PKB - PKB: Housing And Construction Begins To Crack

2023-10-16 16:29:14 ET

Summary

• Housing is in trouble and construction will be the first thing to crack.
• The Invesco Building & Construction ETF (PKB) is a fund to watch closely as a proxy for the housing industry.
• Rising mortgage rates and a looming recession are major concerns that could negatively impact the performance of homebuilder ETFs.

The road to success is always under construction. - Lily Tomlin

I have been early and wrong for the last year and a half, arguing that housing is in deep trouble. So too were those arguing for a Great Financial Crisis in 2006. Nothing has changed in my view. Housing is in trouble, and construction will be the first thing to crack. And if you haven't noticed, the stocks in the space are starting to show this.

One fund to watch closely as a proxy for this dynamic is the Invesco Building & Construction ETF ( PKB ). This is a unique fund that offers exposure to the U.S. homebuilding industry. It is based on the Dynamic Building Construction Intellidex Index, which evaluates companies on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action, and value.

The index is comprised of 30 U.S. building and construction companies, which are primarily engaged in construction and related engineering services for residential properties, commercial or industrial buildings, and large-scale infrastructure projects. The fund and the index are both rebalanced and reconstituted quarterly, in February, May, August, and November.

Fund Holdings and Sector Allocation

PKB boasts a diverse range of holdings within the building and construction industry. The fund's top holdings include leading homebuilders such as PulteGroup, Lennar, and Martin Marietta Materials. Other prominent holdings include Vulcan Materials, and D.R. Horton. These holdings are subject to change depending on market dynamics and the fund's rebalancing strategy.

Peer Comparison: PKB vs ITB vs XHB

When compared to similar ETFs in the market, such as the iShares U.S. Home Construction ETF ( ITB ) and the SPDR Homebuilders ETF ( XHB ), PKB comes out as a strong contender. All three ETFs have seen impressive growth in recent years, thanks to the robust housing market. However, PKB stands out for its somewhat better performance, as evidenced by its lower volatility, lower beta, and lower maximum drawdown. This feature can be potentially beneficial for cautious investors, especially in the current economic climate fraught with uncertainties, and is likely attributable to the rebalancing criteria of the index it's seeking to track. When looking at the price ratio against XHB, it's broken down as of late, but the longer-term alpha is still there.

Impact of Rising Mortgage Rates

While PKB offers a unique and potentially lucrative investment opportunity, it's important for investors to be aware of the current economic climate and its possible impact on the fund. One of the key concerns right now is rising mortgage rates. As mortgage rates continue to climb, housing affordability becomes a critical issue.

A looming recession is another major concern for investors in the space. Recessions typically lead to a slowdown in the housing market, as consumers cut back on large purchases like homes due to economic uncertainties. This can lead to a decrease in demand for new construction, negatively impacting the performance of homebuilder ETFs.

Conclusion

I just don't believe this is a place to be in now, as the housing cycle is notoriously long-tailed and will take time to flush out. It's a good fund for what it does, but there are better ways to play the more intermediate outlook than this in the context of macro headwinds that are finally starting to matter.

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