ETFs to Gain on Record US Homebuilder Confidence in October

Sweta Jaiswal, FRM
·4-min read

The housing market continues to be the bright spot of the U.S. economy despite the worsening coronavirus crisis. For the second month in a row, the homebuilder sentiment has risen to a record high. Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence for newly-built single-family homes surged to an all-time high of 85 points in October in comparison to 83 points in September, 78 in August, 72 in July and 30 in April (the lowest since June 2012). Notably, September and October stood out as the first two months with the index surpassing 80. Any reading above 50 is considered positive and signals at improving confidence.

Notably, all three components of the index performed well by either setting new records or matching their highest readings ever in October. The current sales conditions came in at 90 compared with 88 in September. Buyer traffic remained strong at 74 and sales expectations rose to 88 in October, gaining three points from the prior month, per the NAHB press release. The three-month moving averages for regional HMI scores in the Northeast spiked six points to 82. Moreover, the South index climbed three points to 82. Also, the Western index jumped five points to 90, with the Midwest scaling up three points to 75, per the release.

NAHB chief economist, Robert Dietz, reportedly commented “the housing market continues to be a bright spot for the economy, supported by increased buyer interest in the suburbs, exurbs and small towns,” per the press release.

Present Housing Market Condition

Low interest rates are boosting demand in the housing market, resulting in an increase in mortgage applications. Analysts believe that support from the Federal Reserve keeping rates at such modest levels. The Fed, in its commitment to drive economic recovery, has decided to keep the interest rates at near-zero level. It has also hinted at sustaining the same for a prolonged period until inflation shows a consistent rise and the labor market achieves maximum employment.

The housing market is also steadily benefiting from changing demographical preferences of a large chunk of population, as people are now increasingly looking for work-from-home-friendly properties.

Homebuilder ETFs That May Gain

Against this backdrop, investors can look into the following housing ETFs that might benefit:

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 $2.37 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. It has a Zacks ETF Rank #3 (Hold), with a High-risk outlook (read: Beyond Clean Energy, 5 Sector ETFs Soaring to Record Highs).

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 $1.32 billion. The fund charges 35 bps in annual fees and carries a Zacks ETF Rank of 3, with a High-risk outlook (read: all the Materials ETFs here).

Invesco Dynamic Building & Construction ETF PKB  

This fund follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 32 stocks, each accounting for less than a 5.57% share. It amassed assets worth $130.2 million. The expense ratio is 0.60%. The fund is Zacks #3 Ranked, with a High-risk outlook.

Caveat

The rising lumber prices, which have more than doubled since mid-April, can induce sluggishness in the housing market despite low interest rates. Commenting on the scenario, NAHB chairman Chuck Fowke, a custom home builder from Tampa, FL reportedly stated that “however, it is becoming increasingly challenging to build affordable homes as shortages of lots, labor, lumber and other key building materials are lengthening construction times.”

Also, low employment levels and an aggravating coronavirus outbreak may impede the U.S. housing market momentum.

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SPDR SP 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
 
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