Schwab REIT ETF vs. State Street Real Estate SPDR: Which Real Estate ETF Is Actually More Diversified?

Investors choosing between Schwab U.S. REIT ETF (NYSEMKT:SCHH) and State Street Real Estate Select Sector SPDR ETF (NYSEMKT:XLRE) must weigh the Schwab fund's lower cost against the SPDR trust's higher yield.

Both funds provide exposure to the domestic real estate market but follow different inclusion criteria. While the State Street fund limits its scope to the real estate components of the S&P 500, the Schwab fund offers a broader view of the U.S. equity real estate investment trust landscape. This analysis breaks down the cost structures, recent performance, and underlying holdings of both funds to help determine which strategy aligns with your portfolio goals and income needs.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The Schwab fund is slightly more affordable with a 0.07% expense ratio, though the 0.01 percentage point difference is negligible for most portfolios. Income-focused investors may find the State Street fund more appealing, as it currently offers a higher payout with a 3.2% yield compared to the 2.8% yield provided by the Schwab fund.

Performance & risk comparison

What's inside

The Schwab U.S. REIT ETF seeks to track the total return of an index composed entirely of U.S. equity-classified real estate investment trusts. It maintains 100% exposure to the real estate sector and provides wide diversification through 121 holdings. Its largest positions include Welltower at 10.90%, Prologis at 8.65%, and Simon Property Group at 4.73%. It was launched in 2011. Schwab U.S. REIT ETF has paid $0.66 per share over the trailing 12 months, which on its recent $23.77 share price works out to a 2.8% yield.

The State Street Real Estate Select Sector SPDR ETF mirrors the Real Estate Select Sector Index, which includes companies within the S&P 500 involved in real estate management, development, and equity REITs. It also has 100% real estate exposure but is more concentrated, holding 31 positions. Its top holdings include Welltower at 11.3%, Prologis at 8.95%, and Equinix (NASDAQ:EQIX) at 7%. It was launched in 2015. State Street Real Estate Select Sector SPDR ETF has paid $1.41 per share over the trailing 12 months, which on its recent $44.40 share price works out to a 3.2% yield.

For more guidance on ETF investing, check out the full guide at this link.

Which looks like the better buy

SCHH and XLRE are two popular low-cost real estate exchange-traded funds. They’ve demonstrated similar results over the last five years in terms of both total return and maximum downside, and their betas indicate both are fairly steady investments relative to the S&P 500. Plus, their top holdings are pretty similar. So, which looks like the better buy today?

It likely comes down to what you want your real estate investment to look like. Holding SCHH means you hold only equity real estate investment trusts, or REITs, but you own a lot of them. REITs operate as landlords for large parcels of real estate. Welltower, for example, holds healthcare properties focused on senior living. Prologis, the world's largest industrial REIT, owns and manages logistics facilities, distribution centers, and warehouses. These are steady, income-generating businesses, and SCHH spreads its risk among a wider pool of equities.

XLRE also holds Welltower and Prologis as its two top investments, and its third-largest position, Equinix, is also a REIT, but XLRE doesn’t limit its portfolio to REITs only. It holds a broader selection of real estate-focused stocks, generating diversification through asset type, though its portfolio is much more concentrated, with only 31 holdings.

If your focus is on dividend yield alone, XLRE may be a slightly better selection. XLRE may also win out if you’re looking to hold a wider range of business structures outside of REITs. If you’re looking to spread risk across a wider portfolio by both number of holdings and assets under management, however, SCHH may be more appealing.

Sarah Sidlow has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Equinix, Prologis, and Simon Property Group. The Motley Fool has a disclosure policy.