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ETFs to Gain on Positive US Housing Starts in November

Sweta Jaiswal, FRM
·4 min read

The release of upbeat data from the U.S. housing market underlines the sectorial strength despite the rising coronavirus cases. According to the Commerce Department, total housing starts rose 1.2% to a seasonally-adjusted annual rate of 1.547 million units in November, per a Reuters article. The figure has narrowed the gap from February’s figure of 1.567 million units. The reading surpassed analysts’ expectations of 1.530 million units in November, per a Reuters’ poll.

Building permits, a construction pointer for the coming months, increased 6.2% to a rate of 1.639 million units in the same month.

There was a 0.4% uptick in single-family homebuilding, which constitutes a large portion of the housing market, to a rate of 1.186 million units in November (the highest level since April 2007), per a Reuters article. Moreover, permits to construct single-family homes climbed 1.3% to 1.143 million units in the period.

Meanwhile, housing starts for the multi-family housing segment improved 4% to 361,000 units last month. Moreover, there was 19.2% growth in permits to a rate of 496,000 units in November for building multi-family homes.

Notably, single-family starts ascended for seven consecutive months. This upside is largely driven by the pandemic as at least 21.8% of the labor force is working from home, per a Reuters article. This resulted in people shifting from city centers to suburbs and other low-density areas as they are looking for spacious accommodations for home offices as well as schools.

The U.S. housing sector has been impressing investors with encouraging performance amid the tough pandemic times. However, builder confidence for newly-built single-family homes slipped in December after hitting record-high levels in the previous three successive months.

Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder sentiment for newly-built single-family homes came in at 86 in December in comparison to 90 points in November, 85 in October, 83 in September and 30 in April (the lowest since June 2012). However, the December reading still stands as the second highest in the history of the index. Any reading above 50 is considered positive and signals at improving confidence.

The U.S. housing market has been consistently battling with limited inventory, largely due to land shortages and skilled labor deficiencies along with the escalating material costs. All these factors are affecting affordability as prices of both existing and new homes are soaring. Another looming concern is the possibility of rising interest rates, which will once again hit affordability of the housing market.

Meanwhile, low interest rates are boosting demand in the housing market, resulting in an increase in mortgage applications. Also, the introduction of another round of fiscal stimulus is expected to add strength to the U.S. housing market.

Homebuilder ETFs That May Keep Gaining

In such a scenario, here are a few housing ETFs that might gain from the bettering housing sector scenario:

iShares U.S. Home Construction ETF ITB  

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 $2 billion, it holds a basket of 46 stocks, heavily focused on the top two firms. The product charges 42 basis points (bps) in annual fees (read: 6 Secret Santa ETFs to Add Cheer to Your Portfolio).

SPDR S&P Homebuilders ETF XHB

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 $1.35 billion. The fund charges 35 bps in annual fees (read: Will Housing ETFs Take a Pause as New Home Sales Decline?).

Invesco Dynamic Building & Construction ETF PKB  

This fund follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 30 stocks, each accounting for less than a 5.16% share. It amassed assets worth $167.6 million. The expense ratio is 0.59% (read: all the Materials ETFs here).

Hoya Capital Housing ETF HOMZ

The fund seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the Hoya Capital Housing 100 Index, a rules-based Index designed to track the 100 companies that collectively represent the performance of the US Housing Industry. It has AUM of $41.9 million. The fund charges 30 bps in annual fees (read: ETFs & Stocks to Ride on a Booming Housing Market).

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