When the pandemic hit home and the Federal and State governments ‘shut down’ the country and U.S. economy in March, some industries were predictably going to perform well. The ‘stay at home’ stocks and technology companies or the online and big-box retailers that had web presence where obvious smart plays during a time when social distancing and avoidance of large public places was going to be for the foreseeable future. However, due to government policies, primarily low-interest rates, the housing industry has also become a powerful economy sector.
In August, existing-home sales were up 10.5% year-over-year at a seasonally adjusted annual rate of 6 million units. In August, new home sales hit 1 million units, which represents a 43.2% increase compared to August of 2019. If current sales rates continue as they have been, unsold inventory is just three months of supply, which ties December of 2019 for the lowest level we have seen in the last 20 years.
In hindsight, it makes perfect sense, but during the stock market crash in March and the fact that for the most part, the vast majority of American’s were stuck at home, it was hard to predict that the housing industry would boom in the middle of a pandemic. However, that is exactly what has happened, and as I mentioned, looking back now, it is obvious why housing would boom at a time like this. People are stuck at home and realize how much they don’t like their home, or they were living in densely populated cities and want to move to the suburbs and have more space.
With the unknown of how much longer Covid-19 and the pandemic will disrupt life as we knew it, there are a few housing-related Exchange Traded Funds that you may want to consider owning as a way to catch a piece of the housing boom, without investing directly into real-estate yourself.
The first ETF I would consider adding to your watchlist is the iShares U.S. Home Construction ETF (ITB). The ITB tracks a market-cap weighted index of companies in the production and sale of materials used in home construction. ITB has 60% of its assets in home builders, 12% in construction supply companies, and almost 10% in home improvement companies. The ETFs top four holdings are all home builders, while Lowe’s (LOW) rounds out the top five. 65% of the fund’s assets are in the top ten holdings, and 100% of the funds 48 holdings are U.S. based companies. Year-to-date, the ETF is up 27%, and its 0.42% expense ratio is very reasonable. Furthermore, the 0.42% yield and $2.39 billion in assets under management make the fund very attractive.
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Another fund to consider is the Hoya Capital Housing ETF (HOMZ). HOMZ tracks a tier-weighted index of U.S. listed companies that represent the residential housing sector. HOMZ has four major segments in the housing industry; homeownership and rental operations, home building and construction, home improvement and furnishings, home financing, technology, and services. HOMZ picks the top 100 companies it finds that fall into these categories and meet their other guidelines and holds them. Year-to-date, the fund is only up 2.3%, but it rose more than 18% over the last three months and could undoubtedly continue to climb if housing continues to outperform. The fund has an expense ratio of 0.30%, a yield of 1.54%, $33.64 million in assets, and a weighted average market cap of $42.76 billion. The top ten holdings, which start with Lowe’s and The Home Depot (HD), make up 20% of the fund, which is pretty diversified for a fund that has 100 positions.
Finally, we have the riskiest of the three ETFs, the Direxion Daily Homebuilders & Supplies Bull 3X ETF (NAIL). NAIL is a three times exposure ETF, giving you three times the leverage, to an index composed of U.S. companies that operate in the home construction sector. The ETF has an expense ratio of 0.99% and is intended to be held for short periods at a time, ideally daily, or you will experience fund decay due to the nature of achieving leverage. Over the last three months, the fund is up more than 121%. However, it is still down 24% year-to-date. NAIL is very risky due to its leveraged nature; however, it could offer a great upside as the housing boom continues.
Most investors reading this still clearly remember the last time we saw a housing boom. And most investors would say that it didn’t turn out well. And we could be in the early stages of the next housing boom. But I am not here to say this time will turn out better or worse. I am here to show you where you can look to potentially make some money on the ‘ride’ up without taking on single stock exposure risk. Regardless, this may not be for everyone, especially if the leveraged product should only be invested in by those who fully understand the risks associated with that type of investment.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor held shares of Home Depot at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
