SCHH - SCHH: Better Options Out There

2023-10-22 11:27:05 ET

Summary

• The Schwab U.S. REIT ETF is a cost-effective option for gaining exposure to the U.S. real estate market.
• The ETF holds a diversified portfolio of approximately 124 holdings, with a high concentration in the top ten holdings.
• SCHH has underperformed compared to its peers and carries potential sector risks, making it a less desirable choice for risk-averse investors.

I would give a thousand furlongs of sea for an acre of barren ground. - Shakespeare

I've written about REITs before and am on a relative basis optimistic on them very long-term just given how badly they've broadly underperformed for years, but not all REIT ETFs are created equal. Among the plethora of available options, the Schwab U.S. REIT ETF ( SCHH ) is one that's been getting traction, but it seems to be a suboptimal way to gain exposure to the space compared to some of the more traditional REIT funds out there.

SCHH is an exchange-traded fund that seeks to mirror the performance of U.S. equity REITs. Operating with an expense ratio of a mere 0.07%, SCHH offers a cost-effective avenue for investors to gain exposure to the U.S. real estate market. The ETF encompasses a broad portfolio including various types of REITs, excluding mortgage or hybrid REITs, thereby offering a diversified investment option.

Detailed Overview of SCHH Holdings

The portfolio holds approximately 124 holdings. The top ten holdings constitute about 46% of the overall portfolio. These top holdings include well-known entities like Prologis Inc., American Tower Corporation, and Equinix Inc., that have demonstrated financial resilience and stable dividend payouts. However, the concentration within the top ten names is notably high, which could potentially elevate the portfolio's risk profile.

Top 10 Holdings of SCHH

SCHH Performance: Past and Predicted

Performance has been mixed relative to its category. It seems to go through periods where it's in the top of its category to being among the last. Mean reversion, it would appear, happens not just in life but also in performance rankings.

When we compare the fund to the Vanguard Real Estate ETF ( VNQ ) which is one of the behemoths in the space, it's clear that SCHH never fully recovered on a relative basis from the 2019 level prior to the Covid crash. It's more recently outperformed, but that's a lot of wood to chop to get back to doing better than VNQ.

Dividend Yields & Style Tilt

The dividend yield is another important measure to consider while evaluating REIT ETFs. It has a good history of solidly consistent yield, with the current yield creeping up to the highest it's ever been. REITs are typically attractive for their income, and the fund stays true to that. The reality of course is that yield alone shouldn't be a determining factor given what short-duration Treasuries are yielding.

It's also worth noting that this fund (and REITs in general) are primarily mid-cap in nature. This matters because so long as we are in a cycle where investors broadly favor large-cap equities, it's hard for sustained momentum independent of valuation to take hold.

Final Thoughts: Is SCHH Worth the Investment?

Despite the diversification it offers, SCHH's underperformance in comparison to its peers, along with the potential sector risks, suggests that there are better REIT ETFs available for investors. The ETF's high concentration in the top ten holdings also elevates its risk profile, making it a less desirable choice for risk-averse investors. While REITs can provide attractive opportunities very long-term, especially given how they've lagged in recent years, I just think there are better ways of accessing the space. This is a pass for me.

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