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I have a dilemma, one I suspect I share in one fashion or another with many others.
Unless you’ve been living under a rock, you are likely aware that the housing market is on fire. A recent article from FreddieMac nicely summarizes the circumstances that have led to this. First, for years and for a variety of reasons, U.S. housing stock, and in particular entry-level homes, was underbuilt. Next, with a population of some 72 million, millennials are at their peak first-time home buying age. Many of these millennials are just now recovering from the effects of the 2008-2009 financial crisis and are finally in position to buy.
As if that wasn’t enough, the COVID-19 pandemic introduced a new set of factors. Here’s just one example. According to a recent Zillow analysis of data from a major U.S. moving company, “[A]n ongoing confluence of social, demographic and economic factors [are] spurring high demand for housing as Americans rethink where they live and seek to decouple their home location from their office location as telework opportunities grow.”
Due to a combination of personal circumstances, I decided to put my home up for sale, right in the middle of this exciting time. As I write this, I am working on fielding offers and, by all appearances, my home should sell soon.
However, I have not yet made any final decisions with respect to where my next home should be. My wife and I are evaluating multiple options, but the pandemic has made exploring some of them a little difficult. My dilemma, then, is that I need to figure out how to invest that cash for some unknown period of time. As Ray Dalio has famously stated; in the current environment, “Cash is trash” and “The economics of investing in bonds . . . has become stupid.”
Oh, if only there were some way that I could “hedge my bets” by investing at least some portion of my money in something that might in some way approximate the housing market.
HOMZ - Revisiting An Old Friend
As it happens, I was among the first ETF-focused authors to review this ETF shortly after its launch in March, 2019. At the time that article was written, HOMZ’s AUM was a mere $6.72 million. Today, despite not being on any of the major “wirehouse” platforms (Merrill, JPMorgan, Morgan Stanley, etc.), its AUM has grown to right around the $75 million mark. Further, in August, 2020, its expense ratio was lowered from the previous .45% to .30%. Additionally, HOMZ was awarded the Most Successful & Innovative ETF Launch of 2019 by ETF Express, named one of five finalists for the 2019 ETF.com Awards for Best New US Equity ETF and Most Innovative New ETF while Hoya Capital was named as a finalist for New ETF Issuer of the Year.
What makes HOMZ unique? Let’s quickly break it down. When investors’ thoughts turn to including an allocation to real estate ETFs in their portfolio, likely the first thing that comes to mind are Real Estate Investment Trusts (REITS), such as the venerable Vanguard Real Estate ETF (VNQ). As it turns out, though, residential REITS only comprise 13.8% of this ETF as of this writing. To focus more specifically on housing, two other alternatives would be SPDR S&P Homebuilders ETF (XHB) and iShares Residential and Multisector Real Estate ETF (REZ). For purposes of this article, I won’t get into a detailed discussion of these two ETFs. Of the two, REZ is perhaps the closest in character to HOMZ. However, even this ETF has almost half its allocation in areas other than housing.
Taking A New Approach
It was exactly this dilemma that intrigued Alex Pettee, CFA, President of Hoya Capital Real Estate, a research-focused investment advisor with expertise in real estate securities.
In its investment case document, Hoya suggests that the ETF “addresses a core investment need” and further that “we believe that HOMZ is especially compelling for renters and homeowners seeking to “hedge” the negative impacts of rising housing costs.”
How, exactly, does it go about doing this? The following graphic, taken from that same document, provides a nice graphical overview.
Starting on the left, the graphic displays a high-level breakdown of GDP spending on housing. As can be seen, this breaks down broadly into four sub-categories. In the center panel, this breakdown is translated into the basis for assembling the 100 companies in HOMZ’s underlying index. Finally, as can be seen in the right panel, samples of related companies are featured, ranging from well-known residential REITS such as Equity Residential (EQR) to homebuilders such as Lennar (LEN) to home retailers such as Home Depot (HD) and even newer “upstarts” such as Zillow (Z) and Redfin (RDFN) that have literally redefined the way homes are bought and sold.
Next, let’s dive just a little deeper. The graphic below, from the fund’s summary prospectus, offers a more detailed breakdown of the index’s construction.
Specifically, the index is broken down into 8 subsectors, weighted by their respective contributions to U.S. economic output. Within each subsector, the selected components are then equally-weighted.
As a result, only two securities, Home Depot (HD) and Lowe’s Companies (LOW) have a greater than 2% weighting in the fund. Below are HOMZ’s Top-10 holdings. As can be seen, these only comprise 18.59% of the fund, quite reasonable for a fund with 100 holdings.
Bringing It All Full Circle
So, back to my dilemma. Once the sale of my home is completed, how should I invest my cash until I am able to purchase my next home? What if overall home prices keep rising? Can you see how HOMZ could help me to mitigate the impacts of such an eventuality? Since, first, it focuses exclusively on residential real estate and, second, includes a nice balance of income and growth components, an allocation to HOMZ could help me hedge against some portion of that risk.
But here’s another angle to consider. In addition to all I have already featured, HOMZ was designed to be relatively agnostic to the distribution of households between renting and owning, instead focusing on providing investors a tool with which to invest in the broader housing market. Why might that matter? A recent article on CNBC answers that question nicely. I stated at the outset of this article that the housing market has been on fire. In that statement, I was referring to home prices. Now, evidence indicates that rents are starting to catch up to prices.
The good news? HOMZ is designed to work well in either scenario. So, if you currently find yourself in the situation whereby you have no choice but to rent as you save to buy that first home, again, HOMZ may have something to offer.
As mentioned, with an inception date of March 19, 2019, HOMZ might still be considered a relative newcomer. But here are a couple of other factors to consider.
First, courtesy of Portfolio Visualizer, have a look at this backtest, with REZ and VNQ, two other competitors in the real estate space, used for comparison. The backtest starts from April, 2019, the first month for which data is available for HOMZ, and runs through the present. Likely due to the growth-related components included in HOMZ, it has outperformed over that span, particular since the depths of the COVID-related panic in March/April 2020.
Second, unlike most ETFs that tend to pay dividends quarterly, HOMZ pays dividends monthly. In this aspect too, it matches how housing typically works, as rent or mortgage payments are paid monthly. You can find its distribution history and calendar on this page, for any who would like to take a closer look.
I hope my overview of this innovative ETF has been of interest. Whatever your personal decisions, The Monkey wishes you . . .
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