The housing sector held up quite well for most of 2013, but
concerns have started to build of late on bad weather conditions
and Fed tapering plans. As the Fed discussed curtailing its
stimulus, interest rates moved up leading to a rise in mortgage
While mortgage rates have since stabilized, home prices have
continued to move higher, and these are keeping most homebuyers
away from the market. Additionally, a harsh winter has taken a toll
on homebuilders resulting in lower demand as depicted by the string
of weak data that raises the question on the strength of the
Homebuilder confidence, as indicated by the National Association of
Home Builders/Wells Fargo housing market index, dropped to 46 in
February from 56 in January. This represents the lowest level in
nine months and a pessimistic outlook for the near term (read:
The Comprehensive Guide to Housing ETFs
Further, housing starts tumbled 16% to an annualized rate of
880,000 in January buoyed by lower single-family homes and
apartments. This marks the biggest drop in almost three years.
Building permits, a gauge of future construction, also declined for
the third straight month to 5.4% in January.
If this wasn't enough, existing home sales saw the slowest pace in
18 months in January, declining 5.1% from the last month.
Once winter passes, the sector will likely gain momentum on an
improving economy and healing job market. Home prices also seems to
be leveling off on rising inventories across the country
Homebuilder ETFs Rise on Solid Earnings, Strong
According to the latest data from
, the value of homes in the U.S. was up only 0.2% in January,
representing the smallest monthly gain since May 2012. Inventory
increased slightly to a 4.9-month supply in January from a
4.6-month supply in December.
Notably, 22 of the 35 largest metro areas have higher inventory
with the largest gains coming from Las Vegas (up 42.8%), Phoenix
(up 30.5%) and Sacramento (up 26%).
The rising inventory and modest home prices are expected to
encourage buyers to purchase more homes in spring and offset the
impact of any rise in mortgage rates. This might propel the
homebuilder stocks higher in the weeks ahead as demand for homes
Zacks Industry Rank
confirms the bullish trend for the space, as homebuilding actually
has the best Rank for any industry at the time of writing. All of
the five industries classified under homebuilding or construction
have Zacks Rank within the top 42%, suggesting smooth trading in
the coming months.
Given this, investors seeking to ride out this opportunity could
look to the following homebuilder ETFs for exposure (see:
all the Industrial ETFs here
SPDR S&P Homebuilders ETF (
The most popular choice in the homebuilding space, XHB, follows the
S&P Homebuilders Select Industry Index. The fund manages about
$2 billion in assets and trades in heavy volume of more than 4.6
million shares a day. The ETF charges 35 bps in fees per year from
In total, the fund holds about 37 securities in its basket with
none holding more than 3.91% of total assets. The product focuses
more on mid cap securities with 50% share, followed by 36% in small
caps. From a sector look, homebuilding and building products make
up for nearly 60% of assets, while home furnishing retail and home
furnishing account for double-digit exposure.
XHB lost 1.41% in the year-to-date period and has a decent Zacks
ETF Rank of 3 or 'Hold' with 'Medium' risk outlook.
iShares U.S. Home Construction ETF (
This fund provides pure play to the home construction sector by
tracking the Dow Jones US Select Home Builders Index. It holds a
small basket of 34 stocks and is heavily concentrated on the top 10
holdings with over 63% of total assets with the double-digit
allocations going to Lennar (
), PulteGroup (
) and D.R. Horton (
The fund is skewed toward mid cap securities (59%), followed by
small cap (29%), and charges 45 bps in fees and expenses. Apart
from the home construction sector, building materials &
fixtures as well as home improvement retailers also account for
double-digit levels of exposure. The product is rich with AUM of
nearly $1.7 billion and average daily volume of more than 5.2
The ETF added about 2% so far this year and has a Zacks ETF Rank of
2 or 'Buy' rating with 'Medium' risk outlook (read:
3 Sector ETFs Benefiting from Plunging Interest
& Construction Fund (
This product follows the Dynamic Building & Construction
Intellidex Index, holding 30 stocks in its basket. The fund has
managed assets worth $109.4 million while it sees light volume, and
the expense ratio comes in at 0.63%. The product is little bit
concentrated on the top 10 firms at under 47% of total assets.
Here again, the ETF is tilted toward mid caps which make half of
the portfolio while small and large caps take the remainder. The
top three sectors include engineering and construction (22%),
construction materials (16%) and specialty retail (13%).
PKB is up about 0.5% year-to-date and has a decent Zacks ETF Rank
of 3 or 'Hold' with 'Medium' risk outlook.
Though the sector is not performing as expected, it will likely
show some strength in the near term given a rising inventory and
affordable home prices. Further, the demand for homes would rise in
the spring season, which is just a few weeks away (read:
3 Rate Sensitive Sector ETFs Still Going Strong
As such, investors should start preparing for this surge and focus
on the sector with the abovementioned ETFs.
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ISHARS-US HO CO (ITB): ETF Research Reports
PWRSH-DYN BLDG (PKB): ETF Research Reports
SPDR-SP HOMEBLD (XHB): ETF Research Reports
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