The Comprehensive Guide to Housing ETFs - ETF News And Commentary
January 08 2014 - 2:00AM
Zacks
The housing momentum seen
in 2012 and in the first half of 2013 has slowed down in the past
3-4 months due to the recent spike in mortgage rates, rising home
prices, tight credit availability and the political uncertainty in
Washington.
Though interest rates are rising, these are still below historical
levels and housing is still affordable. In addition, accelerating
job growth and increasing consumer confidence are also boosting
demand for new homes. (Read: 3 Hot Sector ETFs for 2014)
Supply, however, is constrained by low home inventories, both of
new single-family and multi-family homes. A shortage of land and
labor is restricting the construction of homes, both single and
multifamily. Home prices have thus started to move up with market
demand gaining momentum and supply remaining limited.
Rising home prices and the spike in interest/mortgage rates since
May this year slowed down the pace of orders and traffic. Buyers
were taken unawares by the sudden increase in rates and a few put
off their purchase decision, thereby increasing cancellation rates
and lowering orders for most homebuilders in the last reported
quarter. (Read: 7 ETFs to buy in 2014)
However, most homebuilders believe that this is only a temporary
factor and are confident of demand picking up in future quarters.
These builders expect buyers to adjust to rising prices and
interest rates and return to the market. Also, Federal Reserve’s
promise to keep interest rates low for some time despite tapering
its $85 billion stimulus plan by $10 billion from Jan 2014 removes
a major overhang for the homebuilders. (Read: Fed Tapers Bond
Purchases: 3 ETFs in Focus on the News)
A slew of housing data released lately clearly shows that housing
recovery is still on. Data released by the U.S. Department of
Housing and Urban Development and the U.S. Census Bureau showed
that sales of newly built, single-family homes rose 25.4% in
October. Another data release by the department showed that
November housing starts surged to their highest in nearly six
years.
The National Association of Home Builders (NAHB)/Wells Fargo
Housing Market Index (HMI), known as the homebuilder sentiment
index, jumped 4 points to 58 in December from 54 in July. This was
the seventh consecutive monthly increase in the index, showing that
the recent interest rate hikes have not dampened the housing
recovery completely. (Read: It's A Merry Christmas for Homebuilder
ETFs). The Consumer Confidence Index also rebounded in December
after declining in November.
ETFs to Tap the Sector
With this in mind, it could be time to give this segment a closer
look. For investors looking to play the homebuilding sector in a
less risky way, an ETF approach can be a good idea.
This technique can help to spread out assets among a wide variety
of companies and reduce company specific risk for a very low cost.
Below, we highlight three ETFs that are worth a look in this
sector:
SPDR S&P Homebuilders (XHB)
XHB is one of the more popular homebuilding ETFs in the market
today with assets under management of around $2.0 billion and a
trading volume of roughly 5.3 million shares a day. The fund has an
expense ratio of 35 basis points.
The fund holds 35 stocks in its basket, with 44% of the assets
going to mid cap and 15% comprising large cap stocks. Despite the
smaller holding pattern, the fund does not appear to be
concentrated in the top ten holdings.
The fund has just 32.5% in the top ten holdings with Lumber
Liquidators, D.R. Horton, Inc. and Lennar Corporation occupying the
top three positions with asset allocation of 3.39%, 3.31% and
3.27%, respectively.
The fund’s assets include 29% homebuilders, 15% household
appliances securities, 27% specialty retail stocks and the balance
28% of building materials companies. The fund carries a Zacks Rank
# 3 (Hold) with a moderate level of risk.
iShares Dow Jones US Home Construction
(ITB)
Another popular choice in the homebuilding sector is ITB, which
tracks the Dow Jones U.S. Select Home Construction Index. It has
$1.72 billion in assets with a trading volume of roughly 5,800,000
shares a day, while its expense ratio is just 45 basis points.
The fund holds 34 stocks in its basket, out of which only 12% are
large cap securities. The fund has a concentrated approach in the
top ten holdings with 62.3% of the asset base invested in them.
Among individual holdings, top stocks in the ETF include Pulte,
Lennar and D.R. Horton, Inc with asset allocation of 10.32%, 9.81%
and 9.51%, respectively.
Homebuilders account for around 67.0% of this fund. The fund
carries a Zacks Rank #2 (Buy) with a moderate level of risk.
PowerShares Dynamic Building
& Construct (PKB)
This ETF comprises around 30 housing companies and has its assets
invested across all classes of the market spectrum. Engineering and
construction stocks comprise 23% of the fund, followed by specialty
retail companies that account for 15%. A look at the style pattern
reveals that the fund has a preference for growth stocks.
The fund manages an asset base of $100.6 million and has an expense
ratio of 63 basis points. The fund has only 25% in large cap
securities and around 46.0% in top ten holdings. The fund carries a
Zacks Rank #3 (Hold) with a moderate level of risk.
To Sum Up
Though the sudden jump in interest rates has temporarily disrupted
housing recovery, we expect sales to continue to rise in 2014 as
pent up demand is released and buyers return to the market. Most
homebuilders also expect the housing momentum to continue into 2014
with the gradual strengthening of the economy.
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ISHARS-US HO CO (ITB): ETF Research Reports
PWRSH-DYN BLDG (PKB): ETF Research Reports
SPDR-SP HOMEBLD (XHB): ETF Research Reports
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