Are ETFs in Trouble as US Homebuilder Confidence Slips in June?

The U.S. housing sector that remained in the bright spot amid the coronavirus crisis has disappointed with the release of latest data. Persistent headwinds of rising material prices and supply chain shortages have taken a toll on builder confidence, which slipped to its lowest level since August 2020. Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder sentiment for newly-built single-family homes declined to 81 in June from 83 in May, 82 in March, 84 in February and 30 in April (the lowest since June 2012). However, the reading looks strong as any reading above 50 signals at improving confidence.

Notably, the current sales conditions index declined by a couple of points to 86 in June. The metric, measuring traffic of prospective buyers, also saw a two-point drop to 71. Moreover, sales expectations for the next six months dipped by two points to 79, per the NAHB press release. The three-month moving averages for regional HMI scores in the Northeast declined five points to 78. Also, the Western Index slipped a point to 89. Moreover, the Midwest slid three points to 72, per the release. Meanwhile, the South Index rose a point to 85.

Going by the press release, NAHB chief economist Robert Dietz reportedly commented, “While builders have adopted a variety of business strategies including price escalation clauses to deal with scarce building materials, labor and lots, unavoidable increases for new home prices are pushing some buyers to the sidelines. Moreover, these supply-constraints are resulting in insufficient appraisals and making it more difficult for builders to access construction loans.”

Current US Housing Market Scenario

Rising softwood lumber, material and labor costs continue to be a major hurdle for homebuilders. In fact, there has been a more than 300% rise in lumber prices from April 2020. Moreover, costs of other materials like steel, concrete and gypsum products are rising at a record pace, per official NAHB data. Going by a Reuters article, tariffs on steel imports have imposed the burden of soaring costs on builders.

Also, supply chain disturbances caused by the lockdown to contain the coronavirus outbreak have led to the rise in concrete, metal products, appliances and other expenses, as mentioned in a FOX Business article. These factors are affecting affordability as prices of existing and new homes are soaring.

Meanwhile, the housing market has steadily benefited from changing demographical preferences of a large chunk of population as people increasingly looked for work-from-home-friendly properties. Notably, individuals were shifting from city centers to suburbs and other low-density areas looking for spacious accommodations for home offices and schools, per the sources.

Commenting on the current market conditions, NAHB Chairman Chuck Fowke has reportedly said that “Higher costs and declining availability for softwood lumber and other building materials pushed down builder sentiment in June. These higher costs have moved some new homes beyond the budget of prospective buyers, which has slowed the strong pace of home building. Policymakers need to focus on supply-chain issues in order to allow the economic recovery to continue.”

Homebuilder ETFs That Might Gain

Against such a backdrop, here are a few housing ETFs that might rise amid the current 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 $2.52 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: Core Inflation at 29-Year High: 6 ETF Areas to Benefit).

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 $1.83 billion. The fund charges 35 bps in annual fees (read: 5 ETFs That Skyrocketed During Biden's 100 Days in Office).

Invesco Dynamic Building & Construction ETF PKB  

This fund follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 31 stocks, each accounting for less than a 5.52% share. It has amassed assets worth $297.6 million. The expense ratio is 0.59%.

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 represents the performance of the U.S. housing Industry. It has AUM of $72.9 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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