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ETFs in Focus as US Homebuilder Sentiment Drops in November

Sweta Jaiswal, FRM

The latest data on the U.S. homebuilder sentiment in November displeased investors. It declined for the first time in five months while staying near the highest level since February 2018. Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence declined to 70 in the month compared with 71 in October, 68 in September and 67 in August.

Of all the three components of the index, the current sales conditions dipped 2 points to 76. The buyer traffic decreased a point to 53. Furthermore, there was a 1-point climb in sales expectations over the next six months to 77.

Lower sentiment in the South was majorly responsible for the weaker homebuilder sentiment in November. Meanwhile, the index touched the highest level since 2016 (read: Are Homebuilder ETFs in for Tough Times?).

Problems Hounding the Housing Market

Of late, a surge in home prices is observed, which is eroding the benefits of low mortgage rates and thus affecting sales. Persistent supply shortages can be cited as a key reason for the soaring home prices. In fact, seeing the price rise for the 91st straight month, the median existing house price increased 5.9% year over year to $272,100 in September.

Builders continue to struggle with rising development and construction costs apart from trade woes. They are grappling with regulatory burdens, deficit of lots and lack of skilled labor. These are hurting supply, which in turn, is disturbing the reasonable pricing of homes. In fact, there was a 2.7% year-over-year fall in inventory levels to 1.83 million homes in September. Notably, inventory levels dropped for the fourth straight  month.

Looking Forward

The Fed cut interest rates for the third time at the FOMC meeting in October 2019. When interest rate drops, mortgage rates decline, making real estate or refinancing mortgages more affordable. This, in turn, leads to higher home sales.

However, per Bloomberg, the 30-year fixed mortgage rates ascended to 3.75% in the week ending Nov 15. The jump in the rates is now witnessed after an almost three-year low of 3.49% in September. 

Homebuilder ETFs in View

Against the backdrop, let’s take a look at some homebuilder ETFs.

iShares U.S. Home Construction ETF ITB — up 51% year to date

This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $1.26 billion, it holds a basket of 45 stocks, heavily focused on the top two firms. The product charges 42 bps in annual fees and trades in a hefty volume of around 2.2 million shares a day on average. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Bet Big on Housing Earnings With These ETFs).

SPDR S&P Homebuilders ETF XHB — up 41.1%

A popular choice in the homebuilding space, XHB follows the S&P Homebuilders Select Industry Index. The fund holds about 35 securities in its basket. It has AUM of $785.5 million and trades in average volume of around 1.9 million shares a day. The fund charges 35 bps in annual fees and has a Zacks ETF Rank of 3 with a High risk outlook (see: all the Materials ETFs here).

Invesco Dynamic Building & Construction ETF PKB — up 43.3%

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket with each accounting for less than a 4.7% share. It has amassed assets worth $115.3 million and sees lower volume of around 16,000 shares per day on average. Expense ratio comes in at 0.60%. It is a Zacks #3 Ranked ETF with a High risk outlook (read: Market-Beating Sector ETFs Year to Date).

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Click to get this free report iShares U.S. Home Construction ETF (ITB): ETF Research Reports Invesco Dynamic Building & Construction ETF (PKB): ETF Research Reports SPDR S&P Homebuilders ETF (XHB): ETF Research Reports To read this article on Zacks.com click here. Zacks Investment Research Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report