After Raft Of Weak Data, What Lies Ahead For Housing ETFs?

The U.S. housing market lost momentum after Hurricanes Harvey and Irma damaged properties in Texas and Florida. Though rebuilding efforts will definitely raise demand for construction and remodeling, it would worsen the already-existing labor shortage and push up cost of materials thereby impacting profitability of homebuilders (read: What Investors Need to Know About Homebuilding ETFs Post Irma).

Downbeat Data

As a result, homebuilder confidence slipped to 64 in September from 68 in August as indicated by the National Association of Home Builders/Wells Fargo sentiment index, suggesting a less optimistic view for future sales. Adding to the downbeat view are housing starts, which dropped for the second consecutive month by 0.8% in August to a seasonally adjusted annual rate of 1.18 million homes.

Additionally, existing home sales dropped to a one-year low to a seasonally adjusted annual rate of 5.35 million units as Harvey and Irma took a toll on sales. Notably, Texas and Florida account for more than 18% of existing home sales. Stripping out these areas, existing home sales would have been unchanged in August, per the National Association of Realtors.

Building permits, a construction bellwether for the coming months, surged 5.7% to an annual rate of 1.30 million in August, the highest level since January.

Solid Outlook

Despite the raft of weak data, homebuilding industry poses a solid outlook. This is because lower mortgage rates, ongoing job creation, wage gains, and accelerating household formations will continue to fuel growth, creating a buying opportunity in homebuilders and housing-related stocks. In addition, slower and gradual rate hikes will not thwart the growth prospect of the sector, at least in the near term. The Fed signaled one more rate hike by the end of the year and said that it will start unwinding its $4.5-trillion balance sheet next month (read: Best ETF Strategies for a Hawkish Fed).

As per the mortgage-finance company Freddie Mac, mortgage rates climbed for the first time this week following two months of consecutive declines. The average rate for 30-year fixed mortgage rate increased to 3.83% for the week ending Sep 21 from 3.78% last week, the lowest level of 2017.

ETFs to Play

Given this, investors might want to look at the homebuilder ETFs — iShares U.S. Home Construction ETF (WA:ITB) , SPDR S&P Homebuilders (NYSE:XHB) ETF XHB and PowerShares Dynamic Building & Construction Fund PKB — for their exposure to the sector. ITB is easily outperforming with gains of 27.2% so far in the year while XHB and PKB have returned much lesser 14% and 8.9%, respectively. These funds have a solid Zacks ETF Rank #1 (Strong Buy) or #2 (Buy), suggesting continued outperformance in the months to come as well (see: all the Materials ETFs here).

ITB

This fund provides a pure play to home construction stocks by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $1.7 billion, it holds a basket of 47 stocks while charges 44 bps in annual fees. The product trades in a heavy volume of around 2.7 million shares a day on average (read: Top-Ranked ETFs That More Than Doubled the S&P 500 This Year).

XHB

The most popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. The fund holds about 37 securities in its basket with AUM of $941.7 million and trades in volume of around 1.4 million shares. Expense ratio comes in at 0.35%.

PKB

This fund tracks the Dynamic Building & Construction Intellidex Index, holding 30 stocks in its basket. It has amassed assets worth $317.8 million while sees moderate volume of around 76,000 shares per day on average. Expense ratio comes in at 0.63%.

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