Housing ETF Investing 101
The housing recovery seems to be picking up after a softer-than-expected spring selling season. The housing slowdown that began in the second half of 2013 was further handicapped by severe weather conditions and declining demand for homes in the first half of 2014. This raised serious doubts about the strength of the housing market.
However, it seems that the buyers are back in the market in the second half of the year encouraged by a recovering economy and an improving job market. The still low interest rate acts as a further stimulus for home buying in spite of the Fed scaling back its bond buying program.
Though mortgage rates are higher than the average rate in 2013, they are still below historical levels, making housing affordable. According to the Freddie Mac mortgage survey, the 30-year fixed mortgage rate has gone down from 4.43% in January to 4.12% in August. (Read: Ride Out the Construction Boom with Housing ETFs).
Also, home prices in 2014 have been rising at more moderate rates than the steep climb last year. The median home price increased 4.8% year over year in August and 4.9% in July, slowing from the double-digit growth seen for much of 2013.
Rising inventory, low mortgage rates and moderating home prices are expected to give homebuyers the much needed confidence paving the way for higher home demand for the rest of the year. However, housing data released so far this month has been rather mixed as compared to the unexpected surge in July.
Sales of new single-family homes in the U.S. rose 18% in August, reaching the highest level in more than six years. This came as a relief considering the unexpected decline witnessed last month. (Read: Healthcare ETFs for your portfolio’s wellness)
US Homebuilder Confidence hit a nine-year high in September, clearly indicating that builders are upbeat about their prospects for future sales. Homebuilders’ confidence, as indicated by the National Association of Home Builders (:NAHB)/Wells Fargo housing market index, rose 4 points to 59 in September — the highest level since Nov 2005 and the 4th consecutive monthly gain for the index.
However, after the dramatic surge in July, the U.S. housing construction and building permits figures declined in August, disappointing market expectations. While housing starts declined 14.4% in August, building permits, a gauge of future construction, declined 5.6%. Nevertheless, they both improved year over year suggesting that the broader housing trends are very much in place. (Read: Best Performing Utility ETFs this year)
ETFs to Tap the Sector
Given the improving fundamentals, the homebuilding sector deserves a closer look. For investors willing to play the space 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 at a very low cost. Below, we have highlighted three ETFs that are worth looking into.
SPDR S&P Homebuilders (XHB)
XHB is one of the more popular homebuilding ETFs in the market today with assets under management of around $1.42 billion and a trading volume of roughly 4.5 million shares a day. The fund has an expense ratio of 35 basis points.
The fund holds 37 stocks in its basket, with 41% of the assets going to mid cap and 6% comprising large cap stocks. Despite the smaller holding pattern, the fund does not appear to be concentrated in the top 10 holdings.
The fund has just 32.1% in the top 10 with Home Depot, Lennar Corporation and Lowe’s Companies Inc occupying the top 3 positions with asset allocation of 3.30%, 3.28% and 3.21%, respectively.
The fund’s assets include 32% homebuilders, 15% household appliances securities, 27% specialty retail stocks and the balance 26% of building materials companies. The fund carries a Zacks Rank #3 (Hold) with a high 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 $1.47 billion in assets with a trading volume of roughly 3.5 million shares a day, while its expense ratio is just 46 basis points.
The fund holds 38 stocks in its basket, out of which only 12% are large cap securities. The fund has a concentrated approach in the top 10 holdings with 61.9% of the asset base invested in them.
Among individual holdings, top stocks in the ETF include Lennar, D.R. Horton, Inc. and Pulte with asset allocation of 10.51%, 10.38% and 9.26%, respectively.
Homebuilders accounts for around 64% of this fund. The fund carries a Zacks Rank #3 (Hold) with a high 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 26% of the fund, followed by construction materials companies that account for 13%. A look at the style pattern reveals that the fund has a preference for value stocks.
The fund manages an asset base of $113.5 million and has an expense ratio of 63 basis points. The fund has only 15% in large cap securities and 46.1% in the top 10 holdings. The fund carries a Zacks Rank #3 (Hold) with a High level of risk.
To Sum Up
While the housing market has improved dramatically compared to where it was a couple of years back, the recent recovery has been a little choppier. However homebuilders are increasingly optimistic of a pick up in sales in the forthcoming months.
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Read the analyst report on ITB
Read the analyst report on XHB
Read the analyst report on PKB
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