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. 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 BlackRock. 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 BlackRock 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 BlackRock.

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 well, 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, like 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 residential 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 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.

I really can't beat SCHH. 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 vessel 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 are tend to be not just focused on the 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, and 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. I mean, 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 you made that macro call. So 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 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 these REITs that got capital to come in and scoop these up on the cheap. There are some underlying macro reasons why you might think these residential REITs can outperform, and I think, you know, relative like Tony pointed out last segment, you know, commercial real estate, probably some better opportunity sets there, some less concerns with the rolling of debt and REITs, Rec collateralizing of debt in the different sectors. So you know, on par potentially, yeah, I think it could outperform going forward here.

Just from a pure strategy perspective though, I do like SCHH. I think if you look at the historical return stream on a risk adjusted basis, it's just going to be a little smoother ride in that overall real estate. I'm still going to give it to SCHH, but fully recognizing here both in the recent past as well as I think in the short term going forward, there there's some rationale on a performance perspective why REZ might be able to provide that outsize return. The question I didn't ask yourself is it going to out provide outsize returns to the broad real estate space or the broad market? Because when you're using tactical tools, you should be comparing it to the broad market and I just don't see that as as the case right now.

All right, got you down for SCHH in the performance and yield category. That takes us next to the mystery category, and this is where our judges can pick any factor that they feel is crucial to today's contest. So Mike, what is your mystery battle category and which of these ETFs wins it?

You know, it's interesting when you when you get into the real estate space, the sub sectors are are they can be pretty dislocated. You can see the returns across these different sub sectors really change a lot. One thing that's not really in either one of these is the digital infrastructure, the REITs that are infrastructure, the REITs that are focused on the data centers, the REITs that are focused on on the the the growth that is needed in data centers for AI, for everything else that's driving all that power usage. There are a few ETFs out there that kind of focus in in that area, IDGT from Ishares, DTCR from Global X, I really like a lot, the data center in digital infrastructure.

SRVR is the older one, I don't love that one as much just purely from a component perspective, I don't think it's getting quite as much as the growthy names that that I'd be looking for in this space to add into my REIT allocations. Goldman Sachs just launched their their future real estate infrastructure GREI, but those are all that we kind of put under that infrastructure thematic bu bucket as digital infrastructure, and they all have hefty allocations to real estate, right ranging those four tickers I just named off 47% up to 65%. That's an area that hasn't really made its way into being big allocations in these broad-based REIT strategies yet. So it can move the needle by by allocating to this area, you're going to get a little bit of tech in it, you're going to get a little bit of Comm Services as well, but mostly they're they've got exposure to real estate and I think that's a that's an area within the real estate market I'm I'm still pretty excited about.

They haven't they've performed well relative to the broad real estate market, but I think there there's room to continue to be optimistic in that space. So any of those four specifically stand out you it seems like you like the global x one but any any of those. I think IDGT and DTCR are my favorite of the two. Just if you kind of really dive into the underlying and look at the growth metrics and kind of the the drive analytics that we produce, there's a lot more momentum in those names the underlying and there's I think a little bit more allocation if you will to that gross side of that investment.

Yeah, solid analysis, thank you Mike and certainly a a backdoor investment approach to AI that some investors may have overlooked, so thank you for pointing that out. Tony, you're up next for your mystery battle category, what is it and which of these ETFs wins it?

I'd like to introduce a third ETF, it's called HOMS, H-O-M-S, and the reason for it is I am also bullish on residential real estate and I'm pretty bearish on commercial real estate, so that for me personally rules out SCHH. I don't like how narrow REZ is, and to be honest the the extra allocation of healthcare REITs kind of makes me cringe a little bit. I don't understand why it's there that the index is like residential and multi sector, I know they kind of ran out of options and this ETF addresses that. So HOMS tracks 100 companies represented by the Hoya Capital housing index, so it has a lot of the residential REITs that you saw in REZ, but it also has home builders, so you get stuff like PTY group, builders, you get home improvement companies, so you also get a lot of those up in, so sorry, those Mega cap consumer discretionary companies like it has Home Depot and it has Lowe's and it has real estate service and technology companies, so firms that you know Outsource Property Management, they have technology platforms for property management and so forth.

Also one thing that we might have forgotten is that for REZ and they don't make monthly distributions, so if you're relying on them for income you're not going to get that payment every month, but HOMS is actually one of the few real estate ETFs out there to pay on a monthly basis. Right now you're getting a 2.55 30-day SEC yield with monthly payments, and you honestly nobody's really noticed this ETF, it only has 40 million in AUM, and you don't really see it mentioned in in favor of the bigger ones like VNQ, but I I actually quite like it and just for me it's the inclusion stuff like Home Depot and Lowe's, these home improvement stores that Source the materials that are needed and they benefit from an uptick and residential construction and just the home builders which in the states have some of the highest free cash flow yields out there besides from oil companies but without the cyclicality in terms of sensitivity or prices, they're still very cyclical, don't get me wrong, but home builders they they' they have momentum on their side for sure and this is one of the only ETFs I know that can bins all that with residential real estate.

Yeah, and they could have some tailwinds too if interest rates come down in 2025. Absolutely, we shall see. So that brings us to the part of the program where our judges can give us their overall battle winner.

Tony, give it to us. It's going to be HOMS. I was very excited to introduce this and it's just another one of those ETF hidden gems that you know unless you work in the space and really get to know how issuers work and who's who's a smaller player there you you likely would have glossed over it, but you know this one has done really well compared to the S&P 400, so compared to the midcap index where a lot of its holdings are drawn from and it's not like it's it's not as concentrated as REZ just because you get those home builders, you get those home improvement companies and it's also less topheavy, so that's my pick if I had to get real estate exposure this moment.

Mike, your final chance to weigh in with your overall winner. I don't love real estate in general right now, I'm still not there yet, so I I can't really say making a tactical call for me anywhere across the real estate Spectrum other than digital infrastructure which I think is a different ball game. That's too far away from the ballpark here to consider that as a in this category. I think it's it's growth versus value, you're not going to get a yield from these, so leaving that out I just think broad allocation to real estate historically has made sense.

It's a little bit equity REITs are Equity they have Equity type risk in fact REITs historically have a higher risk relative to the market than than the broad the S&P 500 so but I think there is a is a rationale behind having a a a REIT allocation or real estate allocation and SCHH is a just a really good cheap lowcost product to to get it done and Achieve that so that's my category winner. The HOMS call by Tony is fantastic. If you like residential space, just pulled it up while he was talking, but you know it's got a 1.13 baited AR on the threee it's up capture is 130% down capture about 100% so if you're looking for like you're making an active call in that space you're going to get more beta play into your call of course that can work negative as well but if you're if you're making a macro call for it it HOMS makes a lot of sense in that residential space because you still get those REITs but you add on to it through through more allocations so just hat tip to Tony for bringing that up excellent.

Well our judges have both weighed in with some awesome analysis and according to our final battle scorecard this could be a split decision between SCHH and HOMS. Our judges for the most part agreed on SCHH in three categories. I thought for a second SCHH was going to take it and then Tony blindsided us with his Wild Card. Mike also blindsided us with his Wild Card of course Mike's Choice was those data center focused real estate ETFs which I thought were a very solid analysis and alerting us about that availability another way to get into the the growth of data centers and AI of course through the route of a real estate focused approach.

Then Tony focusing on HOMS he likes the the fact that this ETF has a monthly distribution plus it's it's kind of under the radar for a lot of investors but it also focuses on US housing you don't get exposure to some of those troubled areas of the real estate market like commercial real estate and the office market so solid Choice as far as his wild card and both of our judges did an outstanding job in today's contest well done guys we really appreciate your analysis.

Thanks Ron awesome thanks good seeing you Tony. Well be sure to visit the description section below we've got links to both of our program judges don't be a stranger we've also got links down there to our program sponsor Direction lots of good educational in investment stuff that you can brush up on to get your 2025 off to a strong start so again check out the description section below send me your ETF battle requests in the comment section below be sure to include your ETF ticker symbols you can also hit us up on X our X feed is at ETF guide thank you so much for watching I'm Rond Deli and this is ETF battles we'll see you on the next episode.