Inside ProShares’ bull and bear levereaged homebuilding ETFs

Over the last few months, issuers have been showing immense interest in the housing ETF space. Before 2015, the space was devoid of leverage and inverse ETFs, but the industry filled this gap this year having seen housing ETF launches in all forms. In fact, a couple of bull/bear leveraged products targeted at the housing market are still in the pipeline.

Let’s take a look at two newly launched leveraged housing ETFs by ProShares designed in both long and short manners.

Newly Launched ETFs in Focus

ProShares Ultra Homebuilders & Supplies ETF (HBU) looks to offer double the daily exposure to the Dow Jones U.S. Select Home Construction Index while ProShares UltraShort Homebuilders & Supplies ETF (HBZ) gives twice the opposite exposure of the daily performance of the same index. Both funds charge 95 bps in fees.

The benchmark follows the performance of a basket of 40 homebuilding companies. The index is heavily concentrated on the top 10 holdings in which it puts around 65% of assets. Lennar CP Cl A (11.20%), D R Horton Inc (11.15%) and Pulte Group (8.47%) take the top three spots in the basket and make up for a combined 31% share.

How Do These Fit in a Portfolio?

These products could be interesting choices for those seeking a targeted exposure to the U.S. homebuilding sector. The space has turned around this year again on sustained economic recovery, a healing job market, rising consumer confidence, moderating home prices and, of course, low interest rates prevailing in the U.S.

Though the first quarter was downbeat for the sector, spring sprung good news for the companies. In any case, its key selling season started in March and will run through the back-to-school season in September. A plunge in yields is another positive for the space. Even if mortgage rates rise in the latter half of the year – as is widely anticipated – housing will likely remain reasonable.

To add to the positives, the White House plans to slash premiums on mortgage insurance should prove a tailwind for mortgage availability, pushing first-time homebuyers to purchase houses. Overall, the sector has set off for a decent start for the future and investors can very well capitalize on this trend via the leverage bull ETF HBU.

Having said this, we would like note that the space is highly rate sensitive. And with the Fed expected to hike key rates sometime later in 2015, mortgage rates will see some upheaval. This might have investors who are pinning hopes on the housing market boom tread in trouble waters for a short while. However, investors can ride on this momentary dip via HBZ, the objective of which is to gain from a housing market downturn.

ETF Competition

The homebuilding ETFs space previously used to be closely-tied area. But in 2015, a sudden boom in housing-related product launches has been noticed. Earlier, there were three regular housing ETFs, namely iShares U.S. Home Construction ETF (ITB), SPDR S&P Homebuilders ETF (XHB) and PowerShares Dynamic Building & Construction Fund (PKB).

But this year, two new products from UBS – ETRACS ISE Exclusively Homebuilders ETN (HOMX) and ETRACS Monthly Reset 2xLeveraged ISE Exclusively Homebuilders ETN (HOML) – have hit the market.  Being a twice leveraged product, HOML could pose as a threat to HBU. This is truer given that HOML charges (85 bps in fees) lower than HBU.

The difference between daily (in the case of HBU) and monthly resetting technique (for HOML) might have caused this disparity in expense ratio. However, there is no visible risk for the leveraged bear ETF as any product in this category is yet to enter the market. 

PRO-UL HB&S (HBU): ETF Research Reports
PRO-ULS HB&S (HBZ): ETF Research Reports
ISHARS-US HO CO (ITB): ETF Research Reports
SPDR-SP HOMEBLD (XHB): ETF Research Reports
PWRSH-DYN BLDG (PKB): ETF Research Reports
E-TRC ISE EH (HOMX): ETF Research Reports
E-TRC MR2XL IEH (HOML): ETF Research Reports
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