A Soaring Homebuilders ETF Could Offer More Q4 Upside

Last Friday's jobs report was stronger than expected and the September number was revised higher. Plus, there were modest gains in wages.

On the other hand, some other recent economic data points, consumer-related and manufacturing among them, have drawn concern among participants.

What Happened

While the economic data scene has recently been mixed, there's no debating the point that homebuilders stocks and the related exchange traded funds are soaring this year. For example, the SPDR S&P Homebuilders ETF XHB is higher by nearly 42% this year.

The equal-weight XHB features exposure to following industry groups: Building Products, Home Furnishings, Home Improvement Retail, Homefurnishing Retail, and Household Appliances.

In other words, investors embracing XHB are just as likely to find consumer discretionary stocks levered to the retail side of the residential real estate trade as they are actual homebuilders.

Why It's Important

As this year's performance indicates, XHB's methodology can be rewarding for investors and some market observers believe the fund can generate more upside in what remains of the fourth quarter.

“However, headwinds are turning into tailwinds this year. Falling 30-year mortgage rates and the Federal Reserve’s dovish monetary stance have boosted housing activity and homebuilder sentiment and lifted homebuilder stocks,” State Street said in a recent note.

XHB, which is higher by more than 7% since early October, has another tailwind: improving home sales data.

“The total of new and existing home sales has rebounded from the bottom since January and exceeded the previous peak in June 2017,” notes State Street. “Homebuilder sentiment, as measured by the NAHB/Wells Fargo Housing Market Index, picked up for the sixth straight month.”

Those are important points because XHB allocates two-thirds of its weight to makers of building products and pure play homebuilders.

What's Next

Rising wages, as revealed by the October jobs and favorable demographic trends are among the other factors that could provide a boost to XHB. Plus, this industry is attractively valued.

“A strong labor market, rising wages, and favorable demographic changes are likely to continue supporting housing demand and homebuilders’ earnings growth,” said State Street. “The homebuilders’ comeback may still have legs, as the industry is trading within the bottom quartile over the past 10 years based on trailing and forward price-to-earnings.”

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