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ETF Specialist

Homebuilders and the Fed: An ETF for Investors Seeking Housing-Sector Exposure

With no tapering imminent, housing stocks rallied on Wednesday. For those who see more upside from here, this ETF offers the purest exposure to U.S. housing stocks.

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Following the surprise news that the Federal Reserve will continue with its easy-money policy and not taper its bond-buying program, interest rates fell across the board on Wednesday, with rates reversing some of their recent rises and the 30-year mortgage rate settling in around 4.5%, or 10 basis points less than it had been a week earlier. Since May, the 30-year mortgage rate has risen more than 100 basis points, and mortgage rates still are much higher from their all-time lows earlier this year. Still, Wednesday's news from the Fed was great news for the equity markets, with the S&P 500 Index rising 1.2% on Wednesday. And it was better news still for the housing sector, with the housing-oriented exchange-traded fund  iShares U.S. Home Construction ETF (ITB) rallying close to 5% on Wednesday. That was a nice lift for the housing sector, which surged in 2012 but has been under pressure in recent months. Homebuilders could move further in either direction given that several important indicators of the health of the housing market are due out next week, including the latest read on the Case-Shiller index and several earnings reports from publicly traded homebuilders.

Investors who believe that more good news is ahead for homebuilders might consider a sector-specific ETF devoted to the homebuilding industry. ITB has the greatest exposure to the housing sector. Because ITB is a concentrated bet on a very narrow segment of the market, we view this fund as a tactical investment, suitable only as a complementary satellite holding in a diversified portfolio. Investors should take note that the housing sector is highly cyclical and sensitive to employment and credit conditions.

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Robert Goldsborough does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.