Though homebuilders are struggling with higher lumber prices as well as labor and land shortages, an upbeat housing starts report was a silver lining in the space. U.S. housing starts climbed 5% in May to a seasonally adjusted annual rate of 1.35 million homes, representing the highest level since July 2007.  

The uptick in construction activity was driven by acceleration in both single-family and multi-family home construction that rose 3.9% and 11.3%, respectively. Overall, starts increased 11% year over year in the first five months of 2018, buoyed by increases of 13.3% in multi-family and 9.8% in single-family.

Building permits, a construction pointer for the coming months, dropped 4.6% to an annual rate of 1.31 million units — the lowest level since September 2017. Nevertheless, permits were 8% higher than the year-ago level. This indicates that housing market activity remains solid though mortgage rates have risen in recent months leading to higher borrowing cost.

Mortgage rates dropped to a certain extent this month after hitting seven-year highs last month. Even at this peak, the rates are much below the 30-year average rate of nearly 8% over the past 45 years, suggesting that the rates are still at historic lows. With the Fed on track to raise its short-term interest rates over the next two years and unwind some of its prior asset purchases, longer-term interest rates, including that of mortgages, will rise and make homes costlier, hampering affordability.

As such, most borrowers seeking to buy homes wish to lock in the still-low rates, creating solid demand. Additionally, accelerating job market with rising wages and lowest unemployment rate in 18 years will fuel strong demand for homes. This will in turn benefit the homebuilders and the related ETFs.

Further, homebuilders are currently well placed, belonging to a top-ranked Zacks Industry (top 40%), suggesting that the ongoing headwinds have not been able to diminish their appeal.

ETFs in Focus

Given this, investors might want to look at the homebuilder ETFs — iShares U.S. Home Construction ETF (ITB - Free Report) , SPDR S&P Homebuilders ETF (XHB- Free Report) and Invesco Dynamic Building & Construction ETF (PKB - Free Report)— for their exposure to the sector. These funds shed 0.1%, 0.2% and 0.6%, respectively in yesterday’s trading session.

ITB

This fund provides a pure play to home construction stocks by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $1.4 billion, it holds a basket of 47 stocks while charging 44 bps in annual fees. The product trades in a heavy volume of around 3 million shares a day on average and has a Zacks ETF Rank #3 (Hold) with a High risk outlook.  

XHB

The most popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. The fund holds about 35 securities in its basket with AUM of $888.7 million and trades in volume of around 2.6 million shares. It charges 35 bps in annual fees and has a Zacks ETF Rank #4 (Sell) with a High risk outlook.

PKB

This fund tracks the Dynamic Building & Construction Intellidex Index, holding 30 stocks in its basket. It has amassed assets worth $243.2 million while it sees moderate volume of around 68,000 shares per day on average. Expense ratio comes in at 0.63%. PKB has a Zacks ETF Rank #3 with a High risk outlook