This era of “work from home” due to a global pandemic has meant another great month for the U.S. housing market due to strong demand, tight supplies and attractive low mortgage rates. It has also delivered a phenomenal ride for homebuilder ETF investors who’ve seen gains rise farther and farther into record territory.
Existing home sales jumped 24.7% in July, exceeding estimates, and marking the second consecutive month-on-month record, according to the National Association of Realtors. As sales hit a seasonally adjusted annualized rate of 5.86 million, inventory of existing homes grew tighter, and median home prices rose 8.5% on the year to break above $300,000 for the first time.
The two most popular ETFs in this segment, the iShares U.S. Home Construction ETF (ITB) and the SPDR S&P Homebuilders ETF (XHB) continued to rally sharply higher, tallying now gains of 27% and 18%, respectively, year to date. Returns since the March 23 market low, however, sit at a whopping 122% for ITB and 110% for XHB, far outpacing the broader stock market as measured by the SPDR S&P 500 ETF Trust (SPY):
Chart courtesy of StockCharts.com
At a glance, ITB is the purer homebuilder portfolio of the two ETFs. The market-cap-weighted mix is led by the likes of Lennar Corp, DR Horton and PulteGroup. The fund allocates more than 56% to homebuilder stocks and 12% to construction supply names.
By comparison, XHB—which equal weights its portfolio, avoiding concentration in the largest names—has only 26% of the mix tied to homebuilder stocks and 17% to construction supplies.
Both funds extend their reach into other home-related segments such as home furnishings, home improvement names and even some retailers. XHB goes as far as having about 5% tied to appliances and housewares—the fund’s single biggest holding is Whirlpool.
Beyond The Builders
While these differences in allocation matter, in truth, all of them have actually worked well for investors this year because the strength in the housing story goes beyond the builders.
In this latest earnings cycle coming to a close, just about every company in these two ETFs delivered strong results. ITB’s portfolio of 44 stocks had 98% of them beating earnings-per-share estimates in the second quarter by an average of 19%, according to ETF Action data. Some 94% of the 34 companies in XHB also beat EPS estimates by an average of 16%.
Housing—builders, furnishers and retailers alike—has had a stellar run. And investors have followed it. Since the March 23 stock market low, ITB has taken in more than $700 million in net new assets. The fund is now a $2.1 billion ETF.
Investors have also poured nearly $200 million in net assets into XHB in that same period, pushing the fund above $1.1 billion in assets.
“The housing market is well past the recovery phase and is now booming with higher home sales compared to the pre-pandemic days,” said Lawrence Yun, chief economist at the National Association of Realtors in a release. “With the sizable shift in remote work, current homeowners are looking for larger homes, and this will lead to a secondary level of demand even into 2021.”
For a complete list of homebuilder ETFs, check out our Homebuilder ETF Channel.
Contact Cinthia Murphy at [email protected]