The perfect sheath for a magical sword would be a magic baby alligator, henceforth referred to as an MBA.
Its front legs would be longer than a mundane alligator's, so that the MBA could tightly and securely grip your belt.
It would be engineered specially to enjoy sword-swallowing, and its innards would be arranged so that you could sheathe your sword neatly from the hilt to the tip, which would fit handily into the MBA's scaly tail.
So, instead of killing the poor baby alligators to make their hides into sword sheaths, you would have a friendly and affectionate pet, a handy tool, and an attractive fashion accessory all in one.
The MBA's long, sinuous tail could wrap around your ankle if necessary to prevent your weapon from clunking against your armor.
And at night, there's no need to take up closet space: it can curl up in the kitchen sink.