The housing market and sector-related exchange traded funds have been one area of strength in an uncertain economy that has been ravaged by a coronavirus pandemic.
“Diversified stock funds can help investors seek exposure to housing trends in a simple way. Shares of building companies, home improvement retailers and wood product producers all offer the potential for long-term growth in an environment of low mortgage rates and strong demand for roomier digs,” Chris Dieterich, Strategist in BlackRock’s ETF and Index Investments group, said in a research note.
“For U.S. investors, ETFs that seek to track an index can offer efficient and cost-effective access to shares of the companies with business exposure to trends in home construction and basic materials,” he added.
For example, the iShares U.S. Home Construction ETF (ITB), the largest ETF dedicated to homebuilder equities, tracks the Dow Jones U.S. Select Home Construction Index, which is composed of U.S. equities in the home construction sector. The underlying index measures the performance of the home construction sector of the U.S. equity market. The fund may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents.
Additionally, the iShares Global Timber & Forestry ETF (WOOD) tracks the S&P Global Timber & Forestry Index, which is comprised of approximately 25 of the largest publicly-traded companies engaged in the ownership, management or upstream supply chain of forests and timberlands.
In response to the coronavirus-induced economic depression, the Federal Reserve has enacted aggressive monetary policies to support the economic recovery process, such as cutting interest rate to near zero for the foreseeable future. In this low-rate environment, homebuilders now enjoy record low mortgage rates that are driving up housing upgrades amid the pandemic.
Meanwhile, home sales and optimism over new construction have helped support lumber prices. Supply and demand imbalances have supported fundamentals for the wood industry, with lumber prices surging in the face of strong demand from builders. Meanwhile, North American sawmills in anticipating an economic contraction have slowed production lines – lumber output in the U.S. was essentially flat in the first five months of 2020 and fell 16% in Canada over the same period. Consequently, the low inventories and strong demand have sent lumber prices up roughly 100% year to date and a lumber pricing benchmark topping $800 per thousand board feet for the first time.
For more news and information, visit the Equity ETF Channel.