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Homebuilder, REIT ETFs Booming on Falling Mortgage Rates

Mortgage rates have been on a declining trend this year with a steep drop lately. Per mortgage-finance company Freddie Mac, the average rate for a 30-year fixed mortgage declined to the lowest level since October 2016 to 3.49% for the week ended Sep 5 from the previous week of 3.58%. It fell considerably from a high of around 4.5% at the start of this year. The 15-year average rate dropped to 3% from last week’s 3.06%.

At the current average rate, the monthly payment on a $300,000, 30-year loan would be $1,345. This is down from $1,527 a year ago, when the rate was 4.54%.

The decline came on the heels of slowdown in global growth and the recession fears sparked by the bond market. The trend is likely to persist this year given the Fed’s first rate cut in more than a decade and the prospect of further cuts this year. Many analysts expect the Fed to lower interest rates by 25 basis points (bps) again when it meets later this month (read: Housing ETFs & Stocks to Buy on Likely September Rate Cut).

The low interest rate environment has led to strong optimism for homebuilders and real estate sectors, pushing stocks higher. This is because lower rates have made buying of real estate or homes and refinancing mortgages more affordable. This, in turn, boosts activity in the market, and is lifting homebuilder and real estate stocks.

Though global growth is slowing down due to trade disputes, the United States’ economic fundamentals are still solid. The unemployment rate is low, housing affordability is improving, homebuyer demand is rising, refinancing is booming, home price growth is stable and consumer confidence at multi-year high (read: ETFs to Buy as Americans' Confidence Nears 19-Year High).

How to Play

Given the plunging rates, investors seeking to tap the two spaces could look at the following ETFs that hit highs in the recent session and could be more compelling picks rather than a single stock. These products erase company-specific risks and provide a higher level of diversification while reducing volatility. All these ETFs have a Zacks ETF Rank #3 (Hold), suggesting room for more upside in the coming weeks.

iShares U.S. Home Construction ETF ITB

This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $1.1 billion, it holds a basket of 46 stocks with heavy concentration on the top three firms. The product charges 42 bps in annual fees and trades in heavy volume of around 2.3 million shares a day on average. It has surged 37.2% so far this year.

Invesco Dynamic Building & Construction ETF PKB

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket with each accounting less than 5.6% share. It has amassed assets worth $143.8 million and sees lower volume of around 15,000 shares per day on average. Expense ratio is 0.58%. PKB is up 33.1% so far this year (read: ETFs to Grab as US Existing Home Sales Hit a 5-Month High).

iShares Cohen & Steers REIT ETF ICF

This fund offers exposure to large real-estate companies that are dominant in their respective property sectors by tracking the Cohen & Steers Realty Majors Index. It holds 30 stocks in its basket with each making up for less than 8.5% share. Specialized REITs take the largest share at 32.5% of assets while residential REITs, retail REITs, and office REITs round off the next spots with double-digit exposure each. The ETF charges 34 bps in annual fees and sees good volume of around 98,000 shares on average. It has AUM of $2.4 billion and has gained 27.2% in the same time frame.

iShares Residential Real Estate ETF REZ

This fund offers exposure to the U.S. residential real estate sector and follows the FTSE Nareit All Residential Capped Index. It has AUM of $567.7 million and holds 43 stocks in its basket with moderate concentration in the top firms. Here, residential REITs is the top sector with 48.6% share while healthcare REITs and specialized REITs round off the next spots. The ETF has 0.48% in expense ratio and average daily volume of 34,000 shares. It has rallied 29.7% so far this year (read: Real Estate Tops YTD: 5 Best ETFs & Stocks).

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iShares U.S. Home Construction ETF (ITB): ETF Research Reports
 
Invesco Dynamic Building & Construction ETF (PKB): ETF Research Reports
 
iShares Cohen & Steers REIT ETF (ICF): ETF Research Reports
 
iShares Residential Real Estate ETF (REZ): ETF Research Reports
 
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Zacks Investment Research
 
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