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Upbeat Data to Renew Confidence in Homebuilding ETFs

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After a strong rally, the U.S. housing sector saw a pause recently as land and labor shortages continued. This appears to be an entry point for investors as the trend is likely to reverse on upbeat data that may renew confidence in the space. This is because U.S. homebuilding rebounded in October and permits for future home construction jumped to a more than 12-year high (see: all the Materials ETFs here).

U.S. housing starts grew 3.8% to a seasonally adjusted annual rate of 1.314 million homes in October. The uptick was driven by rising single-family construction and rebounding activity in the multi-family houses. In fact, October was the second best month for housing starts so far in 2019. Building permits, a construction bellwether for the coming months, surged 5% to an annual rate of 1.461 million units last month, marking the highest level since May 2007.

Lower mortgage rates and slower home price growth are providing an impetus to the housing market. This is especially true as the Fed’s easy monetary policy stance has pushed mortgage rates down, encouraging people to buy more homes and has made refinance cheaper.  Meanwhile, home prices have been rising at a slower pace. Further, homebuilder confidence is hovering near the highest level since February 2018 (read: ETFs in Focus as US Homebuilder Sentiment Drops in November).

Moreover, solid economic fundamentals are fueling growth in the sector. For instance, the unemployment rate is low, housing affordability is improving, homebuyer demand is rising, refinancing is booming, and consumer confidence is also rising. The latest report from the Commerce Department showed an increase in home completions and the stock of homes under construction, which could help to ease a supply squeeze that has plagued the housing market despite strong fundamentals.

How to Play

Given this optimistic scenario, investors seeking to capitalize the beaten down prices in the homebuilder space could look at the three ETFs that make for a more compelling choice rather than a single stock. These products erase company-specific risks and provide a higher level of diversification while reducing volatility. All these have a Zacks ETF Rank #3 (Hold) with a High risk outlook.

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

This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $1.3 billion, it holds a basket of 45 stocks with heavy concentration on the top two firms. The product charges 42 bps in annual fees and trades in heavy volume of around 2.2 million shares a day on average. It has gained 42.3% so far this year (read: Bet Big on Housing Earnings With These ETFs).

SPDR S&P Homebuilders ETF (XHB - Free Report)

The most-popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. The fund holds about 35 securities in its basket with equal-weighted exposure of around 5% each. It has AUM of $789.5 million and trades in volume of almost 1.9 million shares. The fund charges 35 bps in annual fees and is up 31.8% in the year-to-date time frame.

Invesco Dynamic Building & Construction ETF (PKB - Free Report)

This fund follows the Dynamic Building & Construction Intellidex Index, holding 30 well-diversified stocks in its basket with each accounting less than 5.4% share. It has amassed assets worth $115.9 million and sees a lower volume of roughly 16,000 shares per day on average. Expense ratio comes in at 0.60%. PKB is up 43.2% so far this year (read: Market-Beating Sector ETFs Year to Date).

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