ETF Comparison: Schwab U.S. REIT ETF (SCHH) Versus Vanguard Real Estate ETF (VNQ)

SCHH vs VNQ: total cost of ownership

Both ETFs are known for their low-cost structures, primarily due to their passive index-tracking methodologies.

VNQ

has an expense ratio of 0.12%, which translates to about $12 per year for every $10,000 invested. SCHH

SCHH

-1.02%

, on the other hand, is even cheaper with an expense ratio of 0.07%, costing around $7 per year for the same investment amount.

However, expense ratios aren't the only costs to consider. The bid-ask spread is another important factor, especially if you plan on trading the ETF frequently.

The bid-ask spread represents the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. A wider spread can increase your costs when entering or exiting a position.

SCHH vs VNQ: methodology and holdings

VNQ

tracks the MSCI US Investable Market Real Estate 25/50 Index, which includes a broader range of real estate-related equities.

Notably, VNQ's top holding is actually a mutual fund—the Vanguard Real Estate II Index Fund Institutional Plus Shares (VRTPX). Vanguard employs this strategy to achieve better index tracking and ensure liquidity, which is a distinctive feature of VNQ.

In addition to its core REIT holdings, VNQ's portfolio is broader, with 155 holdings compared to SCHH's 118. This broader scope includes real estate equities that are not strictly REITs.

Examples of these non-REIT holdings include companies like Zillow Group, CBRE Group, and Compass Inc. These companies are involved in real estate services, brokerage, and technology, providing a more diversified exposure to the real estate sector.

On the other hand, SCHH

tracks the Dow Jones U.S. Select REIT Index, which focuses purely on REITs. To qualify as a REIT, companies must meet specific regulatory requirements, including distributing at least 90% of their taxable income as dividends to shareholders.

This focus on REITs means that SCHH provides more targeted exposure to companies that own, operate, or finance income-producing real estate. In other words, you're getting more core real estate exposure as opposed to periphery support.

Now, which ETF is better depends on your investment objectives. If you prefer a pure-play REIT exposure as an alternative asset class, SCHH

might be more suitable due to its strict focus on REITs.

Conversely, if you're looking for broader real estate sector exposure, including companies involved in real estate services and technology, VNQ

offers a wider portfolio that may align better with those goals.

Finally, both ETFs are fairly top-heavy, with over half of their portfolio weighted in the top 15 holdings. To me, this makes them better for a satellite as opposed to a core holding.

SCHH vs VNQ: risk and return

As always, it's important to remember that past returns don't predict future performance, but they can provide insights into how two ETFs with similar strategies and objectives have fared historically. This can help you assess their suitability for your risk appetite.

When comparing the SCHH and VNQ, we see that over the three and one-year periods, SCHH has outperformed VNQ. Additionally, SCHH has garnered greater net inflows, indicating its popularity among investors.

Regarding volatility, both ETFs exhibit similar historical standard deviations and drawdowns. It's important to note how steep and prolonged these drawdowns can be. This sector can experience significant fluctuations, which is something investors need to be prepared for.

In terms of risk and return, this part of the comparison is a toss-up. The difference in performance between SCHH and VNQ is not substantial enough to be a decisive factor.

Both ETFs offer similar risk profiles and return potential, making them suitable candidates for tax loss harvesting. You can feel comfortable switching between these two ETFs without significantly altering your investment risk or expected returns.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.