My Favorite REIT ETF Right Now (And It's Not VNQ)

David Dierking

Real estate gets a reputation as a defensive hedge during volatile markets and a high yield option for income seekers. And deservedly so. They're backed by steady and predictable cash flow streams that many companies may not be able to replicate during challenging market environments.

Vanguard, not surprisingly, has the most popular REIT ETF in the space - the Vanguard Real Estate ETF (VNQ). It has more than 6 times the assets of the next closest real estate ETF, ironically, another Vanguard product.

Due to its sheer size and popularity, many investors assume it's the best option for real estate exposure. I would disagree. While it's certainly a fine ETF that will do the job, there's one ETF that I think is better.

The Schwab U.S. REIT ETF (SCHH).

Background

SCHH is a fund that offers broad real estate exposure with a couple of twists. It excludes non-REIT stocks that may be included in other indices and it excludes mortgage REITs. The latter point was a big advantage for SCHH earlier this year when mREITs were among the market's worst performing groups.

SCHH has a high degree of overlap with VNQ - 85% according to the ETF overlap tool from ETFRC. The biggest difference is that VNQ has more holdings than SCHH, including some of the securities mentioned earlier.

Yield and Expense Ratio

SCHH's big advantage currently over VNQ is that it comes with both a higher yield and a lower expense ratio.

SCHH yields 4.4% vs. 3.8% for VNQ. SCHH's expense ratio of 0.07% also beats out VNQ's 0.12%.

The expense ratio is admittedly a small difference that'll likely only be important to investors committing large sums of money. The dividend yield, however, is a noticeable difference.

Conclusion

SCHH and VNQ are two very similar portfolios that will large perform in unison. Given that, even small differences can be the tiebreaker.

In a vacuum, I always prefer cheaper ETFs and the yield gap is an important differentiator when choosing between the two funds.

In the end, SCHH is my top choice in the REIT space.

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