The housing market returned to impressive growth in September
driven by the Fed's taper hold, and the resulting decline in
interest rates. This is because if rates continue to decline or at
least hold steady at the current levels, it would allow more
potential buyers to enter the market (read:
3 ETF Winners from the 'No Taper' Shocker
This robust growth might not continue this month though, as the
housing market could face troubles from the prolonged government
shutdown. Starting this month, the U.S. government went for its
first closure in 17 years following political gridlock between the
White House and Republican lawmakers over government funding.
If this partial shutdown continues for much longer, it could slow
down the broader economic recovery, affecting almost all the major
classes and categories.
Further, the increase in government debt ceiling from the current
$16.7 trillion is looming large across the economy with a deadline
of October 15. Failure to raise such limit could turn to a global
financial crisis by defaulting on U.S. Treasury obligations (see:
3 ETFs to Watch as the Government Shutdown Drags
The prolonged shutdown suggests delays in obtaining new home loans
and approval for mortgage-backed finance by the Federal Housing
Administration (FHA). This could impact borrowers and sellers,
hurting overall home sales.
The builders that offer homes using FHA financing like
D.R. Horton (
Beazer Homes (
KB Home (
would also be negatively impacted. This is primarily true as less
than one-tenth of the FHA employees are working during the
In such a backdrop, the following homebuilder ETFs could see rough
trading in the days ahead if the government closure drags on (see:
all the Industrial ETFs here
SPDR S&P Homebuilders ETF (
This is by far the most popular and liquid choice in the
homebuilding space with AUM of over $2 billion and average daily
volume of roughly 6.6 million. The fund follows the S&P
Homebuilders Select Industry Index and charges 35 bps in fees a
year. In total, the product holds 37 securities with none holding
more than 3.4% of total assets.
The ETF is pretty spread out across the sectors with homebuilding
taking the top position at 30%, while building products and home
furnishing retail round off the next two spots. XHB gained 7.2% in
the past month and over 11.4% so far this year. The fund currently
has a Zacks ETF Rank of 2 or 'Buy' rating with 'Medium' risk
iShares U.S. Home Construction ETF (
This fund follows the Dow Jones US Select Home Builders Index and
holds a small basket of 33 stocks. It is heavily concentrated in
its top 10 firms with 63% of the total assets. Additionally, the
product puts more focus on home construction, indicating that it is
a 'pure play' on the space (read:
The Comprehensive Guide to Homebuilders ETFs
The fund is popular and liquid with AUM of just under $2 billion
and average daily volume of nearly 5.8 million shares. The ETF
charges 46 bps in fees and expenses.
The ETF added 8.6% in the past month and is up just 2.5% in the
year-to-date time frame. ITB currently has a Zacks ETF Rank of 1 or
'Strong Buy' rating with 'Medium' risk outlook.
& Construction Fund (
This fund tracks the Dynamic Building & Construction Intellidex
Index, which evaluates companies on good investment merits such as
price momentum, earnings momentum, quality, management action and
The product has amassed $98.8 million in its asset base while
charging 63 bps in annual fees. Volume is small, trading in more
than 52,000 shares a day.
The product holds 30 securities in its basket, with top allocations
to Fluor Corp, Mohawk Industries and Vulcan Materials. These
securities make up for a combined 15.75% share. The fund is tilted
toward engineering and construction with just less than one-third
share, followed by specialty retail and building materials with at
least 11% share each.
PKB added 6.7% in September and is up 14.3% in the year-to-date
time frame. The fund currently holds a Zacks ETF Rank of 3 or
'Hold' rating with a 'Medium' risk outlook (read:
3 Biggest ETF Winners from the 3rd Quarter
Investors should note that the long-term outlook for the
homebuilder ETFs remains bright, although the short term looks
bleak if the government shutdown persists for long. Home sales
could decline during an extended shutdown period, suggesting the
reversal in trend toward the improving economy and thus, less
chances of Fed taper at least this year.
As such, investors should take some precaution while trading in
these homebuilder ETFs at present, or at least be prepared for some
big moves in the short term.
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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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