Homebuilder ETFs Shining In 2020: Will This Continue?

The U.S. homebuilding industry continued its strong momentum heading into the New Year given that groundbreakings on new U.S. homes surged to a 13-year high in December.

U.S. housing starts spiked 16.9% to a seasonally adjusted annual rate of 1.361 million homes in December, the highest level since December 2006. The uptick was driven by strong activity in the multi-family houses, which increased 32%, marking a 33-year high. Single-family construction was up 11%. However, building permits, a construction bellwether for the coming months, fell 3.9% to an annual rate of 1.42 million units last month. The decline of 11% in authorizations for multifamily housing development led to a downturn in permits.

On an annual basis, housing starts were up over 40% in December, while homebuilding in 2019 overall was up 3.2%. Lower mortgage rates, slower home price growth, solid job growth and robust consumer confidence are driving the housing market higher though land and labor shortages are acting as headwinds (read: 5 Market-Beating Sector ETFs of 2019).

This is especially true as the Fed’s easy monetary policy stance has pushed mortgage rates down, encouraging people to buy more homes and has made refinance cheaper. In particular, the central bank cut interest rates three times last year, which helped lower mortgages from multi-year highs. The 30-year fixed mortgage rate has dropped from its peak of 4.94% in November 2018 down to an average of 3.65% last month, according to Freddie Mac data.

Further, homebuilder confidence is at the highest levels in many years. Though the National Association of Home Builders/Wells Fargo Housing Market Index showed that confidence among homebuilders dipped in January, it remained at the highest levels in two decades.

The combination of factors suggests that construction activity will remain elevated at least through the first quarter of 2020 and will support the homebuilding industry. Moreover, homebuilders are currently well placed, belonging to a top-ranked Zacks industry (top 30%), suggesting strong outlook.

How to Play

Given the optimistic scenario, investors seeking to capitalize on the beaten down prices in the homebuilder space could look at the three ETFs that make for a more compelling choice rather than a single stock. These products erase company-specific risks and provide a higher level of diversification while reducing volatility. All these have a Zacks ETF Rank #3 (Hold) with a High risk outlook.

iShares U.S. Home Construction ETF (WA: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 $1.1 billion, it holds a basket of 45 stocks with heavy concentration on the top two firms. The product charges 42 bps in annual fees and trades in heavy volume of around 2.2 million shares a day on average. It has gained 6.3% so far this year (read: 9 ETFs at the Forefront of 2019 Market Rally).

SPDR S&P Homebuilders (NYSE:XHB) ETF XHB

The most-popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. The fund holds about 35 securities in its basket with equal-weighted exposure of around 5% each. It has AUM of $811.7 million and trades in volume of almost 1.8 million shares. The fund charges 35 bps in annual fees and is up 4.6% in 2020 so far (read: Bet on Favorite Sector ETFs & Stocks This Earnings Season).

Invesco Dynamic Building & Construction ETF PKB

This fund follows the Dynamic Building & Construction Intellidex Index, holding 30 well-diversified stocks in its basket with each accounting less than 5.2% share. It has amassed assets worth $109.1 million and sees a lower volume of roughly 15,000 shares per day on average. Expense ratio comes in at 0.60%. PKB is up 5.9% so far this year.

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SPDR S&P Homebuilders ETF (XHB): ETF Research Reports

Invesco Dynamic Building & Construction ETF (PKB): ETF Research Reports

iShares U.S. Home Construction ETF (ITB): ETF Research Reports

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Zacks Investment Research