The Best Homebuilder ETFs to Buy

In early July, like they've done so often before, investors focused on Warren Buffett, Berkshire Hathaway (BRK.B) and their latest 13F filing. A 13F is a quarterly disclosure of equity holdings by institutional investors with more than $100 million under management.

Most headlines focused on Buffett's new position in the troubled health care giant UnitedHealth Group (UNH), which was dealing with the assassination of a business unit CEO and a Department of Justice probe.

What caught some investors off guard, however, was new exposure to major U.S. homebuilders. The filing revealed roughly $800 million invested in Lennar (LEN) and about $190 million in D.R. Horton (DHI).

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Immediate speculation suggested Buffett and Berkshire were betting on a cyclical rebound in home construction, supported by macroeconomic tailwinds – chiefly falling interest rates.

Lower mortgage rates reduce financing costs, stimulating new housing demand and boosting builders' margins. And this thesis is beginning to materialize.

In September and October, the Federal Reserve cut the target range for the federal funds rate by a total of 50 basis points to bring it down to 3.75% to 4.00%. Odds favor another 0.25% reduction at the next Fed meeting in December.

Homebuilder stocks have rallied modestly during this period, leaving room for investors who want to mirror Buffett's latest positioning.

For those who'd like to be efficient about it, the best homebuilder ETFs offer easy and diversified exposure at reasonable cost.

What are homebuilders?

Homebuilders don't merit a standalone sector under the Global Industry Classification Standard (GICS). They span several sectors, primarily consumer discretionary, industrials, materials, and real estate, like how infrastructure overlaps with utilities and energy.

At the center of the industry are the companies actually constructing new homes. Their business model is straightforward: acquire land, build residential properties and sell them for a profit.

Margins depend heavily on land costs, material prices and demand for housing, which fluctuates with mortgage rates and economic growth.

The biggest names include Lennar and D.R. Horton as well as NVR (NVR) PulteGroup (PHM) and Toll Brothers (TOL), often considered the "big five." These firms are highly cyclical, meaning their earnings and stock prices tend to rise during economic expansions and fall during downturns.

This volatility makes valuing them tricky, since price-to-earnings ratios can look deceptively high at cycle troughs and artificially low near peaks.

But the homebuilding ecosystem doesn't stop there. Those direct builders rely on a wide network of "enablers" that provide materials and services.

Sherwin-Williams (SHW), for instance, sells paints and coatings essential to new construction. Retailers such as Home Depot (HD) and Lowe's (LOW) are grouped here too, as they cater to both contractors and homeowners, a segment often called "home improvement retail."

The industry also includes suppliers of construction materials, furnishings, and building products ranging from HVAC systems and lighting to sofas and mattresses.

Many of these are mid-cap stocks and small-cap stocks, making them less familiar but vital parts of the residential construction chain.

Because this ecosystem covers such a range of activities and company sizes, investors need to pay attention to how homebuilder ETFs define their selection criteria. Some funds focus narrowly on direct builders, while others include related industries.

Weighting methods also vary. Market-cap-weighted homebuilder ETFs tilt toward large-cap stocks such as LEN and DHI, while equal-weighted versions give smaller players a larger role.

Regardless of approach, all homebuilder ETFs revolve around the same theme: capturing different stages of the residential construction process, from the first shovel in the ground to the final coat of paint.

How we picked the best homebuilder ETFs to buy

We had to adjust our usual criteria for evaluating ETFs – based on size, liquidity and fees – for the homebuilder category.

Unlike broad market or sector funds, the homebuilder ETF universe is small. As of November 10, VettaFi reported only six U.S.-listed homebuilder ETFs.

Applying strict filters for assets under management, expense ratios and bid-ask spreads would have left fewer than a handful of eligible funds.

At the same time, broadening the screen too far would defeat the purpose of a focused comparison.

So we chose to highlight the five largest ETFs by assets under management.

Rather than ranking them outright, we'll walk through each fund's advantages and trade-offs using our standard criteria while noting historical performance where relevant for comparison.

Here are the best homebuilding ETFs to buy.

Data is as of November 10.

iShares U.S. Home Construction ETF

• Assets under management: $2.6 billion
• Expense ratio: 0.38%
• 30-day median bid-ask spread: 0.03%

The iShares U.S. Home Construction ETF (ITB), which launched in May 2006, is the largest fund in this narrow category. ITB tracks the Dow Jones U.S. Select Home Construction Index, a modified benchmark weighted by market cap.

The index gives top billing to the big five homebuilders – LEN, DHI, NVR, PHM and TOL – but ranks retail giants HD and LOW lower, given their indirect role in actual home construction.

Performance has been strong. Since the aftermath of the 2008 housing crisis, ITB has delivered an annualized 10-year total return of 15.63% with dividends reinvested.

The tradeoff is higher volatility: Its three-year beta of 1.52 means it’s about 50% more volatile than the S&P 500.

ITB is best for investors seeking direct exposure to leading U.S. homebuilders who are willing to tolerate higher cyclical risk for potentially stronger long-term gains.

Learn more about ITB at the iShares provider site.

State Street SPDR S&P Homebuilders ETF

• Assets under management: $1.5 billion
• Expense ratio: 0.35%
• 30-day median bid-ask spread: 0.04%

The State Street SPDR S&P Homebuilders ETF (XHB) is the runner-up to ITB in size but takes a different approach. XHB tracks the S&P Homebuilders Select Industry Index, which equally weights all 35 of its holdings.

That means company size doesn't matter: Each stock receives the same allocation, and weights reset every quarter. As a result, top holdings shift frequently based on which names outperform between rebalances.

This equal-weighting method has both advantages and drawbacks. Over the past decade, however, that tilt toward smaller names hasn't paid off, as large caps have dominated.

XHB has returned 14.19% annualized with dividends reinvested – solid, but below ITB's performance.

XHB is best for investors who seek diversified exposure across the entire homebuilding value chain, including mid- and small-cap names, with a disciplined equal-weighted structure.

Learn more about XHB at the State Street provider site.

Direxion Daily Homebuilders & Supplies Bull 3X Shares

• Assets under management: $591.7 million
• Expense ratio: 0.95%
• 30-day median bid-ask spread: 0.21%

The Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL) is not a typical buy-and-hold industry ETF.

It tracks the same Dow Jones U.S. Select Home Construction Index as ITB, but NAIL uses three times leverage to magnify daily moves. This leverage resets every trading day – meaning returns are based on the index's daily performance, not long-term trends.

For example, if the index rises 1% in a day, NAIL aims to rise 3%. But if it falls 1%, the ETF should drop 3%. To achieve leverage, the fund primarily holds derivatives such as index swaps rather than the underlying stocks, adding counterparty risk.

Over time, compounding can cause performance to diverge significantly from the index's overall direction, especially in volatile markets. The 0.95% expense ratio further erodes returns over longer holding periods.

NAIL is best for experienced traders looking to make short-term, bullish bets on the homebuilding sector's daily momentum

Learn more about NAIL at the Direxion provider site.

Invesco Building & Construction ETF

• Assets under management: $295.3 million
• Expense ratio: 0.57%
• 30-day median bid-ask spread: 0.33%

The Invesco Building & Construction ETF (PKB) is an alternative to the market-cap-weighted ITB or equal-weighted XHB. PKB tracks the Dynamic Building & Construction Intellidex Index, which takes a fundamentals-driven approach.

The 30-stock index screens for price momentum, earnings momentum, quality, management action and value. Sponsors reconstitute and rebalance quarterly, adding new stocks or removing old stocks and adjusting weights back to target levels based on updated data.

This approach gives PKB a more dynamic mix of holdings, but it doesn't guarantee outperformance – especially after factoring in its higher 0.50% expense ratio.

Still, the strategy has delivered strong historical results, with PKB narrowly trailing ITB with a 15.21% annualized total return. PKB's past success doesn't predict future results. But it validates the potential of a fundamentals-based strategy.

PKB is best for advanced investors who prefer a more actively constructed, fundamentals-driven way to potentially outperform ITB and XHB.

Learn more about PKB at the Invesco provider site.

Hoya Capital Housing ETF

• Assets under management: $34.7 million
• Expense ratio: 0.30%
• 30-day median bid-ask spread: 0.22%

The Hoya Capital Housing ETF (HOMZ) is a smaller, boutique ETF, it's one of the most unique in the housing category. HOMZ tracks the proprietary Hoya Capital Housing 100 Index, which includes 100 companies spanning the full housing ecosystem.

Alongside homebuilders and retailers such as HD and LOW, HOMZ also holds residential real estate investment trusts, or REITs, giving it a blend of growth and income exposure.

Performance has been competitive, with a 10.25% annualized five-year total return. Its 0.30% expense ratio is also lower than most peers.

However, its small size – less than $50 million in assets under management – invites concerns about liquidity and fund longevity. Even so, the ETF may appeal to income-oriented investors thanks to its 2.65% 30-day SEC yield and monthly distributions.

HOMZ is best for income-seeking investors who want diversified housing exposure spanning homebuilders, suppliers and residential REITs.

Learn more about HOMZ at the Hoya Capital provider site.

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