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3 Best ETFs to Play Housing and Real Estate

Housing and real estate exchange-traded funds may have room left to run. Recent housing data and the prospects of the Federal Reserve delaying rate increases to 2016 raises hopes of more upside in the housing sector.

moneyHouses homepageLast week the National Association of Realtors reported that home sales rose at a healthy pace of 6.1% in March to a seasonally adjusted annual rate of 5.19 million. That suggested the housing market may be on solid ground with the spring buying season quickly coming into play.

Also, this week the Standard & Poor’s/Case-Shiller 20-city home price index rose 5% in February from 12 months earlier, which is up from 4.5% in January. This increase is attributed partially to a tightening of supply

As a result of the increase in demand, combined with a lower supply, home prices appear set to keep moving higher, which can prove to be a boon to homebuilders.

Though future prospects for continued strength are not clear, there is still reason to be optimistic.

Here are three of the best ETFs to profit from resilient housing and real estate stocks.

Best ETFs for Housing and Real Estate: SPDR S&P Homebuilders (ETF) (NYSEARCA:XHB)

best etfs xbiInvestors looking for concentrated exposure to the housing sector can consider SPDR S&P Homebuilders (ETF) (NYSEARCA:XHB).

The housing sector is highly cyclical and quite sensitive to economic and credit conditions, which is why the SPDR S&P Homebuilders ETF is poised to jump if the Fed’s credit tightening keeps getting pushed up the road. Homebuilders will also benefit if the high relative demand and low relative supply for housing continue.

This ETF holds 35 stocks, and the portfolio consists primarily of mid- and small-cap U.S. housing companies. The top holdings include specialty retailer of household furniture and appliances Aaron’s, Inc. (NYSE:AAN),  bedding provider Tempur Sealy International Inc (NYSE:TPX) and a manufacturer of water heaters and boilers, A. O. Smith Corp (NYSE:AOS).

The expense ratio for XHB is 0.35%.

Best ETFs for Housing and Real Estate: Vanguard REIT Index Fund (NYSEARCA:VNQ)

VanguardVanguard REIT Index Fund (NYSEARCA:VNQ) provides investors a low-cost way to gain broad exposure to real estate investment trusts.

Low expenses are important in the REIT ETF space because most of the funds have similar holdings. The portfolio is market-cap weighted with 141 holdings, which covers a majority of the real estate sector’s market capitalization.

Top holdings include Simon Property Group Inc (NYSE:SPG), Public Storage (NYSE:PSA) and Health Care REIT, Inc. (NYSE:HCN).

While housing, real estate stocks and ETFs are gathering short-term attention, Vanguard REIT has an outstanding long-term performance track record. The one-, three- and five-year returns all rank above the category average for real estate funds with the 10-year rank in the top 1%.

Again, it is the low expenses that help support the long-term strength of VNQ. The expense ratio is a cheap 0.1%.

Best ETFs for Housing and Real Estate: iShares Cohen & Steers REIT (NYSEARCA:ICF)

isharesIf you are looking for a passively-managed real estate ETF that is a bit more focused than similar funds, iShares Cohen & Steers REIT (NYSEARCA:ICF) is a worthy choice.

Unlike the typical REIT fund that provides diversified exposure to at least 35 or so REITs, ICF has only 30 holdings. This enhanced indexing approach can lead to enhanced performance, especially over short-term periods, compared to its real estate category peers.

In different words, ICF will typically outperform when real estate is doing well but potentially lag behind the averages when the sector is out of favor or experiencing short-term declines.

For example, ICF leads more than 90% of real estate funds for the one-year price performance. However, the long-term performance ranks are just above or just below 50th percentile.

In summary, ICF has similar holdings as other REIT ETFs and investors will need to decide if the increased exposure is worth the 0.35% expense ratio, which is a bit higher than some of its category peers.

Also, investors should remain aware that sector funds in general have greater market risk than more diversified funds. Therefore, sector funds can be small parts of a wider tactical investment strategy.

As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he recommends and holds ICF for some of his advisory clients. His No. 1 holding is his privately held investment advisory firm. Under no circumstances does this information represent a recommendation to buy or sell securities.

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