The housing momentum seen in 2012 and in the first half of
2013 has slowed down in the past 3-4 months due to the recent
spike in mortgage rates, rising home prices, tight credit
availability and the political uncertainty in Washington.
Though interest rates are rising, these are still below
historical levels and housing is still affordable. In addition,
accelerating job growth and increasing consumer confidence are
also boosting demand for new homes. (Read:
3 Hot Sector ETFs for 2014
Supply, however, is constrained by low home inventories, both of
new single-family and multi-family homes. A shortage of land and
labor is restricting the construction of homes, both single and
multifamily. Home prices have thus started to move up with market
demand gaining momentum and supply remaining limited.
Rising home prices and the spike in interest/mortgage rates since
May this year slowed down the pace of orders and traffic. Buyers
were taken unawares by the sudden increase in rates and a few put
off their purchase decision, thereby increasing cancellation
rates and lowering orders for most homebuilders in the last
reported quarter. (Read:
7 ETFs to buy in 2014
However, most homebuilders believe that this is only a temporary
factor and are confident of demand picking up in future quarters.
These builders expect buyers to adjust to rising prices and
interest rates and return to the market. Also, Federal Reserve's
promise to keep interest rates low for some time despite tapering
its $85 billion stimulus plan by $10 billion from Jan 2014
removes a major overhang for the homebuilders. (Read:
Fed Tapers Bond Purchases: 3 ETFs in Focus on the
A slew of housing data released lately clearly shows that housing
recovery is still on. Data released by the U.S. Department of
Housing and Urban Development and the U.S. Census Bureau showed
that sales of newly built, single-family homes rose 25.4% in
October. Another data release by the department showed that
November housing starts surged to their highest in nearly six
The National Association of Home Builders (NAHB)/Wells Fargo
Housing Market Index (HMI), known as the homebuilder sentiment
index, jumped 4 points to 58 in December from 54 in July. This
was the seventh consecutive monthly increase in the index,
showing that the recent interest rate hikes have not dampened the
housing recovery completely. (Read:
It's A Merry Christmas for Homebuilder ETFs
). The Consumer Confidence Index also rebounded in December after
declining in November.
ETFs to Tap the Sector
With this in mind, it could be time to give this segment a closer
look. For investors looking to play the homebuilding sector in a
less risky way, an ETF approach can be a good idea.
This technique can help to spread out assets among a wide variety
of companies and reduce company specific risk for a very low
cost. Below, we highlight three ETFs that are worth a look in
SPDR S&P Homebuilders (
XHB is one of the more popular homebuilding ETFs in the market
today with assets under management of around $2.0 billion and a
trading volume of roughly 5.3 million shares a day. The fund has
an expense ratio of 35 basis points.
The fund holds 35 stocks in its basket, with 44% of the assets
going to mid cap and 15% comprising large cap stocks. Despite the
smaller holding pattern, the fund does not appear to be
concentrated in the top ten holdings.
The fund has just 32.5% in the top ten holdings with Lumber
Liquidators, D.R. Horton, Inc. and Lennar Corporation occupying
the top three positions with asset allocation of 3.39%, 3.31% and
The fund's assets include 29% homebuilders, 15% household
appliances securities, 27% specialty retail stocks and the
balance 28% of building materials companies. The fund carries a
Zacks Rank # 3 (Hold) with a moderate level of risk.
iShares Dow Jones US Home Construction
Another popular choice in the homebuilding sector is ITB, which
tracks the Dow Jones U.S. Select Home Construction Index. It has
$1.72 billion in assets with a trading volume of roughly
5,800,000 shares a day, while its expense ratio is just 45 basis
The fund holds 34 stocks in its basket, out of which only 12% are
large cap securities. The fund has a concentrated approach in the
top ten holdings with 62.3% of the asset base invested in them.
Among individual holdings, top stocks in the ETF include Pulte,
Lennar and D.R. Horton, Inc with asset allocation of 10.32%,
9.81% and 9.51%, respectively.
Homebuilders account for around 67.0% of this fund. The fund
carries a Zacks Rank #2 (Buy) with a moderate level of risk.
& Construct (
This ETF comprises around 30 housing companies and has its assets
invested across all classes of the market spectrum. Engineering
and construction stocks comprise 23% of the fund, followed by
specialty retail companies that account for 15%. A look at the
style pattern reveals that the fund has a preference for growth
The fund manages an asset base of $100.6 million and has an
expense ratio of 63 basis points. The fund has only 25% in large
cap securities and around 46.0% in top ten holdings. The fund
carries a Zacks Rank #3 (Hold) with a moderate level of risk.
To Sum Up
Though the sudden jump in interest rates has temporarily
disrupted housing recovery, we expect sales to continue to rise
in 2014 as pent up demand is released and buyers return to the
market. Most homebuilders also expect the housing momentum to
continue into 2014 with the gradual strengthening of the economy.
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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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