ETF of the Week: iShares U.S. Home Construction ETF (ITB)

This ETF offers exposure to the U.S. homebuilding industry and, as such, offers exposure to a corner of the domestic economy that tends to be cyclical in nature. In addition to pure-play homebuilders, this fund includes companies related to the homebuilding industry, such as Home Depot. For homebuilder exposure, ITB is competitive in terms of the expense ratio, but may be significantly more concentrated than other options such as PKB or XHB.

ITB is a surprisingly resilient sector in a post-coronavirus market. The fund is +34.1% over a 3-month return; +30.6% year-to-date. Meanwhile, the S&P 500 is +9.0% 3-month, +6.3% YTD. So, what’s going on in the homebuilder sector?

Summer replaced spring as the strongest buying season after new home buyers were forced to stay at home in March and April due to the coronavirus pandemic shutdown measures but could return to the market as lockdowns eased. The strong housing market is also seen as a positive sign for the economy since home purchases typically increase spending on furniture, appliances, and renovations. Homebuilders expanded activity in response to the rising demand.

Coronavirus forced people to stay home and rethink their living situation. People stuck in condominiums are eyeing townhomes, and people in townhomes are browsing for single families. With more people going stir crazy at home, some find that they want different features in their home, which means either they move or start some home improvement projects.

Consequently, home-improvement stocks have also rallied on this increased demand from new and old homeowners seeking to spruce up their living spaces. Many use their living spaces as home offices, gyms, and art studios, so more are upgrading their living areas. The coronavirus has also shifted the way people work, with more doing work at home, which means they no longer need to be stuck in a small apartment in a dense city.

“We are seeing a noticeable suburban shift in housing demand to suburbs, exurbs, and rural markets as renters and buyers look for more affordable lower density markets,” Lydon states.

Property values are also going up due to the low supply and higher demand. When home prices appreciate, homeowners are better off and feel more confident in their overall wealth. Some will even borrow more against their home and decide to spend on goods and services or renovate their home.

Considering the housing outlook, the homebuilders sector currently enjoys a suppliers market. The market has witnessed strong housing prices this year, despite the coronavirus-induced recession, which may be attributed to the low supply of new homes. A demand has been elevated this year and may even continue to remain high as things shift over to a more work-from-home environment. Meanwhile, the Federal Reserve has signaled that low-interest rates are here to stay, so buyers will continue to find support from low borrowing rates.

For more podcast episodes featuring Tom Lydon, visit our podcasts category on ETFTrends.com.