2009 – August 31, 2012
Performance of Hypothetical
$10,000 Investment1

 

 

 Average Annual Total Returns¹

 

 

Fund Expense Ratio⁴: 0.08%

 

 

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 you cannot invest in them directly. Performance results less than one year are not annualized.

 

Index ownership—“Standard & Poor’s” and “S&P” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and “Dow Jones” is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and its affiliates and sublicensed for certain purposes by Charles Schwab Investment Management, Inc. (CSIM). The “Dow Jones U.S. Large-Cap Total Stock Market Index” is a product of S&P Dow Jones Indices LLC or its affiliates, and has been licensed for use by CSIM. The Schwab U.S. Large-Cap ETF is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, nor their respective affiliates make any representation regarding the advisability of investing in such product.

 

 

 

 

Schwab U.S. ETFs 9

 

 

The Schwab U.S. Large-Cap Growth ETF (the fund) seeks to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Large-Cap Growth Total Stock Market Index^SM (the index). The index includes the large-cap growth portion of the Dow Jones U.S. Total Stock Market Index^SM actually available to investors in the marketplace. The Dow Jones U.S. Large-Cap Growth Total Stock Market Index^SM includes the components ranked 1-750 by full market capitalization and that are classified as “growth” based on a number of factors. The fund will generally give the same weight to a given stock as does the index.

 

During the 12-month period that ended August 31, 2012, the fund closely tracked the index. The fund’s market price return was 17.06% and its NAV return was 16.96% (for an explanation of the market price and NAV returns, please refer to footnote 2 on the following page). The index returned 17.11% during the same period. Because the return of the index does not include operational and transactional costs, the return of the fund tends to differ from that of the index.

 

Market Highlights. U.S. large-cap stocks overcame global headwinds to generate impressive returns for the 12-month report period, with nine out of the index’s 10 sectors registering gains. Equities started out on rocky footing, as the euro zone’s sovereign debt crisis and a correspondingly sharp increase in financial market volatility pushed investors toward U.S. Treasuries and other perceived safe havens. As meaningful progress in Europe emerged and as the Federal Reserve continued to support an economic recovery in the U.S., investors shifted to potentially higher-yielding assets like stocks. This helped pave the way for a remarkable overall rally by equities—particularly during the fourth quarter of 2011 and first quarter of 2012—in spite of intermittent performance swings, while earnings for large-cap U.S. companies generally rose.

 

Contributors and Detractors. The Information Technology sector was the biggest contributor to the index’s return, and to the return of the fund. The large average weight of this sector reflected part of the reason for this contribution, with Information Technology stocks comprising more than 30% of the fund. Information Technology stocks returned roughly 27%. One example from this sector was Apple, which designs, manufactures, and markets personal computing and mobile communication devices. The fund’s Apple holdings surged nearly 74% over the 12 months as the underlying company enjoyed robust product sales and corresponding revenue growth.

 

Consumer Discretionary stocks, which represented an average weight of approximately 14% of the index and fund, also provided meaningful contributions. The fund’s Consumer Discretionary holdings returned approximately 20%, reflecting the overall performance of companies involved in retailing, consumer services, media, and other activities. Comcast Corp. provided one example of this sector’s performance. The fund’s Comcast holdings surged approximately 59%, as the high-speed Internet, phone service, and video provider benefited from factors such as an impressive cash-flow stream and cable segment growth.

 

The Energy sector was the only sector to generate losses for the index and fund. This sector represented an average weight of almost 10% of the fund. Energy stocks returned approximately -5% for the fund as global economic growth remained disappointing, and corresponding demand for energy resources was limited. Schlumberger, an oil-services company, provided one example from the Energy sector. The fund’s Schlumberger holdings returned approximately -6%.

 

As of 08/31/12:

 

 Statistics

 

 Sector Weightings % of Investments

 

 Top Equity Holdings % of Net Assets²

 

Manager views and portfolio holdings may have changed since the report date.

 

An index is a statistical composite of a specified financial market or sector. Unlike the fund, an index does not actually hold a portfolio of securities and its return is not inclusive of operational and transaction costs incurred by the fund.

 

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF.

 

Source of Sector Classification: S&P and MSCI.

 

 

 

 

10 Schwab U.S. ETFs

 

 Schwab U.S. Large-Cap Growth ETF^tm

 

Performance and Fund Facts as of 08/31/12

 

 

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.schwabetfs.com.

 

December 11, 2009 – August 31, 2012
Performance of Hypothetical
$10,000 Investment1

 

 

 Average Annual Total Returns¹

 

 

Fund Expense Ratio⁴: 0.13%

 

 

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 you cannot invest in them directly. Performance results less than one year are not annualized.

 

Index ownership—“Standard & Poor’s” and “S&P” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and “Dow Jones” is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and its affiliates and sublicensed for certain purposes by Charles Schwab Investment Management, Inc. (CSIM). The “Dow Jones U.S. Large-Cap Growth Total Stock Market Index” is a product of S&P Dow Jones Indices LLC or its affiliates, and has been licensed for use by CSIM. The Schwab U.S. Large-Cap Growth ETF is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, nor their respective affiliates make any representation regarding the advisability of investing in such product.

 

 

 

 

Schwab U.S. ETFs 11

 

 

The Schwab U.S. Large-Cap Value ETF (the fund) seeks to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Large-Cap Value Total Stock Market Index^SM (the index). The index includes the large-cap value portion of the Dow Jones U.S. Total Stock Market Index^SM actually available to investors in the marketplace. The Dow Jones U.S. Large-Cap Value Total Stock Market Index^SM includes the components ranked 1-750 by full market capitalization and that are classified as “value” based on a number of factors. The fund will generally give the same weight to a given stock as does the index.

 

During the 12-month period that ended August 31, 2012, the fund closely tracked the index. The fund’s market price return was 17.66% and its NAV return was 17.53% (for an explanation of the market price and NAV returns, please refer to footnote 2 on the following page). The index returned 17.73% during the same period. Because the return of the index does not include operational and transactional costs, the return of the fund tends to differ from that of the index.

 

Market Highlights. U.S. large-cap stocks overcame global headwinds to generate impressive returns for the 12-month report period, with all sectors of the index registering gains. Equities started out on rocky footing, as the euro zone’s sovereign debt crisis and a correspondingly sharp increase in financial market volatility pushed investors toward U.S. Treasuries and other perceived safe havens. As meaningful progress in Europe emerged and as the Federal Reserve continued to support an economic recovery in the U.S., investors shifted to potentially higher-yielding assets like stocks. This helped pave the way for a remarkable overall rally by equities—particularly during the fourth quarter of 2011 and first quarter of 2012—in spite of intermittent performance swings, while earnings for large-cap U.S. companies generally rose.

 

Contributors and Detractors. The Financials sector was the biggest contributor to the index’s return, and to the return of the fund. The large average weight of this sector reflected part of the reason for this contribution, with Financials stocks comprising nearly 21% of the fund. Financials stocks returned roughly 15% for the report period. The fund’s Wells Fargo shares provided one example of this sector’s performance, rising nearly 34% as the diversified financial services company benefited from factors such as an improving mortgage-origination business and investment-banking fee growth.

 

Consumer Discretionary stocks, which represented an average weight of approximately 9% of the index and fund, also provided meaningful contributions. The fund’s Consumer Discretionary stocks returned approximately 25%, reflecting the overall performance of companies involved in retailing, consumer services, media, and other activities. Home Depot provided one example of this sector’s performance. The fund’s Home Depot holdings surged approximately 74%, as the global home-improvement chain benefited from factors such as respectable operational results amid emerging signs of a turnaround in the U.S. housing sector.

 

The Materials sector generated positive returns for the index and fund, but was one of the weakest contributors due to the sector’s performance compared with other sectors. The Materials sector represented an average weight of approximately 3% of the fund, and returned roughly 10%. Dow Chemical provided one example of this sector’s performance. The fund’s Dow Chemical holdings returned roughly 7% as the diversified, globally present chemical company experienced slowing business trends amid lackluster economic fundamentals around the world.

 

As of 08/31/12:

 

 Statistics

 

 Sector Weightings % of Investments

 

 Top Equity Holdings % of Net Assets²

 

Manager views and portfolio holdings may have changed since the report date.

 

An index is a statistical composite of a specified financial market or sector. Unlike the fund, an index does not actually hold a portfolio of securities and its return is not inclusive of operational and transaction costs incurred by the fund.

 

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF.

 

Source of Sector Classification: S&P and MSCI.

 

 

 

 

12 Schwab U.S. ETFs

 

 Schwab U.S. Large-Cap Value ETF^tm

 

Performance and Fund Facts as of 08/31/12

 

 

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.schwabetfs.com.

 

December 11, 2009 – August 31, 2012
Performance of Hypothetical
$10,000 Investment1

 

 

 Average Annual Total Returns¹

 

 

Fund Expense Ratio⁴: 0.13%

 

 

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 you cannot invest in them directly. Performance results less than one year are not annualized.

 

Index ownership—“Standard & Poor’s” and “S&P” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and “Dow Jones” is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and its affiliates and sublicensed for certain purposes by Charles Schwab Investment Management, Inc. (CSIM). The “Dow Jones U.S. Large-Cap Value Total Stock Market Index” is a product of S&P Dow Jones Indices LLC or its affiliates, and has been licensed for use by CSIM. The Schwab U.S. Large-Cap Value ETF is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, nor their respective affiliates make any representation regarding the advisability of investing in such product.

 

 

 

 

Schwab U.S. ETFs 13

 

 

The Schwab U.S. Mid-Cap ETF (the fund) seeks to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Mid-Cap Total Stock Market Index^SM (the index). The index includes the mid-cap portion of the Dow Jones U.S. Total Stock Market Index^SM actually available to investors in the marketplace. The Dow Jones U.S. Mid-Cap Total Stock Market Index^SM includes the components ranked 501–1,000 by full market capitalization. The fund will generally give the same weight to a given security as does the index.

 

During the 12-month period that ended August 31, 2012, the fund closely tracked the index. The fund’s market price return was 13.31% and its NAV return was 13.32% (for an explanation of the market price and NAV returns, please refer to footnote 2 on the following page). The index returned 13.45% during the same period. Because the return of the index does not include operational and transactional costs, the return of the fund tends to differ from that of the index.

 

Market Highlights. U.S. mid-cap stocks overcame global headwinds to generate respectable returns for the 12-month report period, with nine out of the index’s 10 sectors registering gains. Equities started out on rocky footing, as the euro zone’s sovereign debt crisis and a correspondingly sharp increase in financial market volatility pushed investors toward U.S. Treasuries and other perceived safe havens. Investors soon shifted to potentially higher-yielding assets like stocks, however, as meaningful progress in Europe emerged, and as the Federal Reserve continued to support an economic recovery in the U.S. through a variety of active efforts. In spite of intermittent up- and downdrafts, equities staged a remarkable overall rally, while U.S. stock market volatility eventually dwindled.

 

Contributors and Detractors. The Financials sector was the biggest contributor to the index’s return, and to the return of the fund. The large average weight of this sector reflected part of the reason for this contribution, with Financials stocks comprising nearly 21% of the fund. Financials stocks returned roughly 14% for the report period. Digital Realty Trust—a company that acquires, owns, and manages technology-related real estate—provided one example of this sector’s performance. The fund’s Digital Realty Trust holdings rose nearly 25% as U.S. real estate investment trust companies benefitted from generally improving property fundamentals and earnings.

 

Consumer Discretionary stocks, which represented an average weight of approximately 15% of the index and fund, also provided meaningful contributions. The fund’s Consumer Discretionary stocks returned approximately 21%, reflecting the overall performance of companies involved in retailing, consumer services, media, and other activities. PulteGroup—a company that constructs and sells homes, communities, and residential land—provided one example of this sector’s performance. The fund’s PulteGroup holdings surged approximately 185% amid emerging signs of a turnaround in the U.S. housing sector, and on the heels of the sector’s lackluster performance in recent years.

 

The Energy sector was the only sector to generate losses for the index and fund. This sector represented an average weight of roughly 6% of the fund. Energy stocks returned approximately -7% for the fund as global economic growth remained disappointing, and corresponding demand for energy resources was limited. The fund’s holdings in Rowan Companies—a provider of contract drilling services for domestic and international interests with a global fleet of rigs—provided one example of this sector’s performance, returning roughly -3%.

 

As of 08/31/12:

 

 Statistics

 

 Sector Weightings % of Investments

 

 Top Equity Holdings % of Net Assets²

 

Manager views and portfolio holdings may have changed since the report date.

 

An index is a statistical composite of a specified financial market or sector. Unlike the fund, an index does not actually hold a portfolio of securities and its return is not inclusive of operational and transaction costs incurred by the fund.

 

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF.

 

Source of Sector Classification: S&P and MSCI.

 

 

 

 

14 Schwab U.S. ETFs

 

 Schwab U.S. Mid-Cap ETF^tm

 

Performance and Fund Facts as of 08/31/12

 

 

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.schwabetfs.com.

 

January 13, 2011 – August 31, 2012
Performance of Hypothetical
$10,000 Investment1

 

 

 Average Annual Total Returns¹

 

 

Fund Expense Ratio⁴: 0.13%

 

 

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 you cannot invest in them directly. Performance results less than one year are not annualized.

 

Index ownership—“Standard & Poor’s” and “S&P” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and “Dow Jones” is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and its affiliates and sublicensed for certain purposes by Charles Schwab Investment Management, Inc. (CSIM). The “Dow Jones U.S. Mid-Cap Total Stock Market Index” is a product of S&P Dow Jones Indices LLC or its affiliates, and has been licensed for use by CSIM. The Schwab U.S. Mid-Cap ETF is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, nor their respective affiliates make any representation regarding the advisability of investing in such product.

 

 

 

 

Schwab U.S. ETFs 15

 

 

The Schwab U.S. Small-Cap ETF (the fund) seeks to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Small-Cap Total Stock Market Index^SM (the index). The index includes the small-cap portion of the Dow Jones U.S. Total Stock Market Index^SM actually available to investors in the marketplace. The Dow Jones U.S. Small-Cap Total Stock Market Index^SM includes the components ranked 751-2,500 by full market capitalization. The fund will generally give the same weight to a given stock as does the index.

 

During the 12-month period that ended August 31, 2012, the fund closely tracked the index. The fund’s market price return was 14.48% and its NAV return was 14.52% (for an explanation of the market price and NAV returns, please refer to footnote 2 on the following page). The index returned 14.54% during the same period. Because the return of the index does not include operational and transactional costs, the return of the fund tends to differ from that of the index.

 

Market Highlights. U.S. small-cap stocks overcame global headwinds to generate respectable returns for the 12-month report period, with nine out of the index’s 10 sectors registering gains. Equities started out on rocky footing, as the euro zone’s sovereign debt crisis and a correspondingly sharp increase in financial market volatility pushed investors toward U.S. Treasuries and other perceived safe havens. Investors soon shifted to potentially higher-yielding assets like stocks, however, as meaningful progress in Europe emerged, and as the Federal Reserve continued to support an economic recovery in the U.S. In spite of intermittent up- and downdrafts, equities staged a remarkable overall rally, while U.S. stock market volatility eventually dwindled.

 

Contributors and Detractors. The Financials sector was the biggest contributor to the index’s return, and to the return of the fund. The large average weight of this sector reflected part of the reason for this contribution, with Financials stocks comprising nearly 21% of the fund. Financials stocks returned roughly 18% for the report period. Taubman Centers Inc.—a company that acquires, owns, and operates regional shopping centers—provided one example from this sector. The fund’s Taubman Centers Inc. holdings rose nearly 43% as U.S. real estate investment trust companies benefitted from generally improving property fundamentals and earnings.

 

Consumer Discretionary stocks, which represented an average weight of approximately 14% of the index and fund, also provided meaningful contributions. The fund’s Consumer Discretionary stocks returned approximately 21%, reflecting the overall performance of companies involved in retailing, consumer services, media, and other activities. One example of this sector’s performance was franchise bakery café Panera Bread Company. The fund’s Panera Bread Company holdings rose approximately 40%, helped by factors such as the underlying company’s impressive earnings results.

 

The Energy sector was the only sector to generate losses for the index and fund. This sector represented an average weight of roughly 6% of the fund. Energy stocks returned approximately -9% for the fund as global economic growth remained disappointing, and corresponding demand for energy resources was limited. The fund’s holdings in Rosetta Resources—an oil and gas exploration and production company—provided one example of this sector’s performance, returning roughly -7%.

 

As of 08/31/12:

 

 Statistics

 

 Sector Weightings % of Investments

 

 Top Equity Holdings % of Net Assets²

 

Manager views and portfolio holdings may have changed since the report date.

 

An index is a statistical composite of a specified financial market or sector. Unlike the fund, an index does not actually hold a portfolio of securities and its return is not inclusive of operational and transaction costs incurred by the fund.

 

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF.

 

Source of Sector Classification: S&P and MSCI.

 

 

 

 

16 Schwab U.S. ETFs

 

 Schwab U.S. Small-Cap ETF^tm

 

Performance and Fund Facts as of 08/31/12

 

 

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.schwabetfs.com.

 

November 3, 2009 – August 31, 2012
Performance of Hypothetical
$10,000 Investment1

 

 

 Average Annual Total Returns¹

 

 

Fund Expense Ratio⁴: 0.13%

 

 

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 you cannot invest in them directly. Performance results less than one year are not annualized.

 

Investments in smaller companies typically exhibit higher volatility.

 

Index ownership—“Standard & Poor’s” and “S&P” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and “Dow Jones” is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and its affiliates and sublicensed for certain purposes by Charles Schwab Investment Management, Inc (CSIM). The “Dow Jones U.S. Small-Cap Total Stock Market Index” is a product of S&P Dow Jones Indices LLC or its affiliates, and has been licensed for use by CSIM. The Schwab U.S. Small-Cap ETF is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, nor their respective affiliates make any representation regarding the advisability of investing in such product.

 

 

 

 

Schwab U.S. ETFs 17

 

 

The Schwab U.S. Dividend Equity ETF (the fund) seeks to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Dividend 100 Index^SM (the index). The 100-component index is a subset of the Dow Jones U.S. Broad Market Index^SM, excluding REITs, master limited partnerships, preferred stocks, and convertibles. The index is modified market-capitalization weighted. The fund will generally give the same weight to a given stock as does the index.

 

During the reporting period that began with the fund’s inception date of October 20, 2011, and ended August 31, 2012, the fund’s market price return was 16.95% and its NAV return was 16.83%, closely tracking the index (for an explanation of the market price and NAV returns, please refer to footnote 2 on the following page). The index returned 17.09% during the same period. Because the return of the index does not include operational and transactional costs, the return of the fund tends to differ from that of the index. As of August 31, 2012, the fund’s dividend yield was 3.23%, matching the 3.23% yield of the index, and the fund’s 30-day SEC yield was 2.99%.

 

Market Highlights. U.S. large-cap stocks overcame global headwinds to generate impressive returns for the report period, with all sectors of the index registering gains. Equities started out on rocky footing, as the euro zone’s sovereign debt crisis and a correspondingly sharp increase in financial market volatility pushed investors toward U.S. Treasuries and other perceived safe havens. As meaningful progress in Europe emerged and as the Federal Reserve continued to support an economic recovery in the U.S., investors shifted to potentially higher-yielding assets like stocks. This helped pave the way for a remarkable overall rally by equities—particularly during the fourth quarter of 2011 and first quarter of 2012—in spite of intermittent performance swings, while earnings for large-cap U.S. companies generally rose.

 

Contributors and Detractors. The Consumer Staples sector was the biggest contributor to the index’s return, and to the return of the fund. The large average weight of this sector reflected part of the reason for this contribution, with Consumer Staples stocks comprising approximately 26% of the fund. Consumer Staples stocks returned roughly 16%. The fund’s Wal-Mart holdings provided one example of this sector’s performance, rising approximately 32% as the discount store and supercenter company benefitted from supportive factors such as rising business momentum.

 

Industrials stocks, which represented an average weight of approximately 17% of the index and the fund, also provided meaningful contributions. The fund’s Industrials stocks returned approximately 18%. The fund’s holdings in 3M Company—which operates in markets such as electronics, industrial, telecommunications—provided one example of this sector’s performance, rising approximately 21%.

 

The Utilities sector generated narrowly positive returns for the index and the fund, but was the weakest contributor due to the sector’s performance compared with other sectors. The Utilities sector represented an average weight of approximately 3% of the fund, and finished with a roughly flat return. The fund’s holdings in PPL Corp.—an energy and utility holding company—provided one example of this sector’s performance, returning roughly 5%.

 

As of 08/31/12:

 

 Statistics

 

 Sector Weightings % of Investments

 

 Top Equity Holdings % of Net Assets²

 

Manager views and portfolio holdings may have changed since the report date.

 

An index is a statistical composite of a specified financial market or sector. Unlike the fund, an index does not actually hold a portfolio of securities and its return is not inclusive of operational and transaction costs incurred by the fund.

 

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF.

 

Source of Sector Classification: S&P and MSCI.

 

 

 

 

18 Schwab U.S. ETFs

 

 Schwab U.S. Dividend Equity ETF^tm

 

Performance and Fund Facts as of 08/31/12

 

 

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.schwabetfs.com.

 

October 20, 2011 – August 31, 2012
Performance of Hypothetical
$10,000 Investment1

 

 

 Total Returns¹

 

 

Fund Expense Ratio⁴: 0.17%

 

 

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 you cannot invest in them directly. Performance results less than one year are not annualized.

 

Index ownership—“Standard & Poor’s” and “S&P” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and “Dow Jones” is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and its affiliates and sublicensed for certain purposes by Charles Schwab Investment Management, Inc. (CSIM). The “Dow Jones U.S. Dividend 100 Index” is a product of S&P Dow Jones Indices LLC or its affiliates, and has been licensed for use by CSIM. The Schwab U.S. Dividend Equity ETF is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, nor their respective affiliates make any representation regarding the advisability of investing in such product.

 

 

 

 

Schwab U.S. ETFs 19

 

Fund Expenses (Unaudited)

 

 Examples for a $1,000 Investment

 

As a fund shareholder, you incur two types of costs: (1) transaction costs, including brokerage commissions on purchases and sales of fund shares; and, (2) ongoing costs, including management fees and other fund expenses.

 

The expense examples below are intended to help you understand your ongoing cost (in dollars) of investing in a fund and to compare this cost with the ongoing cost of investing in other mutual funds. These examples are based on an investment of $1,000 invested for six months beginning March 1, 2012 and held through August 31, 2012.

 

Actual Return lines in the table below provide information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value ¸ $1,000 = 8.6), then multiply the result by the number given for your fund or share class under the heading entitled “Expenses Paid During Period.”

 

Hypothetical Return lines in the table below provide information about hypothetical account values and hypothetical expenses based on a fund’s actual expense ratio and an assumed return of 5% per year before expenses. Because the return used is not an actual return, it may not be used to estimate the actual ending account value or expenses you paid for the period.

 

You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only, and do not reflect any transactional costs, including any redemption fees or brokerage commissions you may pay when purchasing or selling shares of the fund. If these transactional costs were included, your costs would have been higher.

 

 

 

 

 

 

 

20 Schwab U.S. ETFs

 

 

Financial Statements

 

Financial Highlights

 

¹ Commencement of operations.

² Calculated based on the average shares outstanding during the period.

³ Not annualized.

⁴ Annualized.

⁵ Effective June 14, 2010, the annual operating expense was reduced. The ratio presented for period ended 8/31/10 is a blended rate.

⁶ Portfolio turnover rate excludes securities received or delivered from processing of in-kind creations or redemptions.

 

 

 

See financial notes 21

 

 Schwab U.S. Broad Market ETF

 

 

Portfolio Holdings as of August 31, 2012

 

 

This section shows all the securities in the fund’s portfolio and their values as of the report date.

 

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings on a daily basis on the fund’s website at www.schwabetfs.com.

 

 

 

 

 

22 See financial notes

 

 Schwab U.S. Broad Market ETF

 

 

Portfolio Holdings continued