SCHH: The Rate-Rise Scare Is A Buying Opportunity

seekingalpha11-03

REITs have underperformed so far in 2024 amid a roller coaster ride in interest rates.SCHH features a low cost, high liquidity, and a new uptrend.With a decent valuation, the current pullback, caused ...

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William_Potter  I came across a fascinating research note from Goldman Sachs. It highlights trends in active and passive fund ownership. Per the report, Real Estate shows the highest percentage of passive allocations, while Energy has seen the largest increase over the past decade. That creates an interesting scenario for investors. If you’re like me, you hold a range of funds across account types for optimal asset allocation and asset location purpose. I hold a REIT index fund in a tax-sheltered account, but the size is small. Of course, going overweight anything other mega-cap tech in recent cycles has proved costly, despite the long-run diversification benefit.  Still, I am generally encouraged to see higher passive ownership in domestic REITs. One popular such fund is the Schwab U.S. REIT ETF (NYSEARCA:SCHH). I have a buy rating on the fund.  Valuations across Real Estate are modest while the fund pays a high yield. With a low annual cost and solid technical backdrop, I expect a rebound in the Real Estate space in 2025. So far in 2024, it’s the second-worst performing S&P 500 sector index. Passive Ownership Rising in Real Estate Goldman Sachs S&P 500 Sector Valuations: Real Estate Reasonable  FactSet YTD S&P 500 Sector Index Returns: Real Estate Weak Stockcharts.com According to the issuer, SCHH seeks to track as closely as possible, before fees and expenses, the total return of an index composed of US real estate investment trusts classified as equities. The fund offers simple access to REITs, excluding non-REIT stocks that may be included in other real estate indices. SCHH is a large ETF with $7.8 billion in assets under management as of November 1, 2024. The fund features a very low 0.07% annual expense ratio while its forward dividend yield is 2.99% - more than 1.5 percentage points above that of the S&P 500. Share-price momentum has been decent in the last handful of months, but I’ll note later in the article that the recent pullback should find support not too far from last week’s closing price.  Considering that the Real Estate sector trades with a forward price-to-earnings ratio below its 5-year average and more than two turns cheaper than the SPX, I see value in the sector. Of course, REITs are priced more off of funds from operations, but that valuation metric appears decent too.  SCHH can be risky at times, and we’ve seen that play out during periods of rising market interest rates – the ETF has sharply underperformed the S&P 500 ETF (SPY) since the Fed cut interest rates back on September 18. Over the past six-plus weeks, the yield on the benchmark 10-year Treasury note has surged from 3.6% to above 4.3%, hurting rate-sensitive spots like REITs.  On the positive side, SCHH sports strong liquidity given average daily volume of more than four million shares with a 30-day median bid/ask spread of just four basis points, per Schwab. Looking closer at the portfolio, the 2-star, Silver-rated ETF by Morningstar has mixed exposure across the style box. More than half of the allocation is considered mid-cap, while the vast majority of SCHH is blend. There’s modest value and growth access when scanning the styles. SCHH: Portfolio & Factor Profiles Morningstar Digging into the positions, the Real Estate slice of the domestic stock market is concentrated. The top two positions account for more than 15%, but beyond that, there is reasonable diversification. In all, the top 10 holdings account for just shy of half of the ETF.  Big picture, there isn’t much surprise when scanning the cap-weighted fund’s allocation – the major S&P 500 Real Estate stocks are found in SCHH. SCHH: Holdings & Dividend Information Seeking Alpha Another bright spot for property stocks is seasonality. The November through January period is just about the top 3-month period on the calendar with the current month having generated the best returns over the past 10 years. SCHH: Bullish Seasonal Trends Through January Seeking Alpha The Technical Take Boasting efficient exposure to REITs and amid bullish seasonal trends, SCHH’s technical chart has taken a turn for the worse just in the last few weeks. Notice in the chart below that shares are off more than 6% from their September peak. The ETF fell below its short-term 50-day moving average and closed last week sharply in the red on high volume. But take a look at the longer-term 200dma – it's positively sloped and could be a key support spot. The 200dma has confluence with an uptrend support line, too. Also notice how there was a strong volume thrust during the Q3 rally. That’s a sign that significant money moved into the fund, so we should see some cushion amid this pullback. That claim is backed up by a high amount of volume by price from $21 down to $18. I am concerned, however, that an open price gap looms at $20 – that would be another 10% of downside from the last closing price. The RSI momentum oscillator at the top of the chart is also not ideal-looking.  On the upside, $23.66 is obvious resistance as is the all-time high just above the $26 spot. Stepping in near $21 appears as a positive risk/reward play. SCHH: Bullish Uptrend In Place, Support Near the 200dma, Gap Looms Stockcharts.com The Bottom Line  I have a buy rating on SCHH. The US REIT ETF features a reasonable valuation after suffering from rising market interest rates over the past three years. While additional short-run downside is possible, bullish seasonality amid a new broader uptrend auger well for gains into 2025.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2480333806"}