On March 20, Hoya Capital Real Estate announced the launch of Hoya Capital Housing ETF (HOMZ), a unique ETF in an otherwise crowded field of REIT and homebuilder ETFs, breaking through the traditional sector classifications by investing in all segments of the housing sector. [Full disclosure: Hoya Capital is a guest contributor to my Forbes Real Estate Investor newsletter].
The ETF combines residential REITs, homebuilders, home improvement companies, and real estate financial services and technology companies into a diversified portfolio of 100 common stocks. Because of its diversification across wide segments of the markets, analysts have postulated that HOMZ may exhibit less volatility and be less sensitive to economic factors like interest rates. Hoya Capital believes that HOMZ captures the central macroeconomic trends affecting the US housing market including rising rents and housing costs, deferred home improvement spending, and a lingering housing shortage.
The culmination of several years of economic research at Hoya Capital, HOMZ is a unique ETF in an otherwise crowded field of REIT and homebuilder ETFs, breaking through the traditional sector classifications by investing in all segments of the housing sector.
HOMZ seeks to track the Hoya Capital Housing 100 Index, a rules-based index designed to capture total spending on housing and housing-related services across the United States by tracking the 100 companies that collectively represent the performance of the US housing sector including home builders, home rental operators, home services and technology firms, and home improvement companies. The index is split into four major US Housing Industry Segments, each weighted according to Hoya based on their relative contribution to GDP.
“HOMZ breaks through the traditional classification lines in the real estate and homebuilding categories,” commented Alex Pettee, CFA, President of Hoya Capital Real Estate. REITs have been notoriously interest-rate sensitive in the post-recession period, whether justified by fundamentals or not. Pettee points out that because of the wide sector diversification, HOMZ may dampen that sensitivity to the economic forces that tend to swing around traditional real estate or homebuilder ETFs.
“Because the index is unbound by the traditional single-sector classifications, each of these housing segments may respond in diverse and potentially counterbalancing ways to macroeconomic factors including interest rates. For these reasons, we believe that HOMZ provides a modernized and highly intuitive evolution in the homebuilding and real estate categories.” The top three holdings include Home Depot (HD), Lowe’s (LOW), NBR Inc. (NBR), and Extra Space (EXR).
Like other ETFs such as XLF and XLK that have become de-facto benchmarks for their entire sector, because the HOMZ index is designed to track total spending across all housing-related categories, Pettee “believes HOMZ has the potential to be the new barometer for the performance of the US housing sector.” Pettee also notes that homebuilding ETFs, which are currently used by analysts and media as a “proxy” for the housing market, only capture a small slice of the total US housing sector, ignoring sectors like rental operators, financial services, and rapidly growing technology firms.
While Pettee sees value in having HOMZ be a benchmark for the performance of the housing sector, he notes that HOMZ was ultimately built to address a core investment need. “Considering the relative importance of housing within a typical American’s spending allocation, with housing costs and rents continuing to rise, we believe that HOMZ could be a core component of millions of household’s asset allocation.” Hoya Capital notes that housing is the single largest annual expenditure for the average American household, accounting for a third of average annual spending.
HOMZ straddles the line between traditional real estate and homebuilder ETFs, and Pettee notes that the most appropriate benchmark may simply be a broad-based index like the S&P 500. Based on holdings data from Morningstar, HOMZ screens favorably across most key metrics compared to the S&P 500 ETF (SPY) including P/E ratio, P/B ratio, sales growth, and dividend yield. HOMZ is on a monthly dividend schedule (current dividend yield is approximately 2.62%), unique among real estate ETFs, which Hoya Capital proposes will align more closely with the schedule in which households pay their rents and mortgage payments.
HOMZ began trading on March 20 and traded on NYSE Arca and is available on most major brokerage platforms. The expense ratio is 0.45%, in the range of the closest comparable offerings including the iShares Residential REIT ETF (REZ) at 0.48% and the iShares Home Construction ETF (ITB) at 0.43%. HOMZ has so far been well-received by investors and analysts. From a March 20 Market Watch article:
“[Compared to XHB and ITB] HOMZ is much broader, and resembles many newer ETFs that are pivoting off an idea rather than making a pure industry play. One consequence: it will almost certainly be far less volatile than the homebuilder biggies, thanks to its inclusion of REIT stocks”
From a March 20 ETF Trends article:
“A confluence of rising interest rates and low affordability have made the housing market a challenging space for investors, but that doesn’t necessarily mean that capitalizing on the real estate market is completely out of reach, especially with the advent of ETFs like HOMZ”
So far, Pettee notes that a surprising amount of early interest in HOMZ has come from younger investors who are acutely affected by rising rents and housing costs. “We believe HOMZ offers the type of core, diversified exposure that is particularly well-suited for the 100 million renters in America that lack the adequate exposure within their current asset allocation.” It’s not just suitable for millennials and renters, however, Pettee notes. “Ultimately, nearly every American is affected by rising housing costs – from home improvement spending, to rents, to home financing – and to the extent that housing costs are a core liability, we believe that HOMZ can be the core asset that addresses these investment needs.”
I do not own shares in HOMZ.
- Originally posted on Forbes