Charles Schwab US REIT ETF: Stable Return and High Volatility (NYSEARCA: SCHH)

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Schwab US REIT ETF (NYSEARCA:SCHH) is a traded index fund (ETF) that invests in real estate investment trusts (REITs) of various sectors, such as residential REITs, retail REITs, healthcare REITs, hotel REITs, industrial REITs/ offices, specialized REITs and diversified REITs. REIT is an entity that owns, operates and/or finances income-generating real estate assets. SCHH pays regularly quarterly dividends since 2011, with an average yield around 5% over the last ten years.

This REIT ETF was launched and managed by Charles Schwab Investment Management, Inc. It was established on January 13, 2011, almost 11 years ago. With $268.5 billion in net assets, Charles Schwab is a household name in the US ETF market. The company manages a total of 27 ETFs and has a reputation for retaining fund managers. Management has placed certain constraints on investments in SCHH in order to be a properly diversified ETF REIT. No REIT may exceed 10% of the SCHH portfolio, and the total weight of all holdings with allocations greater than 4.5% may not total more than 22.5% of the portfolio. “The fund inevitably encounters company-specific risk because the US real estate securities market is somewhat thin, but it diversifies better than most of its peers.”

However, Schwab US REIT ETF is not sufficiently diversified and has a high exposure of 40% to specialized REITs. “Specialized” is a broad generic term, which can include various types of properties like casinos, farmland, self-storage, cinemas, outdoor advertising sites, etc. Residential REITs (16%), Retail REITs (11%), Healthcare REITs (8%), Diversified REITs (3%) and Hotel REITs (2%).

Schwab US REIT ETF is a passive fund and there is almost no difference in composition with its benchmark – Dow Jones Equity All REIT Capped Index. Being a passive ETF, SCHH’s expense ratio is extremely low at 0.07%. As of April 1, 2022, SCHH had assets under management (AUM) of $7.17 billion and a weighted average market capitalization (WAMC) of $46.8 billion. Since this ETF holds a small percentage of ownership interests in various REITs, it has a proportionate ownership interest in these companies. Therefore, part of the market capitalization belongs to this ETF. WAMC is the total of all the market capitalization of all these proportionate interests.

In the short term, Schwab US REIT ETF had a very good price performance. This ETF has grown around 41% and 14% over the past one and three years, respectively. Given the pandemic-related stock market crash of March 2020, these returns are pretty healthy. Since its inception, SCHH has recorded average double-digit price growth. However, average price growth has been just under 8% over the past five years.

A closer look at its top 60% holdings (invested in 20 REITs) reveals that most of its top 20 investments were able to outperform SCHH. Simon Property Group, Inc. (SPG), a retail REIT, is the only stock to perform underperforming throughout. Besides SPG, two residential REITs – Equity Residential (EQR) and Invitation Homes Inc. (INVH) – failed to double their prices in those 11 years. Over the past 5 years, in addition to SPG, another retail REIT, Realty Income Corporation (O) and the world’s largest private forestland owner, Weyerhaeuser Company (WY) has failed to generate price growth of at least 35%, or a CAGR of 6.2%. Thus, most of its main holdings have always performed well. With the exception of retail REITs, SCHH’s investments in other segments have generated medium to high returns.

Up to 12 out of 20 stocks – Extra Space Storage Inc. (EXR), Equinix, Inc. (EQIX), SBA Communications Corporation (SBAC), Sun Communities, Inc. (SUI), American Tower Corporation (AMT), Prologis, Inc. (PLD), Crown Castle International Corp. (CCI), Duke Realty Corporation (DRE), Weyerhaeuser Company, Public Storage (PSA), Mid-America Apartment Communities, Inc. (MAA), Essex Property Trust, Inc. (ESS) – grew over 200% in over the past 11 years. Six REITs grew over 390%, representing a CAGR of over 30% – EXR (990%), EQIX (763%), SBAC (760%), SUI (447%), AMT (405%) , PLD (394 percent).

To be more specific, historically, Schwab US REIT ETF has a very strong and steady performance on average. But this return has been very volatile. In only four of the past ten years has this ETF returned more than 6.5%. But the growth over those four years had been remarkable. At the same time, the average growth rate over the four years between 2015 and 2018 was only 2.3%. This extreme volatility is not a very good indicator for this fund. Had this REIT ETF been well diversified, it may have lower volatility risk.

Basic Principles of CHHS

Basic Principles of CHHS (Schwab Asset Management)

SCHH’s two main investment areas, specialty REITs and industrial/office REITs, make up 60% of its portfolio. However, unlike residential REITs and commercial REITs, specialty REITs and industrial REITs will be highly cyclical. As these REITs create and manage certain specific types of facilities, these assets will always have lower supply and higher demand, but demand will vary from time to time and be more dependent on the growth of the specific industries for which these facilities are built. . We have already witnessed its impact on the average annual return of SCHH.

SCHH is currently trading at a 9% discount to its 52-week high. The price-to-book ratio of 3.35 and the P/E of 44.42 suggest that the valuation of the company is quite high. However, we can ignore this P/E, because this ratio does not matter much for real estate companies. The price/cash flow ratio of 25 is much closer to the average peer price/cash flow of around 21. Looking at historical trends and the efficiency of the selected stocks, there is every chance that the price of SCHH rises and breaks that 52-week high of 26.54. . As all the short-term moving averages are placed above the long-term moving averages, the technical indicators are in favor of an upward movement in the market price of SCHH.

These ratios are an indicator of greater investor confidence in Charles Schwab’s management that they will be able to use SCHH’s assets in the future to generate sufficient cash flow and earnings. As the U.S. economy slowly overcomes pandemic-related economic stagnation and moves toward steady growth, the real estate sector is going to be one of its biggest beneficiaries. Economic growth will not only help specialty REITs and industrial/office REITs, but will also boost the revenues and earnings of residential REITs, commercial REITs and hotel REITs.

Although highly volatile, investors can expect average price growth between 8-10% over the medium to long term. Moreover, all technical indicators point to an upward movement in the price of SCHH in the short term. Besides price growth, SCHH also provided a stable dividend yield of around 5%. As a long-term investor with high hopes in the real estate sector, I will obviously keep Schwab US REIT ETF in my investment portfolio.

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