Low Mortgage Rates Brighten Homebuilder ETFs' Outlook

The housing market has perked up ahead of the key spring selling season thanks to declining mortgage rates. Per mortgage-finance company Freddie Mac, the average rate for a 30-year fixed mortgage declined to the lowest level in a year to 4.37% for the week ended Feb 14 from the previous week of 4.41%. This will encourage people to buy more homes (read: Will the Rally in Homebuilder ETFs Continue?).

The cooling of inflation as well as slowdown in global growth pushed mortgage rates down. The trend is likely to continue this year given that the Fed is not in a hurry to raise rates after four rates hikes in 2018. Additionally, there are a number of other reasons to be optimistic on homebuilders going forward.

According to the Mortgage Bankers Association (MBA) Builder Application Survey, mortgage applications for new home purchases remained unchanged in January from the year-ago month and increased 43% from December. After two lackluster months, new home sales surged almost 30% last month to the fastest pace since the survey began in 2013.

Homebuilder confidence also bounced back from a 3-year low in January, as depicted by the National Association of Home Builders/Wells Fargo sentiment index. Additionally, increases in home prices have slowed sharply in many areas of the country with more homes now on the market. All these developments contribute to the spring home buying season.

Further, low unemployment, solid job growth, wage gains and favorable demographics are expected to propel demand for homes in the coming months, fueling growth in the sector.

If these weren’t enough, Q4 earnings picture of the construction sector has been shaping up well. This is especially true as earnings of about 85.2% of the total sector’s capitalization reported so far are up 21.3% on 16.7% revenue growth. Notably, its earnings have been the fourth best among the 16 Zacks sectors while its revenues have contributed the most to the S&P 500. Earnings and revenue surprise of 44.4% and 66.7%, respectively, seem to be decent (read: Material ETFs Stand Tall Amid Weak Q4 Earnings).

How to Play

Given this, investors seeking to tap the healing 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 (see: all the Materials ETFs here).

iShares U.S. Home Construction ETF (WA: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 $1.1 billion, it holds a basket of 48 stocks with heavy concentration on the top two firms. The product charges 43 bps in annual fees and trades in heavy volume of around 3.2 million shares a day on average. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook and has gained 16% so far this year.

SPDR S&P Homebuilders (NYSE:XHB) ETF XHB

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 4%. It has AUM of $688.7 million and trades in volume of around 3.9 million shares. The fund charges 35 bps in annual fees and has a Zacks ETF Rank #4 (Sell) with a High risk outlook. XHB is up 17.7% in the year-to-date timeframe.

Invesco Dynamic Building & Construction ETF PKB

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket with each accounting less than 5.4% share. It has amassed assets worth $119.3 million and sees lower volume of around 39,000 shares per day on average. Expense ratio comes in at 0.58%. PKB is up 13.8% so far this year and has a Zacks ETF Rank #3 with a High risk outlook (read: US Jobs Off to a Great Start to 2019: Sector ETF Winners).

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