In a bull market that has lasted as long as the current one, spotting laggards becomes increasingly easy. Homebuilding stocks and exchange-traded funds are among those laggards.
Yes, there have been years during the current bull market when homebuilding ETFs have posted some impressive annual returns. This will not be one of those years. Even with Wednesday’s fall, the S&P 500 is up 2% year-to-date while the Dow Jones U.S. Select Home Construction Index, a widely followed gauge of homebuilder and construction stocks, is lower by a stunning 25%. A slew of data points indicate homebuilding ETFs could face additional struggles, particularly if the Federal Reserve continues raising interest rates.
“Sales of new and existing single-family homes have fallen since their recent high in November 2017 while pending home sales are flat to down so far this year,” according to S&P Dow Jones Indices. “Starts of new single-family homes are volatile but also remain below the peak seen at the end of 2017. Recent press reports of declining activity in several major markets including Seattle, San Francisco and New York City confirm the statistics.”
For daring, risk-tolerant investors, these are some of the marquee homebuilding ETFs to consider.
iShares U.S. Home Construction ETF (ITB)
Expense Ratio: 0.43% per year, or $43 on a $10,000 investment.
The iShares U.S. Home Construction ETF (BATS:ITB) is the largest homebuilding ETF by assets, but heft is not helpful in this instance. ITB tracks the aforementioned Dow Jones U.S. Select Home Construction Index, which is to say this homebuilding ETF is enduring a brutal year even as broader domestic equity benchmarks rally.
ITB employs a traditional, cap-weighted approach to residential construction stocks and that creates a top-heavy scenario where this homebuilding ETF allocates 27.5% of its weight to just two stocks — D. R. Horton (NYSE:DHI) and Lennar (NYSE:LEN). That is bad news for this homebuilding ETF, as those two stocks are down 25% and 28% this year, respectively.
The rising cost of home ownership is another long-term fundamental factor to consider with ITB and any homebuilding ETF.
“Signs that future homebuyers are being priced out of the market will dampen consumer sentiment,” said S&P Dow Jones. “Traditionally housing and auto sales follow similar patterns; auto sales are down for much of 2018 though they rebounded in September.”
SPDR S&P Homebuilders ETF (XHB)
Expense Ratio: 0.35%
The SPDR S&P Homebuilders ETF (NYSEARCA:XHB) is often viewed as the most direct competitor to ITB, but there are significant differences between these two homebuilding ETFs. For starters, XHB is an equal-weight, not cap-weighted fund.
Second, while XHB is framed as a homebuilding ETF, it lacks the purity to that theme that ITB features. The $686.43 million XHB allocates just 30.7% of its weight to homebuilding stocks. With its exposure to home improvement retailers, home furnishings makers and retailers and appliance makers, XHB allocates nearly a third of its weight to consumer-oriented sectors.
There is some benefit to this homebuilding ETF’s consumer exposure. While ITB is down 25% this year, XHB has only dropped about 20%.
Invesco Dynamic Building & Construction ETF (PKB)
Expense Ratio: 0.58%
Investors can go cap-weighted with ITB, equal-weight with XHB or use a purely smart-beta approach with the Invesco Dynamic Building & Construction ETF (NYSEARCA:PKB).
This homebuilding ETF targets the Dynamic Building & Construction Intellidex Index, which “evaluates companies based on a variety of investment merit criteria, including: price momentum, earnings momentum, quality, management action, and value,” according to Invesco.
Of the homebuilding ETFs mentioned here to this point, PKB has the smallest lineup with 30 stocks, about 42% of which are small-cap names. Like XHB, PKB tilts away from pure-play homebuilders, as just two such stocks are found among this homebuilding ETF’s top 10 holdings. This could be a homebuilding ETF to consider if the segment rebounds.
Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL)
Expense Ratio: 1.12%
As its name implies, the Direxion Daily Homebuilders & Supplies Bull 3X Shares (NYSEARCA:NAIL) is a leveraged bullish homebuilding ETF. NAIL once had a bearish counterpart, which clearly would be a nice idea right now, but that fund no long exists.
NAIL attempts to deliver triple the daily returns of the aforementioned Dow Jones U.S. Select Home Construction Index. Aggressive short-term traders could find some opportunity with this homebuilding.
From Oct. 22 through Nov. 2, approximately 37% of the components in the Dow Jones U.S. Select Home Construction Index report earnings.
Consumer Discretionary Select Sector SPDR (XLY)
Expense Ratio: 0.13%
Obviously, the Consumer Discretionary Select Sector SPDR (NYSEARCA:XLY) is not a homebuilding ETF. It is the largest ETF tracking the consumer discretionary sector. As such, XLY has significant exposure to home improvement retailers. Dow component Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) are top-10 holdings in XLY, combining for nearly 15% of the fund’s weight.
Shares of Lowe’s are up almost 15% this year, indicating that those shares have been a better way of playing residential real estate than homebuilders equities.
Although XLY is not a dedicated homebuilding ETF, it has another bonus for investors, particularly the capital-starved: a nearly 23% weight to Amazon (NASDAQ:AMZN), which explains why the consumer discretionary sector is one of this year’s best-performing groups.
As of this writing, Todd Shriber does not own any of the aforementioned securities.