ETF Battles: A Dividend Income Duel between Real Estate ETFs - SCHH vs. REZ!
Dividends continue to be an area within the ETF Market with high investor interest and demand, and one way to get high and consistent dividends is to focus on industry sectors with high income. Today's ETF battle is another audience requested matchup, this time between real estate ETFs from Schwab and Black Rock. Find out which ETF is the better choice.
Well, it's great to see you again. I'm Ronda Legi, and you're watching season six of ETF battles, a brand new season. Welcome aboard, keep your awesome ETF battle suggestions coming. We've had some good ones, send me your ETF ticker symbols in the comment section below or on our X feed at etfguide. We could do double, triple, and quadruple headers, so make it good. Also, be sure to check out the description section below this video. I've got viewer resources which include links to free ebooks along with our program sponsor Direction, and we've also got links to our program judges, so don't be a stranger.
Today's ETF matchup was requested by a viewer named V Serin, and it's between real estate ETFs from Black Rock and Schwab. Of course, dividend income is one of the reasons investors like real estate and REIT ETFs, and this battle is going to feature two of them. We've got SCHH from Schwab and REZ from Black Rock. Thank you again for this battle suggestion.
Helping us to sort through today's contest, we've got two of the best minds in the ETF Marketplace. We got Mike Akins with ETF Action and Tony Dong with ETF Central. Guys, welcome back, great to be here.
So we got our four battle categories: cost, exposure strategy, performance and yield combined, and then we've got our mystery category. Of course, is where you guys can pick a certain factor or thing that you feel is important to today's conversation. Our judges can also nominate Wild Card ETFs if they feel there's better choices somewhere else. They can also opt for split decisions. Keep in mind none of the outcomes on this program are ever predetermined or known in advance by myself or our judges. I've got scorekeeping duties, and let's start with the first category, which is cost.
Tony, please kick things off. SCHH completely blows REZ out of the water when it comes to fees. As part of Schwab's low-cost core lineup, SCHH has a seven basis point expense ratio. So if you invested $10,000 in this ETF on the back end, you would only lose $7 a year to fees. REZ is significantly more expensive at 0.48, and when it comes to liquidity, ETF Central data is showing me that the average 30-day bid as spread for SCHH is 0.049, whereas for REZ is 0.072. They're both fairly slim, but again, SCHH is more liquid, so your total cost of ownership is going to be lower. It's pretty obvious here, you put two and two together and SCHH is by far more affordable. Thank you, Tony.
Mike, you're up next, how do you see it? When it comes to cost, there's no question SCHH is the winner when it comes to cost. I would note that REZ is a little bit more nuanced, we'll get into that as we go, so there could be good rationale for going REZ over SCHH, but it certainly is an in cost or liquidity.
All right, well that takes us next to exposure strategy, so break it down for us. Mike, how do these two ETFs compare? SCHH is a broad-based US REIT strategy. It's going to own all of your different sub sectors of the REIT Marketplace, everything from industrial REITs, commercial REITs, specialized REITs, residential REITs. It's going to really own kind of all of them. It's going to own them in a market cap sense, so just like the S&P 500 weights by the largest companies, SCHH is doing the same thing for the real estate side of the marketplace.
That gives it a pretty diversified portfolio across all of your different sub sectors of the REIT Marketplace, but some are larger than others. Specialty REITs takes up the largest portion at 40%, and then kind of across that 10% in residential REITs, another 11% industrial REITs, 11% in healthcare REITs, but a pretty diversified basket of securities. REZ, as the name suggests, is designed to focus more on that residential side of the REIT Marketplace. Note that the name is residential REITs and residential and multi-sector, so they can't just own only residential REITs. It's really not that big of a market to put into a diversified bucket, so they get the rest that allocation.
44% is in residential sub sector using the GICS industry classifications, then you got 37% in health care, primarily Healthcare REITs that are like Assisted Living places like that where it's still got that residential context to it, but not exactly. Then another 20% in specialized REITs, and those specialized REITs tend to have a little bit more allocation to that res sector. Really, you're talking a little bit of apples and oranges here. I think of SCHH as a core allocation if you like REITs as a core allocation in your portfolio above and beyond what you'd get just owning the S&P 500 or a total market index. A lot of folks do consider it a separate asset class.
To that extent, you really can't beat it. I think REZ is more of a trading tool, just like you break down the S&P 500 into all of your different sectors. This is just going a little bit further and breaking down the real estate sector into sub sectors, and if you have a specific call on the sub sectors of the market, then you really like that residential play in the REIT space, then you can look to REZ. I really can't compare the two purely from they're trying to accomplish two different things based on the current market environment of the real estate interest rates, everything else. I'm not looking to tactically allocate this space, if anything, I'm just holding my core allocation, and to that extent, I give currently the win to SCHH, but with that big caveat, they are really different types of. Okay, got you down for SCHH. Thank you, Mike.
Tony, you're up next, how do you see it when it comes to exposure strategy? Like Mike said, SCHH is your default, like, okay, I want to invest in real estate, I don't really know what to do, here's the cheapest, broadest option, and for the job, it does it quite well. REZ, once again, is I really want to drill in deep on residential, both multi-family, single family, and also have some exposure to health care and Industrial, so mostly in the self storage space. I would also note that REZ is very useful if you're bearish on commercial real estate, but bullish on the rest, because commercial real estate, it's a decent section of SCHH, but you're not going to find much in REZ.
You're not going to find those distressed office towers, you're not going to find those retail properties. You're not going to find the stuff that, you know, has people holding commercial mortgage back securities panicking a little bit, so you're going to avoid that. If I took a crowd of 100 people and I had to give them the right ETF to, you know, just make expressive view on real estate, it's going to be SCHH. It's just far broader, you truly get exposure to all the, well, not all the REITs, but most of the publicly traded vesal REITs in the US, and it does so with an index methodology that makes a lot of sense.
All right, well that takes us next to performance and yield, and we've combined these two things into one category since the real estate ETFs tend to be not just focused on the growth aspect, but a big portion of the return is also the income, the dividend income. So Tony, you're still up, break it down for us, how do these two ETFs compare?
SCHH has the higher yield, a 30-day SEC yield of a 3.93, whereas REZ is much lower 2.3. Now one thing to note for you income investors is these, neither of these are very tax efficient. They're not paying out qualified dividends because they hold REITs. I'm from Canada, but I believe in the US these are tax as ordinary income, so correct me if I'm wrong there, but anyways, these aren't like your normal capital gains or qualified dividends. The tax treatment on these is not going to be the best. Now in terms of performance from a back test, 2011 January to just two, three days ago, we see REZ delivering a compound annual growth rate of 8.98%, so that's with dividends reinvested, and SCHH has liked significantly at 6.6.
I wouldn't rely on this too much because that's like saying Tech has outperformed the rest of the market. You wouldn't necessarily overweight that going forward. Residential real estate and Healthcare have outperformed the rest of the real estate market. It doesn't mean it's going to do it perpetually. When you factor in yield and performance, you take a rearward and also forward looking view, I would still go with SCHH here. I don't see a reason for REZ to outperform perpetually. It's also more expensive and the yield is lower, so I'm going to go with SCHH here. All right, very good.
Yes, you are correct Tony, the majority of REITs and dividends from them are tax as ordinary income here in the US up to a maximum rate of 37%, which is the top US income tax rate, and of course, if you hold them in a tax deferred retirement account, then you don't have to worry about that. Great points, we appreciate that. Mike, you're up next on performance and yield, how do you see it?
I mean, I think they're pretty similar right now. Yes, REZ has outperformed, but as Tony aptly pointed out, that it's very similar to saying like semiconductors has outperformed internet stocks. I mean, we know that there's a reason to it. You built, you bought it for a reason, you made that macro call. From a pure like overtime performance perspective, kind of smoothing it out, I think SCHH is just better product here unless you really know what you're doing and you really have a view on this. You believe there's a reason to believe that, you know, REZ, some folks believe that there's a from a residential REIT perspective, we have such a need for home ownership, prices are coming down, they're getting to depressed, it favors th...
