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Ride the Housing Market Momentum With These ETFs

Sweta Jaiswal, FRM
·5 min read

The U.S. housing sector has been a shining spot in the overall economic recovery from the pandemic-led slowdown despite the surge in coronavirus cases. It is being believed that slipping mortgage rates and growing demand for new homes are driving the housing sector. Low interest rates are also resulting in an increase in mortgage applications and have led to cheaper refinancing options. Amid the pandemic, the central bank is determined to hold rates at a near-zero level and will continue with the asset purchase program at the current rate until “substantial further progress” is made to reach a state of healthy inflation and maximum employment levels. This could continue to remain a positive for the sector.

Going on, the housing market is steadily gaining from changing demographical preferences of a large chunk of population as people are now increasingly looking for work-from-home-friendly properties. It is worth mentioning here that at least 21.8% of the labor force is working from home, per a Reuters article. This resulted in people shifting from city centers to suburbs and other low-density areas as they are looking for spacious accommodations for home offices as well as schools.

Other factors like coronavirus vaccine rollout is pointing toward faster economic recovery and adding to the optimism for the sector. Furthermore, President Trump has finally signed the new coronavirus relief and government funding package worth $900 billion into law. This includes $600 stimulus checks to Americans, $300 per week in augmented federal unemployment insurance for unemployed individuals, around $300 billion in aid for small businesses, including $284 billion in forgivable Paycheck Protection Program (per the sources), and tens of billions of dollars across other provisions like rental assistance, vaccine distribution funds, COVID-19 testing and contact tracing efforts and broadband support.

The introduction of another round of fiscal stimulus is making the case stronger for economic recovering in the United States and increased strength in the housing market.

Considering the optimism surrounding the economic recovery, a Redfin report  predicts more than a 10% increase in annual home sales in 2021, following a 5% growth last year. In this regard, Daryl Fairweather, chief economist of Redfin, has reportedly said that “even as the pandemic hopefully nears its end, Americans will continue to buy homes that fit their new lifestyle.  As a result, 2021 will see more home sales than any year since 2006.”

Streak of Encouraging Housing Data Releases

The recent releases of upbeat data from the U.S. housing market highlight the sector’s strength despite the rising coronavirus cases. Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder sentiment for newly-built single-family homes came in at 86 in December in comparison to 90 points in November, 85 in October, 83 in September and 30 in April (the lowest since June 2012). However, the December reading stands as the second highest in the history of the index. Any reading above 50 is considered positive and signals at improving confidence.

Moreover, according to the Commerce Department, total housing starts rose 1.2% to a seasonally-adjusted annual rate of 1.547 million units in November. The figure has narrowed the gap since February’s figure of 1.567 million units. The reading surpassed analysts’ expectations of 1.530 million units in November, per a Reuters’ poll. Building permits, a construction pointer for the coming months, increased 6.2% to a rate of 1.639 million units in the same month.

Homebuilder ETFs to Watch Out For

In such a scenario, here are a few housing ETFs that might gain from the improving housing sector scenario:

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 $1.96 billion, it holds a basket of 46 stocks, heavily focused on the top two firms. The product charges 42 basis points (bps) in annual fees (read: 6 Secret Santa ETFs to Add Cheer to Your Portfolio).

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 35 securities in its basket. It has AUM of $1.30 billion. The fund charges 35 bps in annual fees (read: ETFs to Gain on Positive US Housing Starts in November).

Invesco Dynamic Building & Construction ETF PKB  

This fund follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 30 stocks, each accounting for less than a 5.18% share. It has amassed assets worth $171.7 million. The expense ratio is 0.59% (read: ETFs to Watch Ahead of Georgia Senate Runoff).

Hoya Capital Housing ETF HOMZ

The fund seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the Hoya Capital Housing 100 Index, a rules-based Index designed to track the 100 companies that collectively represent the performance of the US Housing Industry. It has AUM of $39.6 million. The fund charges 30 bps in annual fees (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
 
Hoya Capital Housing ETF (HOMZ): ETF Research Reports
 
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