At High Yield Landlord, we generally do not invest in ETFs. Instead, we seek to identify the most undervalued individual opportunities within the real estate space in an attempt to outperform the market and generate a high ~8% dividend yield.
We are mindful however that active investing is not for everyone. We spend thousands of hours and well over $20,000 researching the market every year. Most individual investors won't enjoy the same resources and would often be better off sticking with ETFs.
Today, we dive into one of the few ETF alternatives that we consider to be attractive for passive real estate investors, and that is the Hoya Capital Housing ETF (NYSEARCA:HOMZ). We like to call it: "The Housing ETF". It allows investors to gain low-cost, passive, liquid, and diversified exposure to one of the world's most important asset classes: housing.
Housing: The Most Important Asset Class
Germany is one of the richest and most successful countries in the world with high income per capita and good standards of living.
Yet, the net wealth of German households is one of the worst in Europe. According to the European Center Bank, Germans are some of the poorest people in Europe - ranking even worse than the troubled nations of Greece, Italy and Spain.
How is that possible?
Most Germans don't buy their homes; they rent. They are missing out on the power of housing to create and preserve wealth:
Although the data is old here, the takeaway remains the same: the homeownership rate is way lower in Germany than in most other countries.
If this factor alone has such a massive impact on the net wealth of a nation's citizens, why aren't we making it a greater priority to become homeowners? Owning a home is no sure path to riches, but it has many economic advantages over renting:
- Inflation protection
- Forced saving
- Tax benefits
Becoming a homeowner is not however feasible to everyone. Perhaps you live in Silicon Valley and even old small houses sell for millions. Or you cannot get financing for a reason or another. Or you prefer the flexibility of not being tied down to one place.
Whatever the reason, there is a solution for you: invest in HOMZ to enjoy the strong economic benefits of a homeownership with the added benefits of diversification and liquidity. This is not however only an ETF for renters. Homeowners will also see a lot of value in HOMZ by allowing them to diversify their housing exposure. Think about it for a second: there is no other asset class in which investors are willing to put all their eggs in one basket. Why should housing be any different?
HOMZ - The Diversified Housing Powerhouse
HOMZ invests in 100 companies that collectively represent the performance of the US housing industry.
As such, by investing in HOMZ:
- Renters can hedge the risk of rising housing cost, and
- homeowners can diversify their housing exposure.
Four Reasons Why We Like "The Housing ETF"
#1 - Diversified Exposure at a Low Cost
The investment holdings of HOMZ are designed to track the total spending on housing, but also housing-related services. It gives investors broad exposure to all major segments of the housing market including the following categories:
Source: Hoya Capital Index Innovations
We like the diversification here as one single ETF allows investors to gain exposure to 100 companies, owning more than a million homes, and various other housing-related businesses.
Famous examples include large residential REITs, including AvalonBay (AVB) and Equity Residential (EQR); home improvement companies Home Depot (HD) and Lowe's (LOW); and even proptech companies such as Zillow (Z) and Redfin (RDFN).
Source: Hoya Capital Index Innovations
This diversified exposure is afforded at a low cost of just 45 basis points, which is even lower than closest peer iShares Residential Real Estate Capped ETF (REZ) at 48 bp and right there with iShares U.S. Home Construction ETF (ITB) at 43 bp.
For a small ETF that is so specialized and innovative, I believe that the fee structure is particularly attractive to investors:
HOMZ REZ ITB Fees 0.45% 0.47% 0.43%
#2 - High Exposure to Apartment REITs
The relentless rise of housing cost and changing consumer behavior has resulted in an ever-larger pool of renters - which in turn is very bullish for Apartment REITs.
Over the past decades, Apartment REITs have significantly outperformed the market, and we do not expect this to change in the future:
Cap rates on new acquisitions have come down, but so have interest rates, and NOI growth remains very healthy in desirable locations. With growing demand for well-located properties, we expect rental apartments to enjoy strong pricing power and continue generating attractive returns far into the future.
#3 - Catalyst: Deferred Home Improvement
The average age of single-family houses in the US is reaching 40 years; the oldest age on record.
HOMZ holds a large ~20% allocation in home improvement companies which we expect to serve as catalyst going forward. A lot of deferred improvement has built up over the years, and as older houses need more frequent and larger repairs, home improvement stocks and builders are set to profit.
#4 - Attractive Yield, Growth, Value Combination
Investment performance is a function of three main factors:
- Income
- Growth
- And Value
In the case of HOMZ, the underlying portfolio compares particularly well to the broader market with:
- Higher dividend yield
- Higher growth in sales
- Lower forward price to earnings multiple
Attributes HOMZ S&P 500 TTM Dividend Yield 2.7% 1.8% Sales Growth 10.1% 6.7% P/E (Forward) 16.4 18
Bottom Line
At High Yield Landlord, we recognize that active investing is not for everyone and HOMZ is one of the few ETFs in which we see great appeal, especially for investors looking to gain passive and well-diversified exposure to the housing sector.
HOMZ was by far the best-performing real estate ETF over the past month:
With a well-diversified portfolio, strong catalysts for further capital appreciation, and low-cost management, we are confident that HOMZ is poised to provide attractive risk-adjusted returns to patient investors in the long run.
- If you are a renter, buy HOMZ to hedge the risk of rising housing cost.
- If you are a homeowner, buy HOMZ to diversify your housing exposure.
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