Play The Housing Boom With 3 Sector ETFs

Amid a volatile U.S. stock market, uncertainty surrounding the Fed rate hike, panic in the global financial markets triggered by the unexpected ‘’Brexit’’ vote and volatile gasoline prices, the homebuilding market remains a pillar of strength for the economy.

The market, in general, believes that the departure of U.K. from the European Union will not have any major impact on U.S. homebuilding activity.

The Numbers

Though recent new home sales and housing starts slowed down slightly, the rest of the housing data – released in June – has been fairly upbeat, clearly indicating that the overall housing market remains intact. (Read: Forget Brexit; Buy These Stocks & ETFs)

New home sales dropped 6% in May from a more than eight-year high in April. U.S. housing starts fell 0.3% from a revised April number to an annual rate of 1,164,000 in May due to a decline in multi-family production.

The number of building permits — a gauge of future construction — rose 0.7% in May. Further, the National Association of Home Builders (NAHB) reported that the home builder sentiment index (HMI) rose 2 points to 60 in June, after holding steady for the past four months. Moreover, existing home sales rose 1.8% in May – its highest pace in almost a decade, per data released by the National Association of Realtors. Construction spending touched a five-year high in April.

The Overall Outlook

Despite a weak start this year amid equity market volatility and global concerns, the construction sector seems to have recovered on the back of strong housing fundamentals. The spring selling season in 2016 was better than last year. The springtime weather boosts construction activity and traffic trends.

Positives like an improving economy, modest wage growth, low unemployment levels, low interest rates, positive consumer confidence and a tight supply situation raise optimism about the sector’s performance for the second half of 2016. (Read: ETFs to Buy after Strong Jobs Report)

ETFs to Tap the Sector


Given the stable demand fundamentals, the homebuilding sector deserves a closer look. For investors willing to make a pretty penny from this space without running much risk, an ETF approach may be a good idea.

This technique can help spread out assets among a wide variety of companies and avoid company-specific risks at a very low cost.

Here we have highlighted three ETFs that are worth a look.

SPDR S&P Homebuilders (XHB)

SPDR S&P Homebuilders is one of the more popular homebuilding ETFs in the market today with assets under management of around $1.22 billion and an average daily trading volume of roughly 3.48 million shares a day. The fund has an expense ratio of 35 basis points (bps).

The fund holds 35 stocks in its basket, with 71% of the assets going to mid caps and 9% comprising large-cap stocks.

The fund has just 45.7% in the top 10 with Owens Corning, D.R. Horton, Inc. and PulteGroup (NYSE:PHM), Inc. occupying the top 3 positions with asset allocation of 4.85%, 4.68% and 4.62%, respectively.

The fund’s assets include 33% building products, 30.74% homebuilders, and 11.52% home furnishing retail stocks. The fund carries a Zacks Rank #2 (Buy) with a High level of risk.

iShares Dow Jones US Home Construction (ITB)

Another popular choice in the homebuilding sector is iShares Dow Jones US Home Construction, which tracks the Dow Jones U.S. Select Home Construction Index. It has $1.54 billion in assets with an average daily trading volume of roughly 3.71 million shares each day, while its expense ratio is just 43 bps.

The fund holds 43 stocks in its basket, of which only 10% are large-cap securities. The fund has a concentrated approach in the top 10 holdings with around 62% of the asset base invested in them.

Among individual holdings, top stocks in the ETF are D.R. Horton, Lennar Corp (NYSE:LEN). and NVR Inc. with a respective of 12.71%, 10.46% and 8.20% asset allocation.

Homebuilders account for around 65% of this fund, which carries a Zacks Rank #2 and a High level of risk.

PowerShares Dynamic Building & Construct (PKB)

This ETF comprises around 30 construction companies and has its assets invested across all classes of the market spectrum. The style pattern shows that the fund has a preference for growth stocks.

The fund manages an asset base of $67.2 million and has an expense ratio of 63 bps. The fund has only 15% in large-cap securities and around 46% in the top 10 holdings. The fund carries a Zacks Rank #2 with a High level of risk.

UBS ETRACS ISE Exclusively Hmbldrs ETN (HOMX)

This ETN offers exposure to the companies that engage in the development and construction of homes and communities by tracking the ISE Exclusively Homebuilders Total Return Index. Notably, the index has around 20 stocks in its basket with the largest allocation going to the top four firms with a combined share of 35.8%. The ETN has accumulated $22.7 million in its asset base and trades in a light average daily volume of about 10,000 shares. It charges 40 bps in annual fees and has a Zacks ETF Rank of 3 or ‘Hold’ rating

To Sum Up

Despite some concerns regarding the health of the economy, homebuilders are increasingly optimistic about the opportunities ahead. However, labor shortages, a slight slowdown in sales in Texas/Houston, increasing competitive pressure and rising land and construction cost will be the headwinds to contend with.

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ISHARS-US HO CO (ITB): ETF Research Reports

SPDR-SP HOMEBLD (XHB): ETF Research Reports

PWRSH-BYBK ACHV (PKW): ETF Research Reports

E-TRC ISE EH (HOMX): ETF Research Reports

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Zacks Investment Research