Homebuilder ETFs Rally, Hit Records After Fed Comments
The rally picked up steam last week after the Federal Reserve indicated it may cut rates next year.
The rip-roaring rally in homebuilder exchange-traded funds reached a new level after the Federal Reserve shocked markets with a dovish pivot last week.
The two biggest homebuilder ETFs, the SPDR S&P Homebuilders ETF (XHB) and the iShares US Home Construction ETF (ITB), gained more than 8% and 9%, respectively, between Wednesday and Friday.
The two ETFs are now up 58% and 67%, respectively, on a year-to-date basis. Both ETFs are also trading at all-time highs.
Lower interest rates make houses more affordable for buyers, which is an obvious plus for homebuilders. The firms have also been benefitting from a deep freeze in the market for existing homes.
Homeowners have been reluctant to part ways with houses financed at rock-bottom interest rates. That’s left the housing inventory at depressed levels and pushed existing home sales to the lowest point in over 13 years.
In turn, new homes—like the ones sold by homebuilders—have gobbled up a record share of the housing market. Sales of such homes have accounted for upward of one-third of all housing sales this year, boosting the fortunes of homebuilders.
With rates down from their recent highs, demand for new homes should stay elevated. Longer term, some believe that a structural shortage of housing may provide support to homebuilder stocks.
Homebuilder ETFs
ITB and XHB are the two largest homebuilder ETFs, with assets under management of $2.4 billion and $1.6 billion, respectively. However, they have two very different weighting schemes—market cap weighting for ITB and equal weighting for XHB.
Moreover, ITB is much more heavily weighted toward traditional homebuilders like D.R. Horton and Lennar; while XHB holds a more dispersed portfolio of homebuilders, building products companies, home-improvement retailers and household appliance manufacturers.
