Homebuilder ETFs Can Strengthen on Homeowners' Desire to Build Out

Homebuilder ETFs can help investors gain exposure to the shifting trends in the housing market as more homeowners opt to reinvest back into their homes.

Millennials have told us through our research, ‘We want to work on our house because we think it’s a good investment,’” Home Depot Chief Financial Officer Carol Tomé told CNBC. “So that’s music to our ears.”

Tomé pointed out that homeowners think of their dwelling as an investment, as opposed to an expense. Consequently, they tend to spend more money or reinvest on their home.

Additionally, the rising home equity values, or the difference between property value and what’s owed, have more than doubled within the past decade and contributed to higher sales at the home improvement chain.

In 2018, homeowners with mortgages enjoyed a more than 8% rise in their home equity, amounting to about $678 billion of excess wealth or approximately $9,700 per homeowner.

“People are coming in and doing major projects” like renovating kitchens, bathrooms and basements, Tomé added. “They feel like their home is an investment.”

ETF investors who are interested in gaining exposure to the home construction segment can look to homebuilder-related ETFs, such as the SPDR S&P Homebuilders ETF (NYSEArca: XHB), iShares U.S. Home Construction ETF (NYSEArca: ITB) and Invesco Dynamic Building & Construction ETF (NYSEArca: PKB). These homebuilder ETFs do not solely focus on home construction companies as they also include discretionary retail names.

For example, XHB includes a hefty 35.2% tilt toward building products, followed by homebuilding 28.2%, household appliances 10.9%, home furnishings 9.9%, home improvement retail 9.2% and homefurnishing retail 6.6%. The portfolio follows a more equal-weight indexing methodology, so the underlying index leans toward smaller homebuilder-related business, which include many retail-related names.

While the majority of its portfolio is allocated to a 63.3% tilt toward homebuilders, ITB includes 13.4% building products, 10.4% home improvement retail, 4.1% home furnishing and 1.0% construction materials. This portfolio follows the more traditional cap-weighted indexing methodology.

Lastly, PKB’s portfolio also lean’s toward smaller companies, but it includes consumer names like Home Depot 5.2% and Tractor Supply 5.2% among its top holdings.

For more information on the housing market, visit our homebuilders category.