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Will the Rally in Homebuilders ETFs Continue in 2020?

Sweta Jaiswal, FRM

The housing sector in the United States seems to be on a roll, thanks to low mortgage rates. The S&P Homebuilders Select Industry Index (TR) has beaten the S&P 500’s rise of 3.5% by returning 8.2% year to date. In fact, the most popular homebuilder ETF iShares U.S. Home Construction ETF (ITB) has gained 13.7% over the period.

Going on, the National Association of Home Builders’ monthly confidence index remained near the highest index reading since June 1999. Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence dropped just one point to 74 in February compared with 75 in January, 76 in December and 62 in the year-ago period (read: ETFs to Gain as Homebuilders Confidence is Near All-Time High).

Moreover, U.S. homebuilding permits rose to a near 13-year high in January. The continued upside indicates sustained growth in the housing market. The latest reports by the Commerce Department showed that building permits rose 9.2% to 1,551,000 units in January, the highest since March 2007. Building permits were driven by gains in both single- and multi-family housing segments and outpaced the consensus estimate of 1,459,000 units.

Single-family homebuilding accounts for the largest share of the U.S. housing market. Per the report, building permits rose 6.4% to a rate of 987,000 units in January, which is the highest since June 2007. Also, multi-family homes permits rose 14.6% to 564,000 units. Permits for buildings with five or more units hit the highest level since June 2015.

However, housing starts declined to 1,567,000 units in January, after rising to a revised 1,626,000 units in the month before. Meanwhile, it recorded an increase of 21.4% on a year-over-year basis in January.

Low Mortgage Rates

After three rate cuts in 2019, the Fed hinted at keeping interest rates unchanged in 2020 unless there is any major change in the economic outlook. It is widely believed that declining mortgage rates have helped the housing sector, as lower borrowing costs are making new houses more affordable. According to data from mortgage finance agency Freddie Mac, the 30-year fixed mortgage rate averages 3.47%, the lowest since October 2016. Fears surrounding the aggravating coronavirus outbreak are also inducing low mortgage rates. This is because mortgage rates are guided by the treasury yields that are sliding due to a rise in demand for safe-haven assets (read: Play These Bond ETFs to Keep the Coronavirus Fear at Bay).

Homebuilder ETFs Poised to Gain

Given the encouraging scenario in the U.S. housing market, let’s take a look at a few homebuilder ETFs.

iShares U.S. Home Construction ETF ITB — up 42% over the past year

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 $1.55 billion, it holds a basket of 44 stocks, heavily focused on the top two firms. The product charges 42 basis points (bps) in annual fees. It has a Zacks ETF Rank #2 (Buy), with a High-risk outlook (read: Sector ETFs at the Midpoint in Q1: Hits & Misses).

SPDR S&P Homebuilders ETF XHB — up 26.6%

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 $853.4 million. The fund charges 35 bps in annual fees and carries a Zacks ETF Rank of 2, with a High-risk outlook (read: Housing ETFs Soar on Upbeat Earnings With More Room to Run).

Invesco Dynamic Building & Construction ETF PKB — up 32.4%

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket, with each accounting for less than a 5.57% share. It has amassed assets worth $115.1 million. Expense ratio is 0.60%. It is a Zacks #2 Ranked ETF with a High-risk outlook (see: all the Materials ETFs here).

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SPDR S&P 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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