For Hoya Capital president Alex Pettee, there’s big opportunity for ETF investors to capture potential upside in the U.S. housing market.
Pettee says it’s one of the largest asset classes that he says “has not been properly defined for investors up to this point.”
While there are popular ETFs that track the housing market such as the SPDR S&P Homebuilders ETF (XHB) and the iShares U.S. Home Construction ETF (ITB), Pettee and his team recently launched their own fund in the space: the Hoya Capital Housing ETF (HOMZ).
Pettee recently caught up with ETFtrends.com to discuss the housing market sector and its HOMZ ETF.
1. What do you see as the shortcomings in existing real estate investment products?
Many of the most exciting innovations happening across the entire financial services industry are happening right here in the ETF sector, and for good reason: Millennials use ETFs at nearly twice the rate of Boomers, and forward-looking financial advisors are understanding the need to adapt to the investing style of the next generation. Millennials like myself grew up investing in ETFs, we love and trust ETFs, and I think you’d be hard-pressed to find a self-directed millennial that owns a single mutual fund. We’re naturally more risk-averse and skeptical of investment styles and managers that claim outperformance and are looking more for sensible asset allocations that are customized and titled towards our particular life stages and goals.
While we’ve seen tremendous innovation across the ETF sector in thematic and outcome-driven funds, the real estate category has been slow to innovate. As a specialized real estate-focused RIA and heavy user of real estate ETFs in our client’s portfolios, we saw a significant gap in the current product lineup and the chance to bring innovation to a sector that has long been dominated by traditional market cap weighted sector indexes and simple sector-indexes that were constrained to a single sub-segment of the housing market. It continues to surprise us that until HOMZ, no ETF viewed the US housing market – the largest and arguably the most important asset class in the world – as a distinct investible sector at the ETF-level. There’s a half-dozen artificial intelligence and bitcoin ETFs, but there wasn’t even an ETF that has the word “housing” in it!
2. What role does HOMZ serve in existing portfolio? What are some examples of target investors and their use case?
HOMZ reflects this investor-driven, asset allocation model of investing where portfolios address a real investment need of the client. In this case, HOMZ addresses perhaps the most pressing investment need affecting the younger generation: Housing. Locked out of the ownership markets by unaffordable home values, elevated student debt levels, and rising rents that make it impossible to save up for a down payment, renters are tremendously exposed to the negative effects of rising rents and housing costs. Put simply, HOMZ is the ETF for renters. While there are numerous other investment-use cases including as a source of diversification and potential outperformance in a portfolio, we think that it’s use-case by renters as a way to get their foot in the door into the housing markets is the most compelling of all. We believe that more than any other ETF, HOMZ gives investors the closest thing there is to physical residential real estate ownership in an ETF wrapper.
Additionally, because the index is unbound by the traditional single-sector classifications, each of the housing segments may respond in diverse and potentially counterbalancing ways to macroeconomic factors including interest rates, which have been a thorn in the side of REIT investors for most of the post-recession period. Many investors we’ve spoken to see HOMZ as the “growth” side of the real estate industry, contrasting with the traditional yield-oriented REIT funds that are not always suitable for younger and growth-oriented investors. Ironically, the need for real estate in an investor’s portfolio peaks during their renting years, but that’s typically the time that advisors have the lowest amount of real estate allocated to that investor due to the bond-like characteristics of traditional REIT funds. We think that HOMZ allows asset allocators to put real estate into a growth-oriented portfolio, which in itself fills a significant investment need.
Finally, we think that HOMZ will eventually be viewed by the large institutional investors like hedge funds and insurance funds as the most direct and efficient way to express a directional view on the US housing markets in the ETF wrapper, while also serving as a possible hedge against existing exposures. The efficiency and liquidity of the underlying basket were significant considerations during the index design process for this reason and with 100 highly-liquid domestic companies with no single name representing more than 3% of the index at rebalancing, we’re excited about the potential of HOMZ as an efficient institutional investment vehicle.
3. Why is there a need to better track US housing?
The US has been significantly underinvesting in residential housing on both new and existing homes. The effects of this underinvestment are far-reaching, but are most acutely visible through rising housing costs- specifically, higher rents and home values. This underinvestment in housing is happing at the same time that we’re seeing some of the strongest demographics and economic backdrop for household formation growth in a generation. 2018 saw the strongest rate of household formations since 1985, powered by rising real wage growth and another year of robust job growth. The conditions in housing markets are creating a “perfect storm” for rising rents and home values, and investors that are on the outside looking in are feeling the negative effects.