Housing Starts Down In September A Sign You Should Buy Housing Related ETF

Matt Thalman - INO.com Contributor - ETFs

Housing starts for September came in at 829,000 units, lower than the 851,000 units reported in August. Some economist and market participants are saying the weak housing starts are a sign the economy is beginning to show signs of wear.

Others have noted that 15.3% of the decline in starts came from parts of the country that were affected by hurricane Harvey and Irma. Furthermore, we can't forget about the wildfires in California, which may not be as impactful as the hurricane's, but still likely played some role in the decline.

Another data point that points to the health of the housing market is the National Association of Home Builders reported their Housing Market Index. In March of this year, the National Association of Home Builders reported their Housing Market Index hit a 71, just one point lower than its all-time high of 72 which was set in June of 2005. If you recall, shortly after June 2005 the housing bubble began to burst, and the housing crisis took down the U.S. economy. The NAHB report their Housing Market Index was at a 68 in October.

What is again interesting about these data point is that when the NAHB's Market Index hit its all-time high in 2005, the housing starts number was at 1.8 million.

Home builders have cited land and labor shortages for the 'low' number of housing starts. This could be a big problem for those looking to buy a home in the future because it could cause prices to skyrocket. But at the same time, that doesn’t mean the home builders will be making money hand over fist because remember their cost is going higher.

According to The U.S. Census Bureau, 35.3% of people 35 and younger owned a home in the second quarter of 2017. That figure is up from 34.1% in the same quarter of 2016. This would indicate that homeownership rates will begin increasing, another sign that the housing market still has room to run. Furthermore, with the Federal Reserve on the path to continue increasing interest rates, combined with higher home prices, some may opt to stay in their own home and update it instead of buying a new one.

With all this information combined, it's easy to see that money will be made in housing-related stocks in the coming year, but knowing which ones is the key. But because of Exchange Traded Funds, that problem is solved. By buying an ETF that has a few or all the housing-related companies in it, you can play the housing boom, without having to worry about whether or not you picked the one or two companies that will benefit the most. Let's take a look at a few of your options.

I would start with either the iShares U.S. Home Construction ETF (ITB) or the SPDR S&P Homebuilders ETF (XHB). These two ETF's are no doubt the two best investments when it comes to getting exposure to the housing sector, but each is a little different than the other.

The ITB provides investors exposure to the traditional market-cap selection and weighting of the U.S. homebuilding industry but will stray away from just owning stocks found in its benchmark, the Dow Jones U.S. Select Construction Index.

ITB boasts a yield of 0.33%, the current has 44 holdings, with each having a weighted average market cap of $16.6 billion, has $1.95 billion in assets under management and has an expense ratio of 0.44%. Some of its top holdings are D.R. Horton (DHI), Lennar (LEN), PulteGroup (PHM), Toll Brothers (TOL), The Home Depot (HD), And Lowe's (LOW).

XHB also holds stocks outside the world of the benchmark and holds more stocks that are not found in the benchmark than that are found within the benchmark. The fund holds stocks that may not be in construction but would benefit from a strong housing market or just homes being sold in general. For example, XHB holds Tempur Sealy (TPX) and Fortune Brands Home & Security (FBHS), a mattress company and a home repair and security systems firm. XHB also selects stocks based on market cap, but then equally weights each component.

XHB has a slightly lower expense ratio tan ITB at 0.35%, a slightly higher yield at 0.69%, and a higher weighted average market cap at $18.8, but only $1.05 billion in assets under management.

Another ETF worth checking out is the Direxion Daily Homebuilders & Supplies Bull 3X ETF (NAIL). These three times bull leveraged ETF tracks the Dow Jones U.S. Select Home Construction Index and provides investors a 3X leveraged exposure to the sector. Year-to-date the index is up 41.09%, but the NAIL ETF is up 158.6% during the same time frame. This is the best way to play the housing boom if it continues to climb. But, investors need to remember that this fund rebalances every day.

Therefore it will lose value if the index is stagnant or not moving up fast enough. Furthermore, since it is leveraged 3X in the positive, that also means it will fall 3X as fast if the index crashes.

The housing market looks strong today, but as we saw in 2007-2008, it can turn nasty, having said that investors should consider taking a look at the industry and especially ITB and XHB.

As of this writing, Matt Thalman did not own shares of any equity mentioned above. Follow him on Twitter at @mthalman5513.

Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: 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.

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