Mortgage Rates At Record Lows: Buy Homebuilder & REIT ETFs
Mortgage rates have been on a declining trend with the 30-year fixed mortgage average rate now slipping deeper to below 3%. Per Mortgage News Daily report, the rate dropped to a new all-time low of 2.9% from 3.5% in late March.
The sharp decline came from a combination of factors. First, the second wave of COVID-19 infection has led to increased uncertainty over economic recovery. The situation worsened Wednesday with confirmed cases topping three million to comprise more than 25% of the global total. California reported its largest one-day jump in new cases at 11,694 on Jul 8, and case growth in Florida and Arizona remained elevated relative to the national average (read: 3 Hot Sector ETFs to Tide Over the Coronavirus Crisis in Q3).
Secondly, investors are turning to safe-haven investments, pushing yields down. Additionally, the Fed’s stimulus to pull the economy out of recession is leading to a decline in interest rates. Fed Chair Jerome Powell maintained a dovish stance and stated that there is no expectation of rate hike through 2022. The central bank has pledged to continue pumping in stimulus until the economy is back on track. It slashed interest rate to a range of 0% to 0.25% in mid-March in a bid to protect against the coronavirus pandemic's economic toll. The Fed followed up its rate cuts with unprecedented lending programs extending credit to corporations, households and municipalities.
The low interest rate environment has led to strong optimism for homebuilders and real estate sectors, pushing stocks higher. This is because lower rates have made buying of real estate or homes and refinancing mortgages more affordable. This, in turn, boosted activity in the market, and has lifted homebuilder and real estate stocks.
How to Play
Given the plunging rates, investors seeking to tap the two spaces could look at the following ETFs 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. All these ETFs have a Zacks ETF Rank #3 (Hold), suggesting room for more upside in the coming weeks.
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 $1.5 billion, it holds a basket of 44 stocks with heavy concentration on the top two firms. The product charges 42 bps in annual fees and trades in heavy volume of around 3.6 million shares a day on average. It has surged 41.7% over the past 13 weeks (read: Housing ETFs to Gain on Upbeat US New Home Sales Data).
SPDR S&P Homebuilders ETF XHB
This ETF provides exposure to the homebuilders segment with a well-diversified exposure across building products, home furnishings, home improvement retail, home furnishing retail and household appliances. It is the most-popular option in the homebuilding space with AUM of $804.8 million and average daily volume of 2.5 million shares. The product charges 35 bps in annual fees and has gained 38.7% so far this year.
iShares Cohen & Steers REIT ETF ICF
This fund offers exposure to large real-estate companies that are dominant in their respective property sectors by tracking the Cohen & Steers Realty Majors Index. It holds 30 stocks in its basket with each making up for less than 8.6% share. Specialized REITs take the largest share at 38.4% of assets while residential REITs, retail REITs, industrial REITs and office REITs round off the next spots with double-digit exposure each. The ETF charges 34 bps in annual fees and sees a good volume of around 114,000 shares on average. It has AUM of $1.8 billion and has gained 3% in the same time frame.
Vanguard Real Estate ETF VNQ
This fund follows the MSCI US Investable Market Real Estate 25/50 Index and holds 183 stocks in its basket with none accounting for more than 9.32% share. Specialized REITs take the largest share at 42% while residential REITs and industrial REITs round off the top three with double-digit exposure each. Expense ratio comes in at 0.12%. VNQ is the most popular and liquid ETFs with AUM of $28 billion and average daily volume of around 7.9 million shares a day. It has risen 6% over the past 13 weeks (read: 5 ETF Ideas for a Winning Portfolio in the Second Half).
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Vanguard Real Estate ETF (VNQ): ETF Research Reports
SPDR SP Homebuilders ETF (XHB): ETF Research Reports
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
iShares Cohen Steers REIT ETF (ICF): ETF Research Reports
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