This Housing ETF Approach Might Make Sense For You

As part of our October Housing is Haunted series, we’re not only covering the seemingly out of control housing crisis, we’re looking for ways to invest in housing. 

Particularly via ETFs. 

Maybe you see opportunity today or want exposure to housing when and if things get back to something resembling normal. 

Whatever your thinking, The Juice is here to help with information and insight. 

Last week, we looked at the top real estate ETFs in our Trackstar database and noted: 

These four ETFs all track indices composed of pretty much the same stocks. In fact, IYR and SCHH both use the Dow Jones Equity All REIT Capped Index as their benchmark index. XLRE uses the Real Estate Select Sector Index. VNQ aims to mimic the returns of the MSCI US Investable Market Real Estate 25/50 Index.

So, by and large, these four ETFs all own the same REITs, or real estate investment trusts. 

What’s a REIT? The Juice has plans to answer that question in the Thursday, October 12th edition of our Housing is Haunted series. Because REITs can be an important way to invest in housing. 

So, yeah, tomorrow we answer the question — what is a REIT? We love real estate investment trusts. However, other ways to get at housing via ETFs exist. Different ways that can give you exposure to stocks you might be more familiar with. 

For example, the top two names in today’s Trackstar top five — Home Depot (HD) and Lowe’s (LOW). Over the last year, HD and LOW are up about 6.0% and 4.1%, respectively. Over the last five years, HD has returned a handsome 55.5%, while LOW has delivered roughly 92.6% worth of upside. Lowe’s is a dividend aristocrat on a 51-year dividend increase streak. Home Depot has increased its payout for 14 consecutive years. These are lifetime stocks you want to buy and hold. And they’re nice ways to maintain broad exposure to the housing market. 

So, how to own HD and LOW indirectly via ETFs? 

First, simply go with the tried and true SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index. We broadly explain why we love SPY in this recent Juice. Part of the reasoning is because its portfolio owns a significant chunk of the United States economy’s most powerful and reliable companies. Home Depot is the 19th largest holding in SPY. Lowe’s comes in at number 62. 

If you want an ETF that’s more concentrated in housing and housing-related stocks that also own a fair bit of HD and LOW, consider the iShares U.S. Home Construction ETF (ITB). This ETF is more diverse than its name implies. 

Yes, it owns homebuilder stocks. In fact, together, DR Horton (DHI) and Lennar (LEN) make up nearly 27% of ITB’s portfolio in the #1 and #2 positions, respectively. However, you’ll also find Sherwin-Williams (SHW) at #5 with a 4.6% composition and Home Depot and Lowe’s at #6 and #7 with 4.5% and 4.3% compositions. 

A similar ETF is the Invesco Building & Construction ETF (PKB). The top holding in this puppy? Heating and cooling specialist Lennox International (LII). Home Depot shows up at #7 in PKB. Lowe’s is not a PKB holding. 

For the record, ITB and PKB are both down over the last month (approximately 8.0% and 6.4%, respectively), however both ETFs have generated double-digit returns over the last six months, YTD and over the last year. 

Near-term returns and even specific holdings aside, you see what we’re getting at here. You can get at housing via myriad angles, be it home building or home improvement. 

To that end, what’s one of the biggest problems facing today’s housing market? Supply. Therefore, there will always be demand for what homebuilders offer — new construction. 

On the bright side of things, while we are in a housing crisis for new and prospective homeowners, the majority of people are in relatively sound, if not objectively amazing housing situations. We covered this extensively last week in The Juice:

• Based on 2022 government data, 84% of outstanding mortgages carry a 5% or lower interest rate. 
• 63% come in at or lower than 4%. 
• 42% of homeowners have no mortgage. That’s up from 34% about ten years ago. 
• 78% of the homeowners with a free-and-clear mortgage (as in, no payment) are 55 years of age or older.

Presumably, many of these folks make comparatively care-free trips to Home Depot and Lowe’s and call up Lennox regularly for service or to replace blown out HVAC systems. In other words, this part of the housing market rolls on, even if lots of people have been priced out of it. In fact, if these all-set homeowners feel trapped in their homes due to high interest rates and prices, they might just have the bug to make upgrades and improvements. 

The Bottom Line: We’ll say it again. The beauty of investing is that there’s always an opportunity. And we don’t just mean getting short when things are bad. If you’re a long-term investor, it pays to take a broad and long-term view of the stock market. As well as segments of the economy. 

Sure, housing is rough as we speak. But do you think Home Depot, Lowe’s and even Lennox, Lennar and DR Horton are going anywhere anytime soon? We don’t. 

So, if you have time on your side and money in your pocket — maybe thanks to that low-interest or free and clear mortgage — consider owning these names via an ETF that owns a wide array of housing stocks. 

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