U.S. Markets closed

Build Something With These 5 Homebuilder ETFs

Todd Shriber

Last year, homebuilder ETFs and stocks were stymied by rising interest rates — among other factors. The Federal Reserve boosted interest rates four times, leading to higher mortgage rates, which chased some would-be homebuyers from the market.

Housing affordability concerns in some of the marquee U.S. real estate markets, including California and New York, also plagued homebuilder ETFs in 2018. While the housing affordability issue is far from being reconciled, the good news for investors considering homebuilder ETFs is that the Federal Reserve is likely to slow its pace of rate hikes or not even raise rates at all this year.

The Dow Jones U.S. Select Home Construction Index, one of the most widely followed gauges of homebuilder and home improvement equities, is higher by nearly 18% this year. Recent housing data has been encouraging, but analysts are advising a cautious approach.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Industry analysts are “arguing that the Fed’s recent pivot toward dovish interest-rate policy, the tempered pace of the housing recovery since the financial crisis, and demographic factors would combine to help support the housing market in the long term,” reports MarketWatch.

In other words, investing mulling homebuilder ETFs have a lot to consider. Here are some of the top homebuilder ETFs that could extend their already sizable gains this year.


iShares U.S. Home Construction ETF (ITB)

Expense ratio: 0.43% per year, or $43 on a $10,000 investment.

The iShares U.S. Home Construction ETF (CBOE:ITB) is the largest homebuilder ETF and tracks the aforementioned Dow Jones U.S. Select Home Construction Index. As such, the $1.18 billion ITB is one of the purest plays among homebuilder ETFs.

This is a cap-weighted homebuilder ETF, so it is dominated by the largest stocks in this group. For instance, Lennar Corp. (NYSE:LEN) and D.R. Horton Inc. (NYSE: DHI) combine for over 27% of ITB’s weight. The fund’s top 10 holdings combine for over 61% of its weight. ITB has some exposure to the retail side of residential real estate, but just to the tune of 13%.

Remembering that homebuilder ETFs and stocks notched their worst annual performances in 2018 since 2008 could be interpreted as a sign that the group has more room to run. While ITB is up 17.74% this year, it is still more than 15% below its 52-week high.


Invesco Dynamic Building & Construction ETF (PKB)

Expense ratio: 0.58% per year, or $58 on a $10,000 investment.

The Invesco Dynamic Building & Construction ETF (NYSEARCA:PKB) is an example of a homebuilder ETF with a unique weighting methodology that offers investors the potential to generate returns above those offered by more traditional homebuilder funds.

PKB, which is more than 13 years old, follows the Dynamic Building & Construction Intellidex Index. That index “thoroughly evaluates companies based on a variety of investment merit criteria, including: price momentum, earnings momentum, quality, management action, and value,” according to Invesco.

In general, homebuilder ETFs tilt toward the lower end of the large-cap spectrum and/or include plenty of mid-cap stocks. PKB’s 30 holdings have an average market value of $19.76 billion and just 15.44% of the fund’s holdings are classified as large caps. Growth investors will like this homebuilder ETF because almost 40% of its holdings are considered growth stocks.


VanEck Vectors Retail ETF (RTH)

Expense ratio: 0.35% per year, or $35 on a $10,000 investment.

As it name implies, the VanEck Vectors Retail ETF (NYSEARCA:RTH) is a retail fund, not a dedicated homebuilder ETF, but this product does have ample exposure to the retail side of residential real estate. Dow component Home Depot (NYSE:HD), the largest home improvement retailer, is the second-largest holding in RTH at nearly 11%.

Of the 220 ETFs with exposure to Home Depot, RTH has the largest weight to that stock. Home Depot rival Lowe’s (NYSE:LOW) is also a top 10 RTH holding at a weight of 4.63%. Of the 190 ETFs with exposure to Lowe’s, RTH has the second-largest weight to that home improvement retailer.

Several of RTH’s other holdings also sell home improvement products and the ETF is a fine way of getting exposure to Amazon.com (NASDAQ:AMZN) as that stock represents over 20% of RTH’s weight.


SPDR S&P Homebuilders ETF (XHB)

Expense ratio: 0.35% per year, or $35 on a $10,000 investment.

Next to ITB, the SPDR S&P Homebuilders ETF (NYSEARCA:XHB) is the most widely followed homebuilder ETF, although the SPDR offering is not as pure as its iShares rival.

XHB’s equal-weight index provides exposure to the following groups: Building Products, Home Furnishings, Home Improvement Retail, Homefurnishing Retail and Household Appliances, according to State Street.

Pure homebuilders represent 31.64% of XHB’s weight, the fund’s second-largest industry weight. This homebuilder ETF also has significant consumer discretionary exposure as household appliances manufacturers, home improvement retailers and home furnishings retailers combine for over 26% of the fund’s roster.


Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL)

Expense ratio: 1.12% per year, of $112 on a $10,000 investment.

The Direxion Daily Homebuilders & Supplies Bull 3X Shares (NYSEARCA:NAIL) is the only leveraged homebuilder ETF on the market and this fund looks to deliver triple the daily returns of the aforementioned Dow Jones U.S. Select Home Construction Index.

As is the case with any leveraged ETF, NAIL should be used with care by risk-tolerant, short-term traders, not buy-and-hold investors. Good times to consider NAIL include days when housing data is released and earnings days for stocks such as D.R. Horton, Lennar and other marquee homebuilders.

Todd Shriber does not own any of the aforementioned securities.

More From InvestorPlace

Compare Brokers

The post Build Something With These 5 Homebuilder ETFs appeared first on InvestorPlace.