Homebuilder Confidence Hits 1-Year High: ETFs to Ride On

The U.S. housing sector has shown immense improvement, with homebuilder confidence reaching its highest level in almost a year. This is especially true as the Housing Market Index (“HMI”) rose five points to 55, surpassing the neutral midpoint of 50 for the first time since July 2022. This marks the sixth straight month of growth in builder confidence.

Investors seeking to bet on the improving homebuilder trends could consider homebuilder ETFs — iShares U.S. Home Construction ETF ITB, SPDR S&P Homebuilders ETF XHB, Invesco Dynamic Building & Construction ETF PKB and Hoya Capital Housing ETF HOMZ — that could be more compelling picks rather than a single stock. These products erase company-specific risks and provide a higher level of diversification while reducing volatility (see: all the Industrials ETFs here).

The surge can be attributed to solid demand for housing and a lack of existing inventory, coupled with improving supply-chain efficiency. Builders are becoming more optimistic due to ongoing gradual improvements in supply chains, despite difficulties in obtaining builder and developer loans over the last year.

The HMI consists of three major indices: current sales conditions, sales expectations in the next six months, and the traffic of prospective buyers. In June, all these indices posted gains. The current sales conditions rose five points to 61, the future sales expectations rose six points to 62, and the traffic of prospective buyers increased four points to 37. These increases suggest optimism among builders about current and future market conditions.

Builders are also gradually pulling back on sales incentives as the market stabilizes. The survey found that 25% of builders reduced home prices to bolster sales in June, down from 27% in May and 30% in April. The average price reduction was 7% in June, a drop from the 8% rate in December 2022. Additionally, 56% of builders offered incentives to buyers in June, slightly more than in May, but fewer than in December 2022.

NAHB Chief Economist Robert Dietz noted that the Federal Reserve nearing the end of its tightening cycle is good news for the sector in terms of mortgage rates and the cost of financing for builder and developer loans. This could potentially spur growth in the home building sector, which in turn would be a positive factor for homebuilder stocks. However, persisting challenges, such as limited access to builder and developer loans, may result in lower lot supplies as the industry recovers from cycle lows.

iShares U.S. Home Construction ETF (ITB)

iShares U.S. Home Construction ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index (read: 5 Sector ETFs Soaring to New 52-Week High).

With AUM of $2 billion, iShares U.S. Home Construction ETF holds a basket of 48 stocks with a heavy concentration on the top two firms. The product charges 39 bps in annual fees and trades in a heavy volume of around 2.4 million shares a day, on average.

SPDR S&P Homebuilders ETF (XHB)

SPDR S&P Homebuilders ETF provides exposure to homebuilders with a well-diversified exposure across building products, homebuilding and home improvement retail. It tracks the S&P Homebuilders Select Industry Index, holding 35 stocks in its basket.

SPDR S&P Homebuilders ETF is the most popular option in the homebuilding space, with AUM of $1.3 billion and an average daily volume of 3 million shares. The product charges 35 bps in annual fees.

Invesco Dynamic Building & Construction ETF (PKB)

Invesco Dynamic Building & Construction ETF follows the Dynamic Building & Construction Intellidex Index, holding 31 well-diversified stocks in its basket, with none accounting for more than 5% of assets.

Invesco Dynamic Building & Construction ETF has amassed assets worth $214.3 million and sees a modest volume of roughly 34,000 shares per day, on average. Expense ratio comes in at 0.57%.

Hoya Capital Housing ETF (HOMZ)

Hoya Capital Housing ETF invests in 100 domestic companies involved across the U.S. housing industry, including rental operators, homebuilders, home improvement companies, and real estate services and technology firms by tracking the Hoya Capital Housing 100 Index (read: 4 Sector ETFs Showing Improvement Ahead of Q2 Earnings Season).

Hoya Capital Housing ETF has accumulated $35.6 million in its asset base and charges 30 bps in annual fees. The product trades in an average daily volume of 3,000 shares.

Bottom Line

Though the above-mentioned ETFs have an unfavorable Zacks ETF Rank #4 (Sell), indicating some pain in the near term, the fortune of the homebuilders is turning around with solid demand, limited inventory, improved supply-chain efficiency and the end of a tight policy era.

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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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Zacks Investment Research

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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