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Homebuilder ETFs Shining Ahead of Spring Selling Season

Sweta Killa

The U.S. housing market has shown a strong rebound since the start of the year and seems to be stronger ahead of the key spring selling season. This is especially true given the slew of upbeat data, decline in mortgage rates and strong earnings. Notably, the Dow Jones U.S. Select Home Construction Index, one of the most widely followed gauges of homebuilder and home improvement equities, has gained nearly 18% this year.

Rebounding Fundamentals

New home sales climbed 3.7% in December — the highest pace in seven months — to a seasonally adjusted annual rate of 621,000. The data is much stronger-than-expected, with Reuters calling for 8.7% decline in home sales to 600,000 units.

Mortgage rates have been on a decline thanks to a dovish Fed that it is not in a hurry to raise rates this year after four rates hikes in 2018. The average rate for the 30-year fixed mortgage declined to 4.35% for the week ending Feb 28 from the year-ago level of 4.43% and the start of the year (for the week ending Jan 3) rate of 4.51%. Additionally, home price, as measured by S&P CoreLogic Case-Shiller U.S. National Home Price Index, rose 4.7% annually in December, down from 5.1% price gains in November. This represents the slowest growth rate since August 2015 (read: Low Mortgage Rates Brighten Homebuilder ETFs' Outlook).

Lower mortgage rates coupled with decelerating home price growth has encouraged people to buy more homes. Homebuilder confidence also bounced back from a three-year low in January and then climbed to a four-month high in February, as depicted by the National Association of Home Builders/Wells Fargo sentiment index.

Further, household formations remain strong as the homeownership rate climbed to the highest level in four years, while the rental vacancy rate was at the lowest level in 34 years. Low unemployment, solid job growth, wage gains and favorable demographics are propelling demand for homes, fueling growth in the sector.

If these weren’t enough, Q4 earnings for the construction sector have been solid. This is especially true as earnings of the total sector’s capitalization are up 23.8% on 13.9% revenue growth. Notably, its earnings have been the third best among the 16 Zacks sectors, while its revenues have contributed the most to the S&P 500. Earnings and revenue surprise of 58.3% and 66.7%, respectively, seem to be decent (read: Trade Optimism & Earnings Effect: 5 Hot ETF Charts).

How to Play

Given this, investors seeking to tap the solid trend in the homebuilder space could look at the three ETFs that make for a more compelling choice rather than a single stock. These products erase company-specific risks and provide a higher level of diversification while reducing volatility.

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 $1 billion, it holds a basket of 48 stocks with heavy concentration on the top two firms. The product charges 43 bps in annual fees and trades in heavy volume of around 3.3 million shares a day on average. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook and has gained 14.3% so far this year (read: Will the Rally in Homebuilder ETFs Continue?).

SPDR S&P Homebuilders ETF 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 equal-weighted exposure of around 5%. It has AUM of $657.2 million and trades in volume of around 4 million shares. The fund charges 35 bps in annual fees and has a Zacks ETF Rank #4 (Sell) with a High risk outlook. XHB is up 18% in the year-to-date timeframe (see: all the Materials ETFs here).

Invesco Dynamic Building & Construction ETF PKB

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket with each accounting less than 5.2% share. It has amassed assets worth $120.9 million and sees lower volume of around 38,000 shares per day on average. Expense ratio comes in at 0.58%. PKB is up 15.8% so far this year and has a Zacks ETF Rank #3 with a High risk outlook.

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