3 ETFs To Gain On 9-Year High Pending Home Sales Data

Pending home sales data, released Thursday, reaffirmed that the housing market is recovering at an impressive rate. Despite the first-quarter slowdown due to a severe winter, the housing market is repeatedly coming up with good numbers in recent times. Improving labor market and a low level of interest rate are among the main reasons that are attracting consumers to buy houses.

Encouraging Pending Home Sales

The National Association of Realtors (NAR) reported Thursday that Pending Home Sales Index, which measures housing contract activity, gained 3.4% from the previous month to 112.4 in April, hitting its highest level since May 2006. Moreover, the rate of growth surpassed the consensus estimate of a 1.5% rise. It was also reported that April’s reading surged 14% year on year, experiencing its fastest annual pace since Sep 2012.

This was the fourth consecutive month of gains in the reading and the eighth straight month of year-over-year gain. The index showed that sales of previously owned homes increased in all four major regions. While the index rose 10.1% and 5% in the Northeast and Midwest, respectively, the Southern and Western regions also witnessed gains in the index.

Lawrence Yun, NAR chief economist, said the strong reading of the index indicated that there is a presence of robust demand in the housing market. He noted that "Homeowners looking to sell this spring appear to be in the driver's seat, as there are more buyers competing for a limited number of homes available for sale."

Improving Economy

After witnessing a slowdown in the first quarter, several indicators signaled that the economy is gradually gaining strength. According to the U.S. Labor Department, the economy added 223,000 new jobs in April, compared with only 85,000 in March. Moreover, the unemployment rate declined to the lowest level since May 2008 to 5.4% in April, gradually getting closer to the Fed’s target.

Separately, most of the housing market data were encouraging, indicating strong recovery in this section. Apart from existing home sales, all the major metrics registered healthy gains in April. But this does not come as a surprise as it has been anticipated that the total number of existing home sales will increase around 6.1% this year after declining 2.9% in 2014.

Meanwhile, the Fed chair Janet Yellen has hinted on several occasions that the weakness seen in the earlier half of the year is largely attributable to the winter season. Several market watchers now believe that the economy will pick up pace over the rest of the year and housing will very much be a part of this onward march.

3 ETFs to Gain

In this favorable scenario, we here highlight three ETFs that are poised to gain from the bright prospects in the housing market.

SPDR S&P Homebuilders ETF (NYSE:XHB)

This fund provides exposure to 37 firms by tracking the S&P Homebuilders Select Industry Index. The fund is also quite popular with $1.7 billion in its asset base while it sees a solid volume of around 4 million shares a day. None of the firms accounts for more than 3.89% of the total assets. Sector-wise, Homebuilding takes the top spot at about 32.7% share while Building Products and Homefurnishing Retail also have double-digit allocation. XHB charges a fee of 35 bps annually and has a Zacks Rank #3 with a High risk outlook. The fund rose 3.1% in the past one month and has returned 6.3% this year.

iShares U.S. Home Construction ETF (NYSE:ITB)

This fund follows the Dow Jones U.S. Select Home Builders Index, holding 37 stocks in its portfolio. The product is largely concentrated in the top 10 firms that collectively make up for 60.7% share of the basket. ITB is the most popular and actively traded ETF in its space with an AUM of about $2 billion and average daily volume of more than 4 million shares. It charges 43 bps in annual fees and expenses. The product has a Zacks Rank #3 (Hold) with a High risk outlook. The ETF gained nearly 2% in the trailing one-month period and rose 4.1% in the year-to-date frame.

PowerShares Dynamic Building and Construction (NYSE:PKB)

This product tracks the Dynamic Building & Construction Intellidex Index, holding 30 securities in its basket. The fund charges 63 bps in fees. Nearly 46% of the fund’s assets are allocated to the top 10 holdings. PKB has amassed $55.3 million in its asset base while it has an average daily volume of around 15,000 shares. The product has a Zacks Rank #3 with a High risk outlook. The fund increased around 2.5% over the past one-month period and surged 11.1% year to date.

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