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ETFs to Gain as Homebuilders Sentiment Continues to Rise

Sweta Jaiswal, FRM

The upbeat U.S. homebuilders sentiment data for October has cheered investors again. The metric has hit the highest level since February 2018. Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence rose to 71 in October compared with 68 in September, 67 in August and 68 a year ago.

Of all the three components of the index, the current sales conditions rose by 3 points to 78. The buyer traffic increased by 4 points to 54. Furthermore, there was a 6-point jump in sales expectations over the next six months to 76.

Per CNBC, in the Northeast, the index rose by a point to 60. Moreover, the South index rose three points to a 14-year high of 73, the Western index inched up three points to 78 with the Midwest rising by a point to 58 (read: Why Homebuilder ETFs Are Rising).

Factors Behind This Optimism

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

Moreover, the boost in confidence level in October can be linked to a drop in mortgage rates in September. Per Bloomberg, the 30-year fixed mortgage rates are nearing three-year lows. Moreover, a crunch in supply of affordable properties has been observed (read: An ETF Area That Excelled in September).

Supply Challenge Persists

Builders continue to bear the brunt of rising development and construction costs apart from trade woes. They are still grappling with regulatory burdens, deficit of lots and lack of skilled labor. These hurdles are affecting supply, which in turn, is disturbing the reasonable pricing of homes.

In this regard, Robert Dietz commented that “however, builders continue to remain cautious due to ongoing supply side constraints and concerns about a slowing economy” (read: Bet on Top-Notch Sector ETFs & Stocks to Sparkle Q4).

Homebuilder ETFs in Focus

Given the improving housing market conditions, it will be prudent for investors to park their money in some homebuilder ETFs.

iShares U.S. Home Construction ETF ITB — up 48.7% 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 $1.39 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 2.1 million shares a day on average. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Homebuilder, REIT ETFs Booming on Falling Mortgage Rates).

SPDR S&P Homebuilders ETF XHB — up 37.9%

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 $751.2 million and trades in average volume of around 2.1 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 40.2%

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket, with each accounting for less than 5.3% share. It has amassed assets worth $111.5 million and sees lower volume of around 15,000 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: ETFs to Pick as New Home Sales Surge on Falling Rates).

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Invesco Dynamic Building & Construction ETF (PKB): ETF Research Reports
SPDR S&P Homebuilders ETF (XHB): ETF Research Reports
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
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