Alex Pettee is president and head of ETFs for Hoya Capital Real Estate, a Connecticut-based registered investment advisor. The Hoya Capital Housing ETF (HOMZ) is his firm’s first exchange-traded product and breaks new ground when it comes to the exposure that it offers.
Unlike existing ETFs that exclusively target real estate investment trusts (REITs) or homebuilders, HOMZ combines the two and holds stocks of companies from outside those areas also. Pettee spoke with ETF.com to explain why this broader approach to investing in housing is superior. He also offered his latest take on the housing market fundamentals.
ETF.com: What makes your ETF different from the housing ETFs already out there?
Alex Pettee: There is the Residential REIT ETF, the iShares Residential Real Estate ETF (REZ), and then there are the homebuilder ETFs, the iShares U.S. Home Construction ETF (ITB) and the SPDR S&P Homebuilders ETF (XHB).
For a while now, we’ve been wondering why there isn’t anything that combines these and looks at the housing sector as a single category.
I think a big part of it is that a lot of issuers don't want to stray too far from the Global Industry Classification Standard (GICS) and from the traditional sector lines. It’s taken a smaller issuer like us to take a housing ETF in a direction that’s outside of GICS and the traditional sectors.
ETF.com: What percentage of the portfolio is more homebuilders versus the REITs?
Pettee: We wanted to create the index as accurately as we possibly could to track total spending on housing at the national level. Our research spent a long time trying to understand how the housing market—from the GDP level—is defined.
What we found is that about 30% of housing spending is on rents and implied rents. There's about $1.5 trillion in direct rents and another $1 trillion in owner-implied rents. Then another 30% is in home construction; another 20% is in home improvement and home furnishings; and the final 20% is in real estate technology and services.
That last segment is what I would call the next generation of real estate companies. People would definitely consider companies like Zillow, Redfin and CoreLogic core housing-related companies, yet they’re not found in other housing or homebuilding indices.
ETF.com: Even though the four groups the ETF invests in are all housing-related, they each have different fundamental drivers?
Pettee: Yes, the ETF should be less volatile because it's owning companies that have historically responded differently to interest rates. REITs are obviously very negatively impacted by rising rates. But then you have the mortgage lenders and servicers that have historically benefited from rising rates.
You get this equalizing effect by moving outside the traditional sector lines. It could be a less volatile way to play real estate that's not going to get so swung around by interest rates or by a single economic data point like housing starts or home prices.
ETF.com: What’s the outlook for the housing market?
Pettee: The focus of what we've been talking a lot about for years is this underinvestment in housing. There’s a number of reasons why it's increasingly more difficult to add new supply, including issues with permitting and zoning.
The first result is you get rising rents, rising housing costs and rising home values. The longer-term effect is that existing homes are now getting older and older because there aren't enough new homes being created to lower the average age. The average age of an existing single-family home is now about 38 or 39 years old, which is the oldest it's ever been.
The core thesis, which is rising housing costs, is captured by the ETF through owning REITs and other companies that are directly benefiting from rising rents.
But the ETF also captures the longer-term effects of the underinvestment in housing by investing in the companies poised to benefit from aging houses, such as roofers, cabinetmakers, etc.
ETF.com: It certainly sounds like the longer-term outlook for housing is positive. However, more recently, we’ve seen ups and downs. Late last year and early this year, we saw existing home sales tumble. But now it seems interest rates are coming back down and sales are picking up a little. What's outlook on the housing market for the next year or two?
Pettee: It certainly seems like the market has been more mortgage rate sensitive than it was in the prerecession period.
In our view, what we saw in 2018 is very similar to what we saw in 2014, when, after the taper tantrum, the 30-year rate rose about 1%, and new and existing home sales slowed anywhere from 10-15% year-over-year growth to almost zero growth.
Then as rates pulled back, sales growth reaccelerated back to 15% in 2015. We could see something similar this year.