Homebuilding ETFs: A Split-Level Decision for Advisors

Homebuilding is on the rise again, while the shares of companies that construct U.S. homes have been stealthily outpacing the broader markets all year.  

With all of the attention provided to the huge year-to-date gains in a small number of very large companies atop the Nasdaq-100 Index, homebuilding stocks are catching market participants by surprise. The resiliency of U.S. home prices has also escaped widespread notice. 

The latest reason for housing bulls to celebrate came in the form of Tuesday’s release of the monthly S&P CoreLogic Case-Shiller national home price index, which rose for the third consecutive month. That latest figure, reported for the month of April, saw housing prices rise by 0.5%, leaving them within 2.4% of their peak from a year ago. 

Coupled with last week’s news that U.S. housing starts (i.e., when they break ground on new single-family home projects) climbed by the most since back in 1990, has refocused the eyes of financial advisors and investors on ETFs that aim to exploit those trends via investment in the stocks tied to that growth. Not surprisingly, the price movement of those stocks has been highly correlated to the Case-Shiller index. 

This is creating one of 2023’s more intriguing decisions for both the happy owners of homebuilding ETFs, and those who have not participated in the rally so far. That’s because despite a price advance this year that might even make some technology stocks jealous, on a trailing P/E basis, homebuilding stocks in aggregate are arguably still value-priced. 

Homebuilding ETFs to Consider

For example, the most popular exchange-traded fund in the housing peer group, the iShares U.S. Home Construction ETF (ITB), is up 36% this year, and a whopping 55% during the past 12 months. This 17-year old, $2.2 billion fund is highly concentrated at the top … in what has turned out to be all the right places so far this year.  

Four of the largest homebuilding companies account for about 43% of its assets, with the remainder of the portfolio spread across 46 other stocks. Despite ITB’s recent success, its portfolio still sells for under 8x trailing 12-month earnings and 2.16x book value—by no means extreme, and arguably quite cheap.  

A similar situation exists with the SPDR S&P Homebuilders ETF (XHB), a $1.2 billion fund that debuted the same year as ITB, 2006. Ironically, that was around the time the last U.S. housing crisis was starting to bubble over.  

XHB is more evenly distributed than ITB, which provides more room at the top of its holdings list for homebuilding suppliers and infrastructure stocks. That mix of 36 holdings sells for just under 11x earnings, and has vaulted 29% higher in 2023. 

And for those seeking to prioritize lesser-known, under-followed ETFs in their research, the $35 million Hoya Capital Housing ETF (HOMZ), a tfour-year old fund, tracks a 100-stock index across four defined subsegments: 1) home ownership and rental operations; 2) homebuilding and construction; 3) home improvement and furnishings; and 4) home financing, technology and services.  

Its portfolio trades at 14.5x earnings, and while it has lagged the performance of the other two ETFs, up “only” 19% this year, its yield of just over 2% is more than double the level of the ITB and XHB. 

There is a bearish side to this story, albeit not one that is showing itself recently. That is the issue of housing affordability, which has surged in recent years, causing concern that in an era of higher interest rates, too many of those newly built homes will fail to find buyers.  

But that is for the markets to decide as things move forward, and for advisors and investors to contemplate as they grapple with a combination of hefty stock price gains but still reasonable valuations in the homebuilding sector.