Schwab REIT ETF vs. Vanguard Real Estate ETF: Which Wins for the Long Term?

The Vanguard Real Estate ETF (NYSEMKT:VNQ) provides broader market exposure and a higher dividend yield, while the cost-efficient Schwab U.S. REIT ETF (NYSEMKT:SCHH) offers a more concentrated portfolio with lower annual management fees.

Real estate investment trusts (REITs) offer a way to gain exposure to property markets without the burden of managing physical buildings. While both of these funds target U.S. real estate, they differ in index construction, cost, and depth of holdings. This comparison explores how these differences could impact an investor's yield and risk profile over the long term.

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 U.S. REIT ETF is the more affordable option with an expense ratio of 0.07%, whereas the Vanguard Real Estate ETF charges 0.13%. However, the Vanguard fund currently offers a higher payout, providing a yield gap of 0.82 percentage points.

Performance & risk comparison

What's inside

The Vanguard Real Estate ETF offers a broad approach to the sector by tracking an index that captures various property sub-industries. The fund currently holds 139 stocks and maintains a portfolio composed of 99% Real Estate. Its largest positions include Welltower at 8.7%, Prologis at 6.8%, and Equinix at 5.5%. This fund was launched in 2004. Vanguard Real Estate ETF has paid $3.47 per share over the trailing 12 months, which on its recent ~$92.91 share price works out to a 3.7% yield.

The Schwab U.S. REIT ETF follows a more streamlined strategy, seeking to replicate the return of an index composed entirely of U.S. equity REITs. It holds 122 positions and is weighted 100% toward Real Estate. Its top holdings include Welltower at 10.2%, Prologis at 8.9%, and Equinix at 4.7%. This fund was launched in 2011. Schwab U.S. REIT ETF has paid $0.66 per share over the trailing 12 months, which on its recent ~$22.74 share price works out to a 2.9% yield.

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Which looks like the better buy

The real estate market has underperformed over the last few years, primarily due to persistently high inflation, which has driven up mortgage rates and the costs of supplies and renovations. While high rates remain a risk in the sector, real estate stocks, particularly real estate investment trusts, can still be a good investment for a diversified portfolio.

REITS are especially attractive to income investors because they pay out at least 90% of their taxable income to shareholders as dividends. The comparison between VNQ and SCHH comes down to whether you want to own a fund that only holds REITs or one that also holds other types of real estate companies.

VNQ is a slightly larger fund in terms of number of holdings, and it typically delivers a higher dividend yield, beating out SCHH by nearly 1 percentage point. But it's also a bit more expensive to own, which may eat into its long-term returns. It's a pretty close comparison between the two funds (indeed, they share the same top three holdings), but as a long-term investor, I still like VNQ in this matchup for its higher dividend and extra diversification, despite its higher expense ratio.

Sarah Sidlow has positions in Vanguard Real Estate ETF. The Motley Fool has positions in and recommends Equinix, Prologis, and Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.