Where Should Construction Investors Look? Four ETFs Capturing Industry Momentum

The U.S. construction sector has shown impressive durability through 2023, defying broader economic pressures that once seemed threatening. Building activity continues to expand robustly, driven by sustained demand across residential and nonresidential segments. August figures tell the story: construction spending jumped 0.5% month-over-month, extending an eight-month winning streak, while year-over-year growth reached 7.4%—solid performance considering elevated inflation and interest rate environments.

What’s fueling this strength? Builders are benefiting from easing material cost pressures. The Producer Price Index for construction materials and components actually declined 0.2% year-over-year through August, providing some relief on input costs. For investors seeking exposure to this momentum, several construction-focused ETFs merit attention: SPDR S&P Homebuilders ETF (XHB), iShares U.S. Home Construction ETF (ITB), Invesco Building & Construction ETF (PKB), and iShares U.S. Infrastructure ETF (IFRA).

Single-Family Housing: The Residential Story

Residential construction has emerged as the primary growth engine. The single-family housing segment—which faced inventory constraints for years—has suddenly accelerated. This category’s activity surge drove residential construction spending higher for the fourth consecutive month in August, increasing 0.6%. By contrast, multifamily development is moderating as numerous apartment projects approach completion, suggesting a natural normalization in that subsector.

Manufacturing and Infrastructure Push Nonresidential Forward

The nonresidential construction picture looks equally encouraging. Total nonresidential outlays have expanded for 15 straight months, rising 0.4% in August. Behind this consistency lie two key drivers: private manufacturing investment showing robust momentum, complemented by strategic public infrastructure spending. On the private side, lodging and manufacturing projects performed strongly, though retail and warehouse spending pulled back slightly. Public investment surged in conservation efforts and critical infrastructure—particularly power generation, highway expansion, and transportation networks—with these categories accounting for three-quarters of the month’s public nonresidential gain.

Four ETF Plays Worth Considering

SPDR S&P Homebuilders ETF (XHB) Tracks the S&P Homebuilders Select Industry Index with well-balanced diversification (no single stock exceeds 4.16% weighting). Charges 35 basis points annually. Provides pure-play exposure to the homebuilding subsector within broader equity markets.

iShares U.S. Home Construction ETF (ITB) Built on the Dow Jones U.S. Select Home Builders Index using market-cap weighting and free-float adjustment. Measures dedicated home construction sector performance. Fee structure: 40 basis points. Offers a complementary approach to XHB with different index methodology.

Invesco Building & Construction ETF (PKB) Employs the Dynamic Building & Construction Intellidex Index, which evaluates companies across multiple criteria—fundamental growth, valuation, timing, and risk assessment. Stock concentration capped at 5.26%. Annual fees: 57 basis points. Best suited for investors seeking broader building and construction exposure beyond homebuilders alone.

iShares U.S. Infrastructure ETF (IFRA) Comprises the NYSE FactSet U.S. Infrastructure Index, capturing companies with infrastructure exposure benefiting from domestic activity expansion. Most diversified holding pattern (no stock exceeds 0.91%). Lowest cost option at 30 basis points annually. Captures the infrastructure investment theme embedded in public spending initiatives.

The Bottom Line

Construction sector strength appears sustainable, supported by residential demand recovery and infrastructure-driven public investment. Building materials price stability removes a key headwind. Investors considering sector participation should evaluate these ETF options based on their specific exposure preferences—pure homebuilding plays (XHB, ITB), broader construction exposure (PKB), or infrastructure-focused allocation (IFRA)—each offering different cost structures and concentration profiles to match various risk tolerances.