PKB Invesco Building and Construction ETF

The housing market returned to impressive growth in September driven by the Fed’s taper hold, and the resulting decline in interest rates. This is because if rates continue to decline or at least hold steady at the current levels, it would allow more potential buyers to enter the market (read: 3 ETF Winners from the 'No Taper' Shocker).
 
This robust growth might not continue this month though, as the housing market could face troubles from the prolonged government shutdown. Starting this month, the U.S. government went for its first closure in 17 years following political gridlock between the White House and Republican lawmakers over government funding.
 
If this partial shutdown continues for much longer, it could slow down the broader economic recovery, affecting almost all the major classes and categories.
 
Further, the increase in government debt ceiling from the current $16.7 trillion is looming large across the economy with a deadline of October 15. Failure to raise such limit could turn to a global financial crisis by defaulting on U.S. Treasury obligations (see: 3 ETFs to Watch as the Government Shutdown Drags On).
 
Market Impact
 
The prolonged shutdown suggests delays in obtaining new home loans and approval for mortgage–backed finance by the Federal Housing Administration (FHA). This could impact borrowers and sellers, hurting overall home sales.
 
The builders that offer homes using FHA financing like D.R. Horton (DHI), Lennar (LEN), Beazer Homes (BZH) and KB Home (KBH) would also be negatively impacted. This is primarily true as less than one-tenth of the FHA employees are working during the shutdown.
 
In such a backdrop, the following homebuilder ETFs could see rough trading in the days ahead if the government closure drags on (see: all the Industrial ETFs here):
 
SPDR S&P Homebuilders ETF (XHB)
 
This is by far the most popular and liquid choice in the homebuilding space with AUM of over $2 billion and average daily volume of roughly 6.6 million. The fund follows the S&P Homebuilders Select Industry Index and charges 35 bps in fees a year. In total, the product holds 37 securities with none holding more than 3.4% of total assets.
 
The ETF is pretty spread out across the sectors with homebuilding taking the top position at 30%, while building products and home furnishing retail round off the next two spots. XHB gained 7.2% in the past month and over 11.4% so far this year. The fund currently has a Zacks ETF Rank of 2 or ‘Buy’ rating with ‘Medium’ risk outlook.
 
iShares U.S. Home Construction ETF (ITB)
 
This fund follows the Dow Jones US Select Home Builders Index and holds a small basket of 33 stocks. It is heavily concentrated in its top 10 firms with 63% of the total assets. Additionally, the product puts more focus on home construction, indicating that it is a ‘pure play’ on the space (read: The Comprehensive Guide to Homebuilders ETFs).
 
The fund is popular and liquid with AUM of just under $2 billion and average daily volume of nearly 5.8 million shares. The ETF charges 46 bps in fees and expenses.
 
The ETF added 8.6% in the past month and is up just 2.5% in the year-to-date time frame. ITB currently has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with ‘Medium’ risk outlook.
 
PowerShares Dynamic Building & Construction Fund (PKB)
 
This fund tracks the Dynamic Building & Construction Intellidex Index, which evaluates companies on good investment merits such as price momentum, earnings momentum, quality, management action and value.
 
The product has amassed $98.8 million in its asset base while charging 63 bps in annual fees. Volume is small, trading in more than 52,000 shares a day.
 
The product holds 30 securities in its basket, with top allocations to Fluor Corp, Mohawk Industries and Vulcan Materials. These securities make up for a combined 15.75% share. The fund is tilted toward engineering and construction with just less than one-third share, followed by specialty retail and building materials with at least 11% share each.
 
PKB added 6.7% in September and is up 14.3% in the year-to-date time frame. The fund currently holds a Zacks ETF Rank of 3 or ‘Hold’ rating with a ‘Medium’ risk outlook (read: 3 Biggest ETF Winners from the 3rd Quarter).
 
Bottom Line
 
Investors should note that the long-term outlook for the homebuilder ETFs remains bright, although the short term looks bleak if the government shutdown persists for long. Home sales could decline during an extended shutdown period, suggesting the reversal in trend toward the improving economy and thus, less chances of Fed taper at least this year.
 
As such, investors should take some precaution while trading in these homebuilder ETFs at present, or at least be prepared for some big moves in the short term.
 
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ISHARS-US HO CO (ITB): ETF Research Reports
 
PWRSH-DYN BLDG (PKB): ETF Research Reports
 
SPDR-SP HOMEBLD (XHB): ETF Research Reports
 
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