After being stalled by the coronavirus pandemic, the housing market has been on fire thanks to the twin tailwinds of tumbling mortgage rates and higher demand for new homes. Notably, the S&P Homebuilders Select Industry Index reached a record high for the first time in 15 years, having gained 13.2% this year and more than doubling from the low it reached in late March.
Mortgage rates have been on a declining trend, now slipping to new unprecedented lows. According to Freddie Mac (OTC:FMCC), the 30-year fixed mortgage rate averaged 2.88% for the week ending Aug 6, down from 2.99% the week before and 3.6% a year ago. The current level is the lowest in the survey’s history dating back to 1971. Record-low mortgage rates are encouraging people to buy more homes and have made refinance cheaper. This trend is likely to continue at least this year on the Fed’s easy money policy and provide a boost to the homebuilder stocks.
Homebuilder confidence has also been rising. The National Association of Home Builders/Wells Fargo Housing Market Index jumped back to the pre-pandemic high in July. Additionally, new homes sales in June hit the highest level since July 2007 while existing home sales jumped the most on record. Mortgage applications to purchase a new home were up over 50% annually in June (read: Housing ETFs Jump on Record Increase in Existing Home Sales).
Moreover, homebuilders are currently well placed, belonging to a top-ranked Zacks industry (placed at the top 2% of 250+ industries), suggesting a solid outlook. However, labor shortage, rising construction costs and high unemployment could remain as causes of concern.
Given the bullish trend, investors should tap the booming housing market with ETFs. The four ETFs available in the space are highlighted below:
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 $1.9 billion, it holds a basket of 44 stocks with a 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 20.8% so far this year and carries a Zack ETF Rank #3 (Hold).
SPDR S&P Homebuilders (NYSE:XHB) ETF XHB
This ETF provides exposure to homebuilders 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 $1.1 billion and an average daily volume of 2.4 million shares. The product charges 35 bps in annual fees and has gained 14.5% so far this year. It has a Zack ETF Rank #3 (read: Is It a Right Time to Buy Housing ETFs Now? Let's Find out).
Invesco Dynamic Building & Construction ETF PKB
This fund follows the Dynamic Building & Construction Intellidex Index, holding 31 well-diversified stocks in its basket, with each accounting for less than 5.4% share. It has amassed assets worth $117.3 million and sees a lower volume of roughly 33,000 shares per day on average. Expense ratio comes in at 0.60%. PKB is up 7.3% so far this year and has a Zack ETF Rank #3 (see: all the Industrial ETFs here).
Hoya Capital Housing ETF HOMZ
This ETF invests in 100 domestic companies involved in the housing industry, including residential REITs, homebuilders, home improvement companies, and real estate services and technology firms by tracking the Hoya Capital Housing 100 Index. It has accumulated $28 million in its asset base and charges 30 bps in annual fees. The product trades in average daily volume of 9,000 shares and has added 1.6% this year. It has a Zack ETF Rank #4 (Sell).
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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
Hoya Capital Housing ETF (HOMZ): ETF Research Reports
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