The spring selling season is turning into a difficult test for the U.S. housing market, as the average mortgage rate on the 30-year fixed loan rose 7 basis points on May 19 to 6.75%. This marks the highest level since July 31. The increase reflects growing economic uncertainty and broader market volatility tied to the ongoing Iran war.
This rapid increase is directly impacting home-building companies, as they are using incentives like mortgage rate buy-downs to offset costs, and their profit margins are getting squeezed.
Consequently, the performance of homebuilder exchange-traded funds (ETFs) is drawing increased investor attention, as their holdings struggle to keep up with surprisingly resilient buyer demand amid higher mortgage rates.
Before identifying which ETF is defying the market trend, it is important to look beneath the surface and examine how macroeconomic pressures and industrial demand are splitting the construction industry into two distinct paths.
The Macro Squeeze Driving Higher Rates and Pressuring Homebuilders
America’s mortgage rates are locked in an upward trajectory due to a combination of persistent core inflation and a hawkish macroeconomic background that has forced the Federal Reserve to keep interest rates elevated. This sticky inflation, paired with a resilient labor market, means borrowing costs are unlikely to ease anytime soon.
The National Association of Home Builders recently reported that builder confidence in the market for newly built single-family homes rebounded slightly to 37 in May, though any reading below 50 indicates that more builders view conditions as poor rather than good. The primary issue remains affordability. As rates rise, buyers lose purchasing power, forcing builders to adapt their strategies.
Looking specifically at how companies are being impacted, data from the first quarter shows significant turbulence among the top holdings of major home builder ETFs. D.R. Horton DHI, the nation's largest builder, holds significant weight in sector funds, and its share price suffered a 6.5% slump year to date, as investors price in margin compression. Other large homebuilders like Lennar Corp LEN and PulteGroup PHM are also grappling with a "new normal" where they are aggressively utilizing heavy incentives and net price reductions to combat severe housing affordability challenges and clear out inventory.
However, the pain is not uniform across the entire construction ecosystem. While firms focused on single-family housing are facing margin pressure, commercial and industrial infrastructure builders are experiencing a strong boom. A massive wave of private capital and public investment is flowing into structural megatrends, particularly the development of AI-driven data centers, localized manufacturing facilities, and green energy infrastructure. As a result, companies involved in building and servicing commercial facilities remain largely insulated from consumer mortgage volatility.
For example, Argan AGX, which provides construction and engineering services for power generation and industrial facilities, has seen its share price surge 104% year to date. Shares of MYR Group MYRG, a specialty contractor serving the electrical infrastructure market, have soared 102%.
ETFs Revealing the Dividing Industry Trend
The divergence between consumer-facing residential builders and industrial non-residential construction, as discussed above, is perfectly mirrored in the performance of the following ETFs, with one particular ETF showing upward momentum:
iShares U.S. Home Construction ETF ITB
This fund, with net assets worth $2.21 billion, provides exposure to 45 U.S. companies in residential construction and related industries. Its top three holdings include: DHI (with 15.76% weightage), PHM (9.27%) and LEN (7.78%).
ITB, a pure-play residential basket heavily weighted toward residential builders, has lost 10.5% year to date. The fund charges 38 basis points (bps) as fees.
State Street SPDR S&P Homebuilders ETF XHB
This fund, with assets under management (AUM) worth $1.38 billion, provides exposure to 34 companies from the homebuilding industry, which includes the Building Products, Home Furnishings, Home Improvement Retail, Homefurnishing Retail, and Household Appliances sub-industries. Modine Manufacturing holds the first position in this fund, with 4.51% weightage, while DHI holds the ninth position with 3.53% weightage.
XHB, being exposed to retail building products and home construction, has lost 7.9% year to date. The fund charges 35 bps as fees.
Invesco Building & Construction ETF PKB
This fund, with a market value worth $415 million, provides exposure to 31 companies that are primarily engaged in providing construction and related engineering services for building and remodeling residential properties, commercial or industrial buildings, or working on large-scale infrastructure projects, such as highways, tunnels, bridges, dams, power lines, and airports. Comfort Systems holds the first position in this fund, with 6.93% weightage, while MYRG holds the third position with 4.82% weightage. AGX holds the sixth position with 4.44% weightage.
PKB, with its top holdings capitalizing on the data center and industrial building boom, has gained 6.6% year to date. The fund charges 57 bps as fees.
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PulteGroup, Inc. (PHM): Free Stock Analysis Report
MYR Group, Inc. (MYRG): Free Stock Analysis Report
Lennar Corporation (LEN): Free Stock Analysis Report
D.R. Horton, Inc. (DHI): Free Stock Analysis Report
Argan, Inc. (AGX): Free Stock Analysis Report
State Street SPDR S&P Homebuilders ETF (XHB): ETF Research Reports
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
Invesco Building & Construction ETF (PKB): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).