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What Lies Ahead for Housing ETFs in 2017?

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In a volatile U.S. stock market surrounded by Fed rate hike speculation as well as political uncertainties and instability in gasoline prices, the homebuilding market remains a pillar of strength for the economy.

Overall, a steady job market and historically low mortgage rates have aided the housing market throughout 2016. However, rates hikes and job creation slowdown might affect the momentum.

New-home sales peaked in July to 622,000 but remained below the 600,000 mark since then. According to the Commerce Department, new single-family homes sales fell 1.9% in October from the prior month to a seasonally adjusted annual rate of 563,000. Sales for September were revised down to 574,000 from an earlier estimate of 593,000.

The latest home-sales data show some weakness for the days ahead. Nonetheless, if we see the existing homes sales data, which account for the bulk of purchases, it grew 2.0% in October from the prior month. This marks the fastest growth since early 2007, as per the National Association of Realtors. Although sales showed a slight decline during summer, it rebounded in September and October (read more: Homebuilder ETFs to Buy on Upbeat Data).

Hence, home shoppers are no longer in the "Should I rent or should I buy?" dilemma. Low mortgage rates, rising rent costs as well as easy availability of loans are driving the homebuilding space. This year, the industry experienced one of the strongest spring housing markets in a decade. Moreover, the sustained period of low mortgage rates has driven home sales. As per the National Association of Home Builders' Housing Market Index (HMI), home builder sentiment read a "confident" figure of 63 out of 100 in October.

Though they acknowledge the rise in labor shortage and land/labor cost, homebuilders in general expect the housing market to continue to recover this year in tandem with steady economic growth (read more: Upbeat Data Sparks Rally in Housing Stocks and ETFs).

ETFs to Tap the Sector

Below we take a look at three construction ETF which are poised to gain from the upswing in the housing market. (See all industrials ETFs here)

SPDR S&P Homebuilders ETF (XHB)

The fund employs a replication strategy in seeking to track the performance of the S&P Homebuilders Select Industry Index, which is an equal weighted index of the homebuilding segment of a U.S. total market composite index.

Top three sectors are Building Products (31.98%), Homebuilding (30.94%) and Home-furnishing (11.23%). Top three holdings are Williams-Sonoma Inc. (4.92%), Bed Bath & Beyond Inc. (4.78%) and Toll Brothers Inc. (4.76%). This fund holds 37 stocks with about 45.79% invested in the top 10 holdings.

iShares U.S. Home Construction ETF (ITB - Free Report)

ITB tracks the Dow Jones U.S. Select Home Construction Index, which measures the performance of the U.S. home construction sector.

Top three holdings are DR Horton (11.79%), Lennar (10.29%) and Pulte Group (7.63%). The fund is heavily exposed to the Homebuilding sector (64.13%), followed by Building Products (14.75%) and Home Improvement Retail (9.28%).

This fund holds 44 securities in its basket and has an expense ratio – an annual fee – of 0.44%.

PowerShares Dynamic Building & Construction Fund (PKB)

PKB seeks to match the performance of Dynamic Building & Construction IntellidexSM Index, which is composed of U.S. building and construction companies. Top sector allocations are Industrials (60.76%), Materials (26.4%) and Consumer Discretionary (10%).

With holdings of 30 stocks, the top spots are taken up by Home Depot Inc., Ingersoll-Rand PLC and AO Smith Corp comprising 5.09%, 5.04% and 5.03%, respectively, of total net assets. 

To Sum Up

One factor that could be hurting investors’ sentiments is the possibility of an interest rate hike. Solid Q3 growth numbers clear the way for the Fed to raise rates at the end of 2016.

However, there are plenty of reasons to be optimistic about the broader housing sector over both the short and the long term. In this context, the above-mentioned ETFs might be sound bets to play the sector.

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