An ETF Area That Excelled In September

September was a decent month for the U.S. stock market. The S&P 500-based ETF (SPY (NYSE:SPY)) gained 1.9% in the month along with a 2.2% gain in the Dow Jones-based ETF (DIA). In comparison to the market’s gain, the homebuilders ETF got huge attention from investors. This ETF area outperformed its broader market. The most popular iShares U.S. Home Construction ETF (ITB) gained 6.4% last month. Let’s take a look at the tailwinds behind this surge (read: Homebuilders ETFs to Gain as Sentiment Surges to Yearly High).

Declining Mortgage Rates

It is widely believed that declining mortgage rates have helped the residential real estate sector as lower borrowing costs are making new houses more affordable. Per Freddie Mac, the average 30-year fixed mortgage rate has declined to 3.5%. Also, the Federal Reserve has cut interest rate by 25 basis points to the range of 1.75-2% for the second time at the FOMC meeting in September. Meanwhile, investors are optimistic that the Fed will announce more interest rate cuts this year (read: Dividend ETFs to Grab as Fed Cuts Rates Once Again).

Slew of Encouraging Data

The NAR’s data for existing-home sales reflects improving housing market conditions. Moreover, the recently published report reflected that U.S. home construction soared to more than a 12-year high in August. Furthermore, U.S. housing starts jumped 12.3% to a seasonally adjusted annual rate of 1.364 million units, the highest since June 2007. Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), the builder confidence also rose to 68 in September from an upwardly-revised 67 in August, 65 in July and another 67 a year ago. In fact, improving domestic economy conditions, rising home buyers’ confidence in economic growth and favorable demographic changes are likely to drive demand in the near term as well.

ETFs in Focus

Given the improving housing market conditions, it will be prudent for investors to park their money in some homebuilder ETFs.

iShares U.S. Home Construction ETF (WA:ITB) — up 41.7% year to date

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 $1.30 billion, it holds a basket of 45 stocks, heavily focused on the top two firms. The product charges 42 bps in annual fees and trades in a hefty volume of around 2.1 million shares a day on average. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Homebuilder, REIT ETFs Booming on Falling Mortgage Rates).

SPDR S&P Homebuilders (NYSE:XHB) ETF XHB— up 31.5%

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 $656 million and trades in average volume of around 2.1 million shares a day. The fund charges 35 bps in annual fees and has a Zacks ETF Rank of 3 with a High risk outlook (see: all the Materials ETFs here) (read: Ride the Millennial Wave With These ETFs).

Invesco Dynamic Building & Construction ETF PKB — up 33.7%

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket, with each accounting for less than 5.3% share. It has amassed assets worth $109.8 million and sees lower volume of around 15,000 shares per day on average. Expense ratio comes in at 0.60%. It is a Zacks #3 Ranked ETF with a High risk outlook (read: ETF Winners Amid Half-Hearted Response to Fed's Rate Cut).

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