The Comprehensive Guide to Housing ETFs

The housing momentum seen in 2012 and in the first half of 2013 has slowed down in the past 3-4 months due to the recent spike in mortgage rates, rising home prices, tight credit availability and the political uncertainty in Washington.

Though interest rates are rising, these are still below historical levels and housing is still affordable. In addition, accelerating job growth and increasing consumer confidence are also boosting demand for new homes. (Read: 3 Hot Sector ETFs for 2014)

Supply, however, is constrained by low home inventories, both of new single-family and multi-family homes. A shortage of land and labor is restricting the construction of homes, both single and multifamily. Home prices have thus started to move up with market demand gaining momentum and supply remaining limited.

Rising home prices and the spike in interest/mortgage rates since May this year slowed down the pace of orders and traffic. Buyers were taken unawares by the sudden increase in rates and a few put off their purchase decision, thereby increasing cancellation rates and lowering orders for most homebuilders in the last reported quarter. (Read: 7 ETFs to buy in 2014)

However, most homebuilders believe that this is only a temporary factor and are confident of demand picking up in future quarters. These builders expect buyers to adjust to rising prices and interest rates and return to the market. Also, Federal Reserve’s promise to keep interest rates low for some time despite tapering its $85 billion stimulus plan by $10 billion from Jan 2014 removes a major overhang for the homebuilders. (Read: Fed Tapers Bond Purchases: 3 ETFs in Focus on the News)

A slew of housing data released lately clearly shows that housing recovery is still on. Data released by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau showed that sales of newly built, single-family homes rose 25.4% in October. Another data release by the department showed that November housing starts surged to their highest in nearly six years.

The National Association of Home Builders (:NAHB)/Wells Fargo Housing Market Index (:HMI), known as the homebuilder sentiment index, jumped 4 points to 58 in December from 54 in July. This was the seventh consecutive monthly increase in the index, showing that the recent interest rate hikes have not dampened the housing recovery completely. (Read: It's A Merry Christmas for Homebuilder ETFs). The Consumer Confidence Index also rebounded in December after declining in November.


ETFs to Tap the Sector

With this in mind, it could be time to give this segment a closer look. For investors looking to play the homebuilding sector in a less risky way, an ETF approach can be a good idea.

This technique can help to spread out assets among a wide variety of companies and reduce company specific risk for a very low cost. Below, we highlight three ETFs that are worth a look in this sector:

SPDR S&P Homebuilders (XHB)

XHB is one of the more popular homebuilding ETFs in the market today with assets under management of around $2.0 billion and a trading volume of roughly 5.3 million shares a day. The fund has an expense ratio of 35 basis points.

The fund holds 35 stocks in its basket, with 44% of the assets going to mid cap and 15% comprising large cap stocks. Despite the smaller holding pattern, the fund does not appear to be concentrated in the top ten holdings.

The fund has just 32.5% in the top ten holdings with Lumber Liquidators, D.R. Horton, Inc. and Lennar Corporation occupying the top three positions with asset allocation of 3.39%, 3.31% and 3.27%, respectively.

The fund’s assets include 29% homebuilders, 15% household appliances securities, 27% specialty retail stocks and the balance 28% of building materials companies. The fund carries a Zacks Rank # 3 (Hold) with a moderate level of risk.

iShares Dow Jones US Home Construction (ITB)

Another popular choice in the homebuilding sector is ITB, which tracks the Dow Jones U.S. Select Home Construction Index. It has $1.72 billion in assets with a trading volume of roughly 5,800,000 shares a day, while its expense ratio is just 45 basis points.

The fund holds 34 stocks in its basket, out of which only 12% are large cap securities. The fund has a concentrated approach in the top ten holdings with 62.3% of the asset base invested in them.

Among individual holdings, top stocks in the ETF include Pulte, Lennar and D.R. Horton, Inc with asset allocation of 10.32%, 9.81% and 9.51%, respectively.

Homebuilders account for around 67.0% of this fund. The fund carries a Zacks Rank #2 (Buy) with a moderate level of risk.

PowerShares Dynamic Building & Construct (PKB)

This ETF comprises around 30 housing companies and has its assets invested across all classes of the market spectrum. Engineering and construction stocks comprise 23% of the fund, followed by specialty retail companies that account for 15%. A look at the style pattern reveals that the fund has a preference for growth stocks.

The fund manages an asset base of $100.6 million and has an expense ratio of 63 basis points. The fund has only 25% in large cap securities and around 46.0% in top ten holdings. The fund carries a Zacks Rank #3 (Hold) with a moderate level of risk.

To Sum Up

Though the sudden jump in interest rates has temporarily disrupted housing recovery, we expect sales to continue to rise in 2014 as pent up demand is released and buyers return to the market. Most homebuilders also expect the housing momentum to continue into 2014 with the gradual strengthening of the economy.

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