The housing market collapse and financial crisis of 2008 seem like a distant memory as Americans are regaining their confidence in the real estate market. Advisors who want to capitalize on this turnaround have a variety of exchange-traded fund choices at their disposal.
Despite potential fiscal headwinds and ongoing political uncertainty, the economic turnaround has translated into increased job creation, and the near record low interest rates has helped more Americans finance homes.
Consequently, we have witnessed housing market prices rise and commercial real estate momentum grow. The rebound is being fueled by basic demand and supply fundamentals. For instance, home prices are rising as inventories continue to drop dramatically across the country, and the looming specter of a “shadow inventory” has not manifested. Moreover, we have are just easing into the traditional Spring selling season.
For advisors with a bullish outlook on the broad housing market, there are a number of ETFs that track home construction and related companies. For instance, the SPDR S&P Homebuilders ETF (XHB) is the largest such fund offering. XHB has a 0.35% expense ratio.
It is important to note that XHB is not a pure homebuilder play. Specifically, only 29.2% of the ETF’s allocations are homebuilder related. The fund, though, includes exposure to other housing products, including building products 26.5%, home furnishings 15.3%, homefurnishing retail 14.2%, home improvement retail 10.5% and household appliances 4.4%. For example, XHB’s largest holding is Temper Pedic Intl Inc 4.2%.
The iShares Dow Jones US Home Construction Index Fund (ITB) has a higher tilt toward homebuilders, which makes up 64.8% of the portfolio, followed by building materials 17.3%, home improvement 12.8% and furnishings 5.0%. The iShares ETF is also slightly more top heavy, with 63% in its top 10 holdings. ITB comes with a 0.46% expense ratio.
Lastly, the PowerShares Dynamic Building & Construction Portfolip (PKB) also provides exposure to U.S. building and construction companies, along with companies that work on large-scale infrastructure projects. Like XHB, the PowerShares ETF has a more spread out exposure to home construction and other related companies – consumer discretionary makes up 41.9% of the portfolio, industrials is 47.3% and materials is 10.8%. PKB has a 0.63% expense ratio.
Real Estate Investment Trusts
While many can more quickly relate to the housing market, investors can also take a look at the broader look at the real estate recovery. For instance, real estate investment trusts offer exposure to diversified, retail, industrial, office, mortgage, specialty, hotel and other real estate services.
In addition to capitalizing on the rebounding real estate market, advisors also find attractive yield generating opportunities with REITs investments, compared to the low yields in government bonds. REITs generate revenue through rent on properties. The companies would then pay out a chunk of their net income to shareholders as dividends in order to qualify for federal tax breaks.
Moreover, commercial real estate assets can also serve as a hedge against inflation, which will eventually become a serious threat, given the Federal Reserve’s loose monetary policies and unlimited quantitative easing plans.
REITs companies have been gaining strength on the steady increase in rent prices across commercial real estate properties and on more leased tenants due to the economic recovery. The REIT asset class could continue its forward momentum, as long as job growth is there to support rent prices and tenant demand.
The Vanguard REIT ETF (VNQ) is the largest REIT ETF offering, with $17.7 billion in assets. The fund tracks the MSCI US REIT Index, which is comprised companies that purchase office buildings, hotels and other real property, and includes 117 component holdings. VNQ has a 0.10% expense ratio and a 3.39% 12-month yield.
The iShares Dow Jones US Real Estate Index Fund (IYR) tracks a similar group of REIT companies to VNQ, but tracks 89 companies from the space. IYR, though, sees much more activity than VNQ, trading at a daily average volume of 7.6 million shares compared to VNQ’s average of 2.3 million. IYR has a 0.47% expense ratio and a 3.52% 12-month yield.
Additionally, for those interested in just the largest names in the U.S. equity REITs space, the iShares Cohen & Steers Realty Majors Index Fund (ICF) provides exposure to 31 large REITs companies, such as Simon Property Group, HCP and Public Storage. Since ICF is based on a smaller basket of stocks, its top 10 holdings make up about 61% of the overall portfolio. The ETF has a 0.35% expense ratio and a 2.93% 12-month yield.