The Q3 earnings season has impressed markets with growth rates and beat ratios tracking higher than expectations, and outpacing the past few quarters.
While there have been winners in many corners of the space, homebuilding and construction is leading the way. The sector has been the major contributor to both earnings (+36.6%) and revenue (+21.2%) growth so far, crushing the estimates and providing a solid outlook.
Further, the continuation of the Fed’s bond buying program until the next year and low interest rates are driving the space. This is because if rates continue to decline or at least hold steady at the current levels, it would attract more buyers to the market (read: Yellen as Fed Chairwoman is Great News for These ETFs).
Thanks to these trends, the homebuilding sector has surged over the past few days, easily outpacing the broad market in the process. And with the shares of some homebuilders like PulteGroup (PHM), D.R. Horton (DHI - Analyst Report) , Lennar (LEN - Analyst Report) , Toll Brothers (TOL), Meritage Homes (MTH) and Beazer Homes (BZH) on the rise and home sales data looking upbeat of late, the outperformance could continue for this sector.
New home sales climbed to the highest level in more than two years, rising 6.4% in September. This suggests increasing consumer confidence and a strong housing recovery.
How to Play
Investors looking to gain exposure to this trend may want to take a look at the following ETFs, as these offer concentrated exposure to homebuilding and construction firms which could be not only winners this earnings season, but for months to come as well (see: all the Industrial ETFs here):
SPDR S&P Homebuilders ETF (XHB)
This is by far the most popular and liquid choice in the homebuilding space with AUM of over $2 billion and average daily volume of roughly 6.6 million. The fund follows the S&P Homebuilders Select Industry Index and charges 35 bps in fees a year.
In total, the product holds 37 securities with none holding more than 3.51% of total assets. Securities are nicely spread out across various market spectrums with mid cap making up for 44%, small caps comprising 43% and the rest allocated to large caps. In terms of sectors, homebuilding takes the top position at 30.82%, while building products and home furnishing retail round off to the next two spots.
The fund currently has a Zacks ETF Rank of 3 or ‘Hold’ rating with ‘Medium’ risk outlook.
iShares U.S. Home Construction ETF (ITB)
This fund follows the Dow Jones US Select Home Builders Index and holds a small basket of 33 stocks. It is heavily concentrated in its top 10 firms with 63% of total assets and focuses more on mid cap securities (60%). PHM, LEN and DHI are the top three holdings in the fund’s portfolio with more than 9% share each.
Further, the product puts more focus on home construction, indicating that it is a ‘pure play’ on the space (read: The Comprehensive Guide to Homebuilders ETFs). The fund is popular and liquid with AUM of just under $2 billion and average daily volume of nearly 6.1 million shares. The ETF charges 45 bps in fees and expenses.
ITB currently has a Zacks ETF Rank of 2 or ‘Buy’ rating with ‘Medium’ risk outlook.
PowerShares Dynamic Building & Construction Fund (PKB)
This fund tracks the Dynamic Building & Construction Intellidex Index, which evaluates companies on good investment merits such as price momentum, earnings momentum, quality, management action and value. The product has amassed $95.1 million in its asset base while charging 63 bps in annual fees. Volume is small, trading under 46,000 shares a day.
The product holds 30 securities in its basket, with top allocations to Fluor Corp, Ingersoll Rand and Mohawk Industries. These securities make up for a combined 15.65% share of the ETF.
In terms of market cap, the ETF has a nice mixture of mid caps (50%), small caps (30%) and large caps (20%). However, the fund is tilted toward engineering and construction with just less than one-third share, followed by specialty retail and building materials with at least 11% share each.
The fund currently holds a Zacks Rank of 3 or ‘Hold’ rating with a ‘Medium’ risk outlook (read: 3 Biggest ETF Winners from the 3rd Quarter).
Homebuilding and construction has been a strong performer this earnings season, accounting for a decent chunk of the growth. Further, the long-term outlook for the sector remains bright thanks to higher home prices, better home sales data, and drop in mortgage rates
Given this, the funds highlighted above may likely be beneficiaries of the Fed’s ‘no taper’ policy as well as recovering housing market and thus, interesting choices for most investors.
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