ETFs to Shine on Upbeat U.S. Housing Starts in September

Sweta Jaiswal, FRM
·4-min read

Another round of upbeat data from the U.S. housing market signals that the sector is a bright spot in the U.S. economy amid rising coronavirus cases. According to the U.S. Housing and Urban Development and Commerce Department, total housing starts rose 1.9% to a seasonally-adjusted annual rate of 1.415 million units in September, per a National Association of Home Builders (NAHB) press release. The reading surpasses August’s downwardly revised figure of 1.388 million units. It lagged analysts’ expectations of 1.457 million units, per a Reuters’ poll.

Building permits, a construction pointer for the coming months, jumped 5.2% to an annualized rate of 1.553 million units in September.

There was an 8.5% increase in single-family homebuilding, which constitutes a large portion of the housing market, to a rate of 1.108 million units in September. Moreover, permits to construct single-family homes climbed 7.8% to 1.119 million units in the month (per a NAHB press release).

Meanwhile, housing starts for the multi-family housing segment, including apartment buildings and condos, fell 16.3% to 307,000 units last month. Also, there was a 0.9% decline in permits to a rate of 434,000 units in September for building multi-family homes.

According to NAHB Chief Economist Robert Dietz, “demand is being supported by low interest rates, a suburban shift in demand and demographic tailwinds. However, headwinds due to limited building material availability is slowing some construction activity despite strong demand, with authorized but not started single-family homes up 22.4 percent compared to a year ago,” stated in the NAHB press release.

The recently-released data on the U.S. builder confidence was upbeat as well. Per the monthly NAHB/Wells Fargo Housing Market Index (HMI), builder confidence for newly-built single-family homes surged to an all-time high of 85 points in October in comparison to 83 points in September, 78 in August, 72 in July and 30 in April (the lowest since June 2012). Notably, September and October stood out as the first two months with the index surpassing 80. Any reading above 50 is considered positive and signals at improving confidence.

Low interest rates are boosting demand in the housing market, resulting in an increase in mortgage applications. Analysts believe that support from the Federal Reserve is keeping rates at such modest levels. The housing market is also steadily benefiting from changing demographical preferences of a large chunk of population as people are now increasingly looking for work-from-home-friendly properties.

Meanwhile, rising lumber prices, which have more than doubled since mid-April, can result in sluggishness in the housing market despite low interest rates. Also, low employment levels and an aggravating coronavirus outbreak may impede momentum of the U.S. housing market. Also, rising labor and raw material costs may challenge the availability of affordable homes for buyers, which may result in a market setback.

Homebuilder ETFs That Might Shine

Against this backdrop, investors can look into the following housing ETFs that might benefit:

iShares U.S. Home Construction ETF ITB  

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 $2.44 billion, it holds a basket of 46 stocks, heavily focused on the top two firms. The product charges 42 basis points (bps) in annual fees. It has a Zacks ETF Rank #3 (Hold), with a High-risk outlook (read: Best Stocks & ETFs to Profit from the Red-Hot Housing Market).

SPDR S&P Homebuilders ETF XHB

A popular choice in the homebuilding space, XHB follows the S&P Homebuilders Select Industry Index. The fund holds about 35 securities in its basket. It has AUM of $1.46 billion. The fund charges 35 bps in annual fees and carries a Zacks ETF Rank of 3, with a High-risk outlook (read: all the Materials ETFs here).

Invesco Dynamic Building & Construction ETF PKB  

This fund follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 31 stocks, each accounting for less than a 5.78% share. It amassed assets worth $147.3 million. The expense ratio is 0.60%. The fund is Zacks #3 Ranked, with a High-risk outlook.

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SPDR SP 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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