ETF Trends CEO Tom Lydon discussed the iShares U.S. Home Construction ETF (ITB) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
ITB seeks to track the investment results of an index composed of U.S. equities in the home construction sector. The Fund seeks investment results that generally correspond to the price and yield performance of the Dow Jones U.S. Select Home Builders Index.
As Jaffe explains, when it comes to home construction, things depend on market conditions. However, as Lydon pointed out, the timing looks better for the homebuilders than it did a year ago. This comes down to interest rates.
Related: ETF of the Week: Columbia Diversified Fixed Income Allocation ETF (DIAL)
“The interest rate environment is a lot different than we saw 12 months ago. Twelve months ago, we were sitting here looking at rising rates, and sure enough, that was happening,” Lydon notes. “The Fed seemed to have their foot on the gas, and they were on a mission to hike rates. However, all things changed in 2019. All of a sudden, they shifted. Global economies are surely affecting things, as central banks around the world are lowering rates, many into negative territories.”
Based on these new developments, the US has to compete. With the Fed is busy fighting off a potential recession, they’ve hiked rates a couple of times so far this year. Additionally, there’s a good chance one or more rate cuts could still take place before the end of the year. All of that means homebuyers can perhaps stop putting off buying a home.
Because of those considerations, there’s been an increase in home construction. With that, a lot of the major corporations in this area, D.R. Horton, Lennar Corporation, are doing quite well.
If the economy is strong, unemployment is lower, and quality and confidence are in a good place, home buyers are going to see it’s time to buy that first home. This all works in turn to help the home builders.
Trend Following Play For Homebuilders
Jaffe points out the necessity of following significant trends when it comes to home construction. Lydon agrees, stating how, in just the third quarter, ITB was up nearly 12% compared to the 1% for the S&P 500. So, something has changed, which one could quickly tell by the trends. But will this continue?
Lydon explains, “If it changed because there were rate cuts, and with the possibility of two more within the year, never mind what may happen in 2020, all the fundamentals are in line, especially with positive attitudes from Americans at this point in time, we might continue to see this trend.”
It’s important not to sell everything else and only invest here, as this is undoubtedly thematic and specific. Investors likely have homebuyers in their mutual funds and general ETFs. However, if there’s a look to follow trends, it might be more positive currently than in other areas, and worth taking a look at.
Not hurting is how easy it is to look into this area. One could go to ETF Trends, search for ITB, filter to the 200-day average, and look at the charts to see how what’s so notable. That said, doing anything from a thematic standpoint means having a plan of when to sell, whether it’s fairly quickly, or waiting five years and forgetting about it.
Listen to the full podcast episode on the ITB ETF here:
For more podcast episodes featuring Tom Lydon, visit our podcasts category.