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Should You Invest in Housing ETFs Now? Let's Explore

Sweta Jaiswal, FRM
·4-min read

The coronavirus pandemic continues to hammer the U.S. economy, largely due to the shutdown of economic activities to fight the outbreak. The April data on U.S. housing starts and building permits reflects significant decline in U.S. homebuilding (per a Reuters article). According to the Commerce Department, housing starts plunged 30.2% to a seasonally adjusted annual rate of 891,000 units in April (the lowest level since early 2015) per a National Association of Home Builders (NAHB) press release. The figure lags analysts’ expectations of 927,000 units in April, per a Reuters’ poll. On a year-over-year basis, housing starts were down 29.7% in April.

Building permits, a construction pointer for the coming months, declined 20.8% to a rate of 1.074 million units in April. There was a 25.4% fall in single-family homebuilding, which constitutes a large portion of the housing market, to a rate of 650,000 units in April. Moreover, permits to construct single-family homes slid 24.3% to 669,000 units in the month (per a NAHB press release).

Meanwhile, housing starts for the multi-family housing segment plummeted 40.5% to 241,000 units in the last month. Moreover, there was a 14.2% decline in permits to build multi-family homes to a rate of 405,100 units in April.

However, the recently-released data on the U.S. builder confidence for May was encouraging. Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence for single-family, newly-built homes rose 7 points to 37 in May, after hitting the lowest point since June 2012 in April and in comparison with 72 in March, 74 in February and 75 in January (per the NAHB press release). 

Homebuilder ETFs: How are they Placed?

The U.S. housing sector is being impacted with the coronavirus crippling the job market and in turn, spending. However, there are certain positive factors about the sector that can help it perform better. In this regard, NAHB chairman Dean Mon has said that “the fact that most states classified housing as an essential business during this crisis helped to keep many residential construction workers on the job, and this is reflected in our latest builder survey”, per a CNBC article. Moreover, mortgage rates at near-record low levels can provide support to the sector by adding to the affordability component.

In such a scenario, here are a few housing ETFs that investors can keep an eye on:

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 an AUM of $990.9 million, it holds a basket of 44 stocks, heavily focused on the top three firms. The product charges 42 basis points (bps) in annual fees. It has a Zacks Rank #2 (Buy), with a High-risk outlook (read: Housing Post COVID-19: All About Pricing, Volume & Rates).

SPDR S&P Homebuilders ETF XHB

A popular choice in the homebuilding space, XHB follows the S&P Homebuilders Select Industry Index. The fund holds about 34 securities in its basket. It has an AUM of $612.7 million. The fund charges 35 bps in annual fees. It carries a Zacks Rank of 2, with a High-risk outlook (read: Follow Warren Buffett With 5 ETF Strategies & Tackle COVID-19).

Invesco Dynamic Building & Construction ETF PKB  

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 29 stocks in its basket, each accounting for less than a 5.94% share. It has amassed assets worth $71.5 million. The expense ratio is 0.60%. It carries a Zacks Rank #2, with a High-risk outlook (see: all the Materials ETFs here).

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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
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