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U.S. Homebuilder Sentiment Data Soft in June: ETFs in Focus

Sweta Jaiswal, FRM

After impressive retail sales in May, homebuilder sentiment data for June has been quite a disappointment. Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), the builder confidence dropped to 64 in June from 66 in May and 68 a year ago. This is considered the first drop in 2019 by the index (read: ETFs in Focus on Impressive Rise in May Retail Sales).

In fact, all three components of the index declined slightly. The current sales conditions declined by a point to 71. Moreover, buyer traffic fell by one point to 48. Furthermore, there was a two-point fall in sales expectations over the next six months to 70.

Moreover, in regards to the three-month moving averages for regional HMI scores, the Northeast and the Midwest were gainers. The West remained stable while the South declined by a point.

What’s Behind the Softness?

Despite lower mortgage rates, the softness in the homebuilder sentiment data puts light on some problems faced by builders. Per CNBC, in spite of demand for single-family homes, builders are not able to supply homes as per the income of the buyers.

Builders continue to face rising development and construction costs, and trade issues. Although new home sales advanced in March and April, builders are still grappling with regulatory burden, deficit of lots and lack of skilled labor that are dampening affordability. In this regard, the NAHB Chairman Greg Ugalde states that, “while demand for single-family homes remains sound, builders continue to report rising development and construction costs, with some additional concerns over trade issues.”

Trade war fears made a comeback in May. The American President raised tariffs to 25% from 10% on Chinese goods worth $200 billion effective May 10 midnight. This was followed by retaliation from China. It is also worth noting that the trade war issue doesn’t seem to get resolved any soon. In this regard, U.S. Commerce Secretary Wilbur Ross told CNBC that Trump is prepared to impose tariffs on the residual $300 billion of Chinese imports in absence of a suitable trade deal.

However, builders must be awaiting Fed’s decision as a decline in mortgage rates may boost demand for homes by making them more affordable. Per a Bloomberg article, investors are expecting the Fed to decrease the borrowing costs in July.

ETFs in Focus

Against this backdrop, it will be prudent for investors to stay on the sideways and look out for Fed’s future course of action. In this regard, we highlight some homebuilder ETFs that investors can watch out for.

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 $1.23 billion, it holds a basket of 46 stocks with heavy concentration on the top two firms. The product charges 43 bps in annual fees and trades in heavy volume of around 2.6 million shares a day on average. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: ETFs Set to Soar on Rate Cuts Signal).

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. It has AUM of $729.7 million and trades in volume of around 3.1 million shares. The fund charges 35 bps in annual fees and has a Zacks ETF Rank #3 with a High risk outlook (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 $114.5 million and sees lower volume of around 22,000 shares per day on average. Expense ratio comes in at 0.58%. It has a Zacks ETF Rank #3 with a High risk outlook (read: ETF Strategies to Follow If Fed Cuts Rate).

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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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