Homebuilder ETFs To Buy On Upbeat Data

After being stalled in the first quarter, the housing market started to show signs of a spring rebound. This is especially true given that new home construction and building permits rebounded in April, indicating that the U.S. economy is again gaining steam.

U.S. housing starts climbed 6.6% to a seasonally adjusted annual rate of 1.17 million homes and much higher than the Reuters expectation of 1.13 million. The uptick in construction activity was broad-based with increases of 3.3% in single-family houses, and 10.7% in multi-family houses, including apartments and condominiums. Meanwhile, new applications for building permits, a construction bellwether for the coming months, rose 3.6% to an annual rate of 1.12 million after declining for three months.

The data released early this week showed that homebuilder confidence remained unchanged for the fourth consecutive month in May as indicated by the National Association of Home Builders/Wells Fargo sentiment index. Builders’ outlook for sales over the next six months jumped to the highest level since December. This reflects that the housing market is still strengthening, though the pace of growth has slowed down.

This is because historically low interest rates and ongoing job creation will continue to fuel growth in a recovering homebuilding sector, creating a buying opportunity in homebuilders and housing-related stocks. In addition, slower and gradual rate hikes will not impede the growth prospect of the sector, at least in the near term.
Given this, investors might want to look at the three homebuilder ETFs – iShares U.S. Home Construction ETF (ITB - ETF report), SPDR S&P Homebuilders ETF (XHB - ETF reportand PowerShares Dynamic Building & Construction Fund (PKB - ETF report– for their exposure to the sector. These funds have a solid Zacks ETF Rank of 2 or ‘Buy’ rating, suggesting some outperformance in the months to come. Further, the residential and commercial building industry has a solid Zacks Rank in the top 34% (read: Buy Housing ETFs on Upbeat Earnings, Existing Home Sales Data).

While the upbeat data failed to garner interest in the sector this week, investors could start piling up these products in their portfolio, especially if the upcoming home sales report due to release on May 24 also shows strength. In particular, PKB is outperforming with gains of 5.8% so far in the year while ITB and XHB have shed 2.5% and 3.5%, respectively.

Investors seeking large profits in a short span could also take a look at the leveraged plays – ProShares Ultra Homebuilders & Supplies ETF (HBU - ETF report) and Direxion Daily Homebuilders & Supplies Bull 3x Shares (NAIL - ETF report). HBU provides double exposure while NAIL offers triple exposure to the index of ITB. However, the fund is relatively new in the space and has low trading activity, making it a riskier and a high-cost choice.

Disclosure: None.

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