VNQ vs. SCHH: Which Real Estate ETF Is the Better Buy?

The choice between the Schwab U.S. REIT ETF (NYSEMKT:SCHH) and the Vanguard Real Estate ETF (NYSEMKT:VNQ) comes down to a familiar investing trade-off: lower costs versus higher income.

Both exchange-traded funds provide broad exposure to domestic real estate investment trusts -- unique tax-advantaged companies that own and operate income-producing properties ranging from apartment complexes to data centers. While VNQ offers a more seasoned track record and higher current income, SCHH provides a lower-cost entry point into the sector for investors seeking long-term growth.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-year return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

SCHH is the less expensive option for long-term holders, with a lean expense ratio of 0.07%, while VNQ charges nearly double that at 0.13%. However, VNQ has a higher dividend yield of 3.64% compared to SCHH’s 2.78%.

Performance & risk comparison

What's inside

Launched in 2004, the Vanguard Real Estate ETF (NYSEMKT:VNQ) invests primarily in real estate investment trusts that own income-producing properties. It manages 145 holdings, and its largest positions include the Vanguard Real Estate II Index (NASDAQMUTFUND:VRTPX) at 14.5%, Welltower (NYSE:WELL) at 7.7%, and Prologis (NYSE:PLD) at 7.1%.

Launched in 2011, the Schwab U.S. REIT ETF is designed to track the total return of the Dow Jones Equity All REIT Capped Index. The fund manages 123 holdings, including top positions Welltower at 9.6%, Prologis at 8.9%, and Equinix (NASDAQ:EQIX) at 4.9%.

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What this means for investors

Real estate has long served as a reliable source of income and portfolio diversification -- and both VNQ and SCHH give everyday investors an accessible way to tap into that potential without the hassle of owning physical property.

The headline numbers here are close enough that the "right" choice largely comes down to what kind of investor you are. If you're in or near retirement and leaning on your portfolio for income, VNQ's 3.64% dividend yield gives you more cash every quarter than SCHH. You’ll pay a slightly higher 0.13% expense ratio to get it -- but for income-seekers, that trade-off may make sense.

On the other hand, SCHH's 0.07% expense ratio is among the lowest you’ll find for a REIT ETF. Over a long time horizon, that cost advantage can compound meaningfully. Investors who are still in accumulation mode -- reinvesting distributions and focused on total return -- may find SCHH to be a better fit.

It's also worth noting that both funds share several holdings, with Welltower and Prologis sitting at or near the top of each portfolio.

The bottom line: either fund is a solid choice. Both offer a straightforward, low-cost way to own a slice of American real estate. The better buy simply depends on whether your priority right now is maximizing income or minimizing costs.

Andy Gould has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Equinix, Prologis, and Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.