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Are ETFs in Trouble as Homebuilders Confidence Drops in March?

Sweta Jaiswal, FRM

The National Association of Home Builders’ (NAHB) monthly confidence index has disappointed in March. Per the monthly NAHB/Wells Fargo Housing Market Index (HMI), builder confidence dropped two points to 72 in March compared with 74 in February, 75 in January and 62 in the year-ago period. The metric compares unfavorably with economists’ expectations of a drop to 73. Notably, any reading above 50 signals improving confidence.

Notably, all the three components of the index dropped. The current sales conditions came in at 79 after falling a couple of points, the buyer traffic declined by a point to 56, with sales expectations decreasing by 4 points to 75.

Regionally, in the Northeast, the index rose a couple of points to 64 on the three-month moving average. Meanwhile, the South index fell by a point to 77. Moreover, the Western index was down by one point to 82, with the Midwest falling by two points to 66 (read: Homebuilder ETFs Shining in 2020: Will This Continue?).

Coronavirus Affects the Housing Market?

It is worth noting here that half of the builder responses were collected before Mar 4, the period prior to the outbreak getting severe. NAHB Chief Economist Robert Dietz has also pointed out that impact of the coronavirus-led stock market rout and its impact on the economic health will be more pronounced in the next month's report.

Economists at the BMO Capital Markets have summed up the current housing market conditions rightly. In this regard, they have said that “while the fundamentals for new home sales remain strong — record low existing homes for sales and sturdy underlying demand for housing — the uncertainty and confidence hits from COVID-19 look to temporarily trump the fundamentals.”

Homebuilder ETFs That May Face Trouble

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 an AUM of $1.37 billion, it holds a basket of 44 stocks, heavily focused on the top two firms. The product charges 42 basis points (bps) in annual fees. It has a Zacks ETF Rank #2 (Buy), with a High-risk outlook (read: Fed Cuts Rates to Near Zero: ETFs & Stocks to Explode Higher).

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 34 securities in its basket. It has an AUM of $835.9 million. The fund charges 35 bps in annual fees and carries a Zacks ETF Rank of 2, with a High-risk outlook.

Invesco Dynamic Building & Construction ETF PKB 

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 29 stocks in its basket, with each accounting for less than a 6.53% share. It has amassed assets worth $98.1 million. Expense ratio is 0.60%. It is a Zacks #2 Ranked ETF with a High-risk outlook (see: all the Materials ETFs here).

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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
 
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