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Get a Bigger Picture of US Housing Market With This New ETF

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Housing ETFs have been on a tear this year, thanks to the sharp decline in mortgage rates. With the Fed being dovish and talks of rate cuts doing the rounds, this rate-sensitive sector has every reason to outperform. Per Freddie Mac, average 30-year mortgage rate was 3.75% versus 4.52% record on Jul 5, 2018, and 3.82% on Jun 6, 2019.

iShares U.S. Home Construction ETF (ITB - Free Report) (up 5.4%), SPDR S&P Homebuilders ETF (XHB - Free Report) (up 5.3%), The Hoya Capital Housing ETF (HOMZ - Free Report) (4.6%) — the trio has beaten the S&P 500 (up 3.4%) in the past three months. While ITB and XHB are longstanding players in the relatively less-jampacked housing ETF space, HOMZ is a new entrant. It hit the market in mid-March.

Let’s take a look at HOMZ and find out what makes it different from the other two 13-year old ETFs.

Inside HOMZ

The underlying Hoya Capital Housing 100 Index looks to track total spending on housing and housing-related services across the United States. Per the issuer, the index is designed to track “the companies with the potential to benefit from rising rents, appreciating home values, and a persistent housing shortage.”

Unlike ITB & XHB, the newbie’s focus on homebuilding and building products is less. Home building and Construction take about 30% of the fund, Home Ownership & Rental Operations occupy about 30% while Home Improvement and Furnishings and Home Financing, Technology & Services account for 20% each. The fund holds about 100 companies. No stock accounts for more than 3.16% of the fund. HOMZ charges 45 bps in fees.

How Does It Fit in a Portfolio?  

HOMZ apparently offers a broader version of the U.S. housing market. It is a mix of defensively-oriented rental REITs, relatively cyclical single-family homebuilding stocks as well as Home Improvement Retail stocks. Real estate services and technology firms also secure a place.

Investors should note that though there has been a Fed-driven rally in homebuilding ETFs this year, the housing market has been struggling for five straight quarters now. Shortage of land and labor is an age-old problem. Cost structure for homebuilder is on the rise. Housing starts in the United States dropped 0.9% sequentially in May (read: Tough Time for Homebuilding ETFs Despite Fed's Dovishness?).

Thanks to housing shortages, home prices and rents have been outdoing wages and inflation, per the issuer. And since HOMZ intends to benefit from companies that are likely to gain from higher rents and home prices, the fund looks like a good bet. Plus, the slightly more diversified nature of the fund makes it a good candidate for tough times.

Some of top stock holdings of the fund come from top-ranked Zacks industries. These industries are Building Products – Retail (top 40%), REIT and Equity Trust – Residential (top 39%) and REIT and Equity Trust – Other (Top 39%).

Competition

Having said all that, we would like to note that HOMZ charges more than ITB (43 bps) and XHB (35 bps). Lower expense ratios might lend competitor funds an edge over HOMZ. Plus, ITB and XHB enjoy first-mover advantage in the market.

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