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Homebuilder ETFs in Focus on Solid New Home Sales Data

Sweta Killa
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The housing market has perked up with the start of summer thanks to soaring demand for homes. This is especially true as new home sales jumped to the highest level in May since November 2017. Sales of new homes in the United States rose 6.7% to a seasonally adjusted annual rate of 689,000 in May. The robust growth was driven by an inventory crunch for previously owned houses. The median sales price in May was 3.3% lower than the year-ago month.

Home sales in South surged 17.9% last month – the highest level in nearly 11 years – and ended two months of decline. However, sales in the Northeast and West dropped 10% and 8.7%, respectively, while Midwest sales remain unchanged. Overall, new homes sales rose about 8.8% in the first five months of this year.

Though homebuilders are struggling with higher lumber prices as well as labor and land shortages, robust home sales data spread some optimism. A report last week that showed housing starts climbed the highest level since July 2007, rising 5% in May also brought some silver lining to the space. However, existing home sales fell for a second straight month in May (read: Housing Starts Scale 11-Year High: ETFs in Focus).

An accelerating job market with rising wages and lowest unemployment rate in 18 years is fueling strong demand for homes. Mortgage rates so far have not dampened demand. The 30-year mortgage rate averaged 4.57% last week and has risen more than 50 bps this year. This is much below the 30-year average rate of nearly 8% over the past 45 years, suggesting that the rates are still at historic lows.

With the Fed on track to raise its short-term interest rates over the next two years and unwind some of its prior asset purchases, longer-term interest rates, including that of mortgages, will rise and make homes costlier. This is also a positive for borrowers as most of them are seeking to buy homes wish to lock in the still-low rates, creating solid demand. This will in turn benefit the homebuilders.

Further, homebuilders are currently well placed, belonging to a top-ranked Zacks Industry (top 39%), suggesting bright prospects for the sector.

ETFs in Focus

Given this, investors might want to look at homebuilder ETFs — iShares U.S. Home Construction ETF ITB, SPDR S&P Homebuilders ETF XHB and Invesco Dynamic Building & Construction ETF PKB — for their exposure to the sector. These funds have become a victim of the broad market sell-off in yesterday’s trading session and shed 1.7%, 1.2% and 1.8%, respectively (see: all the Materials ETFs here).

ITB

This fund provides a pure play to home construction stocks by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $1.2 billion, it holds a basket of 47 stocks, while charging 44 bps in annual fees. The product trades a heavy volume of around 3 million shares a day on average and has a Zacks ETF Rank #3 (Hold) with a High risk outlook.  

XHB

The most popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. The fund holds about 35 securities in its basket, with AUM of $876.5 million and trades in volume of around 2.7 million shares. It charges 35 bps in annual fees and has a Zacks ETF Rank #4 (Sell) with a High risk outlook (read: What Lies Ahead for Housing ETFs?).

PKB

This fund tracks the Dynamic Building & Construction Intellidex Index, holding 30 stocks in its basket. It has amassed assets worth $239.5 million while it sees moderate volume of around 67,000 shares per day on average. Expense ratio comes in at 0.63%. PKB has a Zacks ETF Rank #3 with a High risk outlook.

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SPDR-SP HOMEBLD (XHB): ETF Research Reports
 
ISHARS-US HO CO (ITB): ETF Research Reports
 
PWRSH-DYN BLDG (PKB): ETF Research Reports
 
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