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Here's Why You Should Buy Homebuilder ETFs Now

Sweta Jaiswal, FRM

The U.S. housing sector seems to be in good shape as positive data continues to flow in. Primarily on support from low mortgage rates, the sales of newly-built homes in the United States hit the fastest pace since July 2007 this January. According to data provided by the Commerce Department, sales of new U.S.-single family homes jumped 7.9% to a seasonally adjusted rate of 764,000 units in January, the highest level since July 2007. It compares favorably with the December reading on new home sales that were revised up to 708,000 units from the previously reported 694,000 units. The metric has surpassed economists’ forecasts of new home sales advancing to a pace of 710,000 units.

Notably, new home sales rose 18.6% on a year-over-year basis. Regionally, new home sales surged 30.3% in the Midwest to the highest level since October 2007. In the West, new home sales soared 23.5% to the highest level since July 2006 and also rose 4.8% in the Northeast.

The previously-released housing sector data was also positive. Per National Association of Home Builders (NAHB), builder sentiment in the housing market is near an all-time high in February with monthly confidence index coming in at 74 — just two points below the all-time high recorded last December. Moreover, U.S. homebuilding permits rose to a near 13-year high in January (read: Housing ETFs to Gain on Upbeat Sales Data).

What’s Driving the Upside?

After three rate cuts in 2019, the Fed hinted at keeping interest rates unchanged in 2020 unless there is any major change in the economic outlook. It is widely believed that declining mortgage rates have helped the housing sector, as lower borrowing costs are making new houses more affordable. According to data from the mortgage finance agency Freddie Mac, the 30-year fixed mortgage rate averages 3.45% — the lowest since October 2016. Fears surrounding the aggravating coronavirus outbreak are also inducing low mortgage rates. This is because mortgage rates are guided by the treasury yields that are sliding, thanks to a rise in demand for safe-haven assets (read: Play These Bond ETFs to Keep the Coronavirus Fear at Bay).

Moreover, healthy labor market and wage growth drove demand for homes. The unemployment rate continues to be around a 50-year low mark. Notably, the United States added 225,000 jobs last month, comfortably beating analysts estimate of 160,000 jobs. Going on, wage growth has improved with average hourly earnings rising 3.1% in January.

Homebuilder ETFs to Shine

It is worth noting here that market participants expect around two rate cuts by the Fed of around 25 basis points (bps) along with a 10-bp cut by the European Central Bank by December 2020. If further rate cuts happen, the housing sector can get more boost. Given the encouraging scenario in the U.S. housing market, let’s take a look at a few homebuilder ETFs.

iShares U.S. Home Construction ETF ITB — up 29.2% over the past year

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 $1.48 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: Sector ETFs at the Midpoint in Q1: Hits & Misses).

SPDR S&P Homebuilders ETF XHB — up 14.2%

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 $795 million. The fund charges 35 bps in annual fees and carries a Zacks ETF Rank of 2, with a High-risk outlook (read: Housing ETFs Soar on Upbeat Earnings With More Room to Run).

Invesco Dynamic Building & Construction ETF PKB — up 18.3%

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket, with each accounting for less than a 5.54% share. It has amassed assets worth $106.4 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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