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This title is derived from the best-selling book “Epic of America” ​​by James Truslow Adams written in 1931. It is about the belief that success can be achieved through hard work, not birth status, pure luck or social class. Thus, it is possible for people to climbing the social ladder through hard work, one of the symbols of the American dream being home ownership with education.

However, with the dark macroeconomic clouds looming on the horizon, the purpose of this thesis is to assess whether the ETF Hoya Capital Housing (NYSEARC:NYSEARCA:HOMZ) may allow investors to profit from residential construction, especially after the fund’s decline of nearly 18% over one year.

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HOMZ data by YCharts

I begin by providing an overview of market conditions, including various economic indicators, which are not necessarily aligned.

Uncertainty reigns but the housing industry has not capitulated

First, the Federal Reserve is no longer aiming for a neutral monetary policy, but a tighter one in order to moderate demand for credit, and ultimately prices. At first sight, this increases the risk of recession given the oil prices which remain high, but, on the other hand, the labor market shows few signs of weakness. Still, it is doubted that business activity, in general, can improve as the global economy grapples with a lingering energy crisis and major central banks focus on monetary tightening.

In this regard, the manufacturing PMI still points to the weakest growth in manufacturing activity since mid-2020 despite a slight upward revision in August. What’s more, according to the National Association of Realtors’ Housing Affordability Index, buying a home has never been more unaffordable in more than 30 years, after home values ​​have risen sharply since the onset of Covid, with future owners facing record prices. .

Such an economic environment could spell trouble for HOMZ, which seeks to invest in around 100 of the fastest-growing real estate companies, as its holdings may struggle to continue growing revenue.

HOMZ

HOMZ Fact Sheet (www.hoyaetfs.com)

Still, amid the sluggish housing sector, US consumer confidence improved in early August after further signs that inflationary pressures may be easing. At the same time, there is an unexpected increase in the volume of loan applications, by 1.2% during the last week of July according to the Mortgage Bankers Association. Now, this period has coincided with a drop in mortgage rates as measured by Freddie Mac, but it still indicates that the housing industry has not yet capitulated and is ready to rebound to take advantage of any reduction in the cost of housing. loan.

However, there are other reasons for optimism.

Industry exposure and downside risks

First, we must not forget that with the savings rate skyrocketing due to travel restrictions during Covid, as people have saved more money, there is more disposable income to spend on necessities of accommodation. Also, even though some say the real estate industry is already in a recession, there’s a high chance you’ll see a new building under construction or an existing building under renovation if you look around.

Additionally, while the office REIT industry is more prone to economic cycles, homes and apartment buildings are more tied to demand and supply. An example is shown by the first-time buyers group, which accounted for 34% of all homebuyers in 2021. Additionally, the last year has seen an increase in homeownership rates, to 65.5% , up from 65.3% in 2020. That’s not a big increase, but it certainly helped stem the downward trend in homeownership since 2004, when it was 69%. Moreover, this rise shows that the American dream of owning a physical house is still alive despite the new generation called Genz (born between 1997 and 2012) who are more oriented towards virtual reality.

On the other hand, we observe a decrease in the percentage of adult owners, i.e. by 10% between 1960 and 2017. They showed a preference for renting instead. This trend may continue as Covid has encouraged greater labor mobility, as with your laptop you can work virtually anywhere. Yet HOMZ benefits from this work-from-home trend as it comprises 30% of residential rental REITs, including owners and operators.

Hoya

Exposure to the four housing segments (www.hoyaetfs.com)

Thinking out loud, with the trend towards remote working continuing as many employees are now allowed to work 2-3 days away from the office, there should be continued demand for home improvement products.

Regarding construction and home building, this segment includes thirty related companies which constitute 30% of the total weight of HOMZ, as shown in the table above. Additionally, its goal is to target areas of the United States where there is a housing shortage as well as the age groups most likely to buy a home.

This brings us to one of the benefits of using the ETF option to invest in homebuilding stocks instead of painstakingly researching individual stocks, and for their efforts the fund managers charge a 0.3% fee. To this end, the Hoya ETF tracks the Hoya Capital Housing 100 Index which targets home builders as well as products and materials.

The next step is to provide more precision regarding the holdings.

Participations and comparison with peers

As social animals accustomed to comfort, we tend to renovate our homes or apartments, sometimes at the insistence of our wives or partners. Thus, it is not surprising that Home Depot (HD) which constitutes 3.11% of HOMZ’s assets managed to maintain growth at 3.75% in the June quarter, much better than the pre-pandemic regression. -2.68% in 2019, after the 24% rise in Covid in 2020. Growth has also slowed due to rising wage inflation and supply-driven costs. Thus, the title has suffered by more than 25% since its peak in December 2021, but Home Depot is adapting its product mix to changing lifestyles, different consumer profiles and supply constraints.

Hoya

HOMZ Top Ten Holdings (www.hoyaetfs.com)

On a more positive note, the consumer discretionary sector, which includes Lowe’s Companies (LOW), was the top gainer among the eleven S&P 500 sectors last week. Moreover, with 100 holdings, whose individual weight does not exceed the 3.28% mark, HOMZ takes into account the risks of low concentration by offering a broad exposure to the industry.

However, on the cautious side, the construction sector remains exposed to economic cycles and, compared to their large-cap counterparts, the small- and mid-cap stocks that are part of the Hoya ETF can be more volatile during downturns. periods of economic uncertainty.

Yet a comparison with two other homebuilder ETFs reveals that HOMZ, despite falling 22.6%, has outperformed both the SPDR S&P Homebuilders ETF (XHB) and the iShares US Home Construction ETF (ITB) since the beginning of the year. basis as shown in the tables below.

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HOMZ data by YCharts

This implies that since the onset of the acute market turmoil, HOMZ is a better choice for those considering an investment in residential construction despite the fact that the underlying fund manages far fewer assets than its peers, as shown in the table below. In fact, as of September 8, HOMZ’s total assets under management were $39.41 million with a net asset value of $34.27, which is slightly below its stock price of $34.81.

In addition to outperforming its two peers on the basis of value for money, HOMZ, which targets real estate companies with the highest dividend growth, also pays the best yield of 1.8% as shown in the chart below, while charging less.

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Comparison with peers (www.seekingalpha.com)

Discussion and conclusion

So, based on the fact that the housing market hasn’t capitulated, segment exposure, and market performance against peers, I view HOMZ as a long-term buy with momentum indicators pointing to a potential rebound at the $36 level. However, don’t expect a sustained rise this year.

Here, investors will notice that my optimism is not due to speculation that the Fed might become less hawkish, but rather to view real estate more as a hedge against economic downturns. For that matter, looking at the first half of 2020 when Covid hit, people didn’t suddenly start adopting doomsday views and stopping building houses. Moreover, companies have not stopped investing, but on the contrary have taken advantage of the temporary break in activities to renovate or modernize their facilities.

Now some will say that interest rates were close to zero with the Fed pumping a massive amount of cash into the system but, even with the reverse monetary policy in effect, people won’t stop building houses and wait patiently for the Fed to change. his politics. In this regard, many are realizing that with de-globalization and war in Eastern Europe continuing, high inflation here to stay and home ownership a priority, people are likely to reduce other expenses such as travel abroad in a world where health is now at the forefront. top of mind people.

Also, economic downturns are not strong enough reasons to keep people from dreaming and eventually becoming homeowners. To help them in this task, the fact that, compared to other countries, the United States is geopolitically more secure and enjoys a more temperate climate with abundant natural resources, including oil and land. arable to produce food for their people. Also, with the relocation of supply chains where more manufacturing is done domestically, it is likely that more people will move to the United States, which will maintain housing demand. Alternatively, for foreign investors, putting their money in ETFs like US-based HOMZ is considered a “safe haven” investment.

Finally, the American dream of home ownership is a powerful enough catalyst for the residential housing industry to continue to grow, with HOMZ providing exposure to the fastest growing real estate games and paying a decent return while you patiently wait for the rise.