VNQ vs SCHH: Best REIT ETF for Real Estate Exposure in 2025

Both VNQ and SCHH invest in publicly traded Real Estate Investment Trusts-companies that own income-producing real estate like apartments, offices, warehouses, data centers, and retail properties. REITs are required to distribute 90% of taxable income as dividends, which is why these ETFs yield 3-4%. You're getting diversified real estate exposure without buying physical property.

REIT dividends are taxed as ordinary income, not qualified dividends. If you're in a high tax bracket, you could pay 32-37% on REIT income versus 15-20% on qualified dividends. This makes REITs ideal for tax-advantaged accounts (IRA, 401k) where the tax hit is deferred or eliminated. Both VNQ and SCHH have the same tax treatment-this is a REIT structural issue, not a fund choice issue.

REITs struggled from 2022-2023 as rising interest rates increased borrowing costs and made bond yields more competitive with REIT dividends. Both VNQ and SCHH dropped 25-30% from their 2022 highs. REITs historically perform well when rates stabilize or decline. If you're considering REIT exposure, understand that these assets are more interest-rate sensitive than broad stock indexes.

Many investors already have REIT exposure through total market funds like VTI (which includes REITs at market weight, around 3%). Adding a dedicated REIT ETF overweights real estate beyond market cap. A 5-10% dedicated REIT allocation is common for investors seeking income diversification. Some prefer REITs in tax-advantaged accounts only, keeping taxable accounts in tax-efficient stock funds.