Unless you’ve been living under a rock, you know that the housing industry is booming. Inventory is low, and prices are high! Over asking is now a standard term and contingency waivers are the only way you win those bidding wars with other buyers. Oh, and not to mention, if you find a house for sale, you better see it the first day it is listed, or you can forget about ever getting a chance because the number of days on the market is essentially zero at this point.
So how can you invest in this market without having to deal with this headache of a situation and risk overpaying for an asset class that historically only goes up 2% year-over-year?
Enter the world of Exchange Traded Funds!
There are several Exchange Traded Funds that you can buy today that will give you access to the businesses that are not only performing well right now but are still drooling at the current prospects that lay in front of them. In particular, the home builders.
Let’s be honest, in the current housing market, when you are offering over asking, waiving inspection and appraisal contingencies, losing a number of homes in bidding wars, doesn’t building a new home sound very appealing? You get a brand-new product with no issues. You typically get some sort of warranty for a few years. You don’t get into bidding wars. You don’t have to watch Zillow like it’s your job. You don’t have to compromise because “this is just what’s available.”
The home builders know all of this and so do a lot of potential buyers, which is why for the foreseeable future, it is hard to argue that these businesses will not continue to do well.
First, let’s take a look at the SPDR S&P Homebuilders ETF (XHB). The XHB has been around since 2006, meaning it has gone through the last housing boom and bust cycle and still survived. However, the fund is a passively managed one that follows an equal-weighted index of US companies involved in the homebuilding industry. It has $1.69 billion in assets under management, an expense ratio of 0.35%, with a yield of 0.62%. Currently, it has 35 holdings, of which the top ten make up 40% of the fund. 28% of the fund is invested directly into home builders, with 11% in home improvement companies and 13% in construction suppliers. Year-to-date, the fund is up 20.87% compared to the Vanguard S&P 500 ETF (VOO), being up 6.22%. Over the past 12 months, the XHB is up 129%, but if housing continues to see high demand and low supply, this fund could very easily continue to climb.
Another ETF worth considering is the Invesco Dynamic Building & Construction ETF (PKB). This ETF tracks a quantitative index that selects building and construction companies most likely to outperform based on growth and value metrics. Currently, the fund has 28% of its assets in homebuilders, with 19% in construction materials. Home Depot (HD) and Lowe’s (LOW) are two of the ETF’s top holdings, with D.R. Horton (DHI) coming in third and the top ten stocks representing 46% of the fund. PKB is up 17% year-to-date and 122% over the past 12 months. The fund owns 30 stocks, an expense ratio of 0.59%, and a yield of 0.26%, with over $241 million in assets under management.
Another option, if you are really bullish on the homebuilders, is the Direxion Daily Homebuilders & Supplies Bull 3X Shares ETF (NAIL). This is a 3 times bullishly leveraged ETF exposed to an index of companies that operate in the home construction industry. Obviously, this gives you maximum exposure to home builders and the upside that could come if we continue to see a spike in home prices and high demand with limited supply in the housing industry. The fund has an expense ratio of 0.99%, currently $365 million in assets, and is up more than 60% since the start of the year. Over the past 12 months, the fund is up 515%. Yes, that is correct, five hundred and fifteen percent return over the last 12 months. However, over the past 3 years, the fund is still only up an average annualized 4.61%, meaning that if the housing market does cool off, this fund could get hit very hard.
Investors considering making a move into the housing industry but not wanting to buy a home has several good options. However, as with any investment, you should consider the risk and rewards and keep in mind that while it’s not hard to argue that we aren’t in some sort of housing bubble, it is difficult to see how large that bubble is and when or if it will pop. So be careful and only risk what you can afford to lose.
Disclosure: This contributor did not hold a position in any investment mentioned above 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.