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Homebuilders ETFs to Gain as Sentiment Surges to Yearly High

Sweta Jaiswal, FRM

Apart from the favorable U.S. manufacturing output data for August, investors have a reason to cheer over — the upbeat homebuilder sentiment data for September. Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), the builder confidence rose to 68 in September compared with an upwardly-revised 67 in August, 65 in July and another 67 a year ago.

Of all the three components of the index, the current sales conditions rose a couple of points to 75 (a 16-month high). The buyer traffic was constant at 50 (although the best since last October). Furthermore, there was a point-fall in sales expectations over the next six months to 70.

Notably, the strongest regional performance was observed in the Northeast with its index rising by eight points to 65. Moreover, the South increased three points to 72, the Western index inched up one point to 76 with the Midwest staying at 59 (read: ETFs to Gain/Lose as Fed Rate Cut Less Likely).

Factors Behind This Optimism

The Fed has cut interest rate for the first time since 2008 at the FOMC meeting in July 2019. When interest rate drops, mortgage rates decline, making real estate or refinancing mortgages more affordable. This, in turn, leads to higher home sales. Moreover, per CNBC, the boost in confidence level during September can also be linked to decreased mortgage rates in August. Per Mortgage News Daily, the average rate on the 30-year fixed deteriorated from 3.96% in mid-July to 3.46% by the first week of September. In this regard, NAHB’s chief economist Robert Dietz commented that “solid household formations and attractive mortgage rates are contributing to a positive builder outlook” (read: 5 ETF Zones to Watch Ahead of Fed Meeting).

The U.S. economy — presently at its historically longest 11th year of expansion — has successfully maintained this momentum. Majority of consumer-centric, business-centric and labor market data for August clearly indicated a stable U.S. economy but at a slow pace, removing recessionary fears. Notably, when an economy is going strong, the housing sector’s prospects get a lift. This is because a thriving economy ramps up alike activities and strengthens people's buying capacity. Demand for real estate accelerates and occupancy increases. In fact, landlords are able to command steeper rents (read: Small-Cap ETFs Loved by Investors: Here's Why).

Supply Continues to be a Challenge

Builders continue to bear the brunt of rising development and construction costs besides trade woes. They are still grappling with regulatory burdens, deficit of lots and lack of skilled labor that are dampening affordability. These hurdles are affecting the supply, which in turn, is disturbing the reasonable pricing of homes. In fact, demand for new homes reaches its peak at the entry level of price spectrum whereas majority of new constructions are still in the mid-to-high-end range. Moreover, there is dearth of proper construction projects in urban and suburban homes where demand is maximum from the young generation. Also, uncertainty surrounding the trade war lingers as a overhang on the builders (read: High-Yield ETFs at a 52-Week High Ahead of Fed's Decision).

In this regard, Robert Dietz commented that “builders are expressing growing concerns regarding uncertainty stemming from the trade dispute with China.”

Homebuilder ETFs in Focus

Against this backdrop, we highlight some homebuilder ETFs that investors can watch out for:

iShares U.S. Home Construction ETF ITB — up 39.5% year to date

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 $1.18 billion, it holds a basket of 46 stocks, heavily concentrating on the top two firms. The product charges 42 bps in annual fees and trades in a hefty volume of around 2.3 million shares a day on average. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Homebuilder, REIT ETFs Booming on Falling Mortgage Rates).

SPDR S&P Homebuilders ETF XHB — up 32%

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. It has AUM of $668.5 million and trades in average volume of around 2.4 million shares a day. The fund charges 35 bps in annual fees and has a Zacks ETF Rank of 3 with a High risk outlook (see: all the Materials ETFs here) (read: Ride the Millennial Wave With These ETFs).

Invesco Dynamic Building & Construction ETF PKB — up 36.8%

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket with each accounting less than 5.1% share. It has amassed assets worth $113.7 million and sees lower volume of around 15,000 shares per day on average. Expense ratio comes in at 0.58%. It is a Zacks #3 Ranked  ETF with a High risk outlook (read: ETFs to Grab as US Existing Home Sales Hit a 5-Month High).

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