The true pure play housing stocks have been on a tear lately, as new home construction picks up and industry insiders believe the market could get even hotter as another rate hike is likely in the fall.
In April data indicated that new homes sales grew at the fastest rate in eight years. Furthermore, during the earnings conference call for homebuilder Toll Brothers' (TOL), the companies Chairman Robert Toll said that a rate increase could actually help continue spurring demand.
“What you have with a price increase is an increase in demand created because the price has gone up, which by the way may come to us in the summer months this year,” he said. “If the Fed goes up and the mortgage rates go up an eighth or a quarter, it probably means price increases are coming soon, which spurs demand and spurs action. So it's too early yet to tell, but we could be onto something good.”
If higher rates or just the threat of higher rates is going to help the housing industry than now is the time to buy. Over the last few weeks, the Federal Reserve's meeting minutes and a number of Fed members have hinted that rates will likely increase in the fall. To me, that sounds like at least a threat, if not a clear sign that higher rates are coming soon.
So, what should you buy to profit from a strong housing industry?
VanEck Vectors Retail ETF (PACF:RTH)
Currently, one of my favorite ways to play the current housing boom is with the VanEck Vectors Retail ETF (RTH). While this ETF is more focused on consumer discretionary retail stocks, it gives investors great exposure to individuals buying homes. The ETF's top holdings include Amazon (AMZN), Home Depot (HD), Wal-Mart (WMT), Lowe's (LOW), Target (TGT), TJX Companies (TJX), and Costco Wholesale (COST), to name a few. If you re-read that list and think about the places a new homeowner would shop after purchasing a home, there are only a few companies not mentioned.
Amazon, Target, Wal-Mart, and TJX offering all the same random new decorative items someone just moving into a new place will need. Home Depot and Lowe's offer essentially everything else. As for Costco, well now that someone has moved out of apartment living or their parents' house, they have space to buy in bulk and store 20 rolls of toilet paper and paper towels.
Furthermore, RTH has a yield of 2.29% and an expense ratio of just 0.35%.
SPDR S&P Homebuilders ETF (PACF:XHB)
Ok so, you want more exposure to the actual home builders, but not yet completely sold on owning just the builders. The SPDR S&P Homebuilders ETF (XHB) offers you just that. The top holdings include Restoration Hardware (RH), Fortune Brands Home Security (FDHS), Whirlpool (WHR), Lowe's, Home Depot, Mohawk (MHK), Tempur Sealy (TPX) and Owens Corning (OC). While the majority of these stocks are going to perform better when new home construction is soaring, they still get a large portion of their business from new and current homeowners upgrading existing aspects of their home.
The XHB also has over $1.45 billion in assets, has a yield of 0.54%, and currently boasts a price to earnings ratio of just 15, with an expense ratio of just 0.35%.
iShares US Home Construction ETF (PACF:ITB)
The XHB still isn't enough of the actual homebuilders? Than the iShares US Home Construction ETF (ITB) is what you want. Top holdings include D.R. Horton (DHI), Lennar (LEN), NVR (NVR), PulteGroup (PHM), Toll Brothers, Home Depot, Lowe's, and Sherwin-Williams (SHW).
As I mentioned, this is more of a true play on the home builders themselves than the other two, which does bring in a little more risk for investors. Anyone buying ITB needs to pay closer attention to the builders and housing industry as a whole.
But, that’s not to say ITB is a bad option. It currently has a yield of 0.39%, net assets of $1.39 billion, a P/E of 14 and an expense ratio of 0.43%. Lastly, while its recent performance is poor, down 1.75% year-to-date, now could be a good time to jump in before the rest of the market bids the price higher.
Disclosure: This contributor held long positions in Amazon.com and 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.