Why Building Products ETFs Are Gaining Traction as Construction Boom Extends

The U.S. construction sector is firing on all cylinders heading into the latter part of 2023. After eight straight months of growth, construction spending jumped another 0.5% in August, translating to a year-over-year surge of 7.4%—a solid performance given the persistent headwinds from inflation and elevated borrowing costs. This momentum is attracting investor attention toward building products ETFs and construction-focused funds.

Residential Construction: Single-Family Housing Takes the Lead

The residential construction space is humming along nicely, with single-family housing emerging as the main growth engine. After grappling with a severe inventory shortage, this segment has staged a impressive comeback, pushing residential construction outlays up 0.6% in August for the fourth consecutive month of gains.

Multifamily construction, by contrast, is cooling as developers work through a pipeline of apartment units scheduled for completion over the next few years. This divergence between single-family strength and multifamily moderation is reshaping where builders and investors should be focusing their capital.

Nonresidential: Manufacturing and Infrastructure Lead the Charge

The nonresidential construction story is equally compelling. Outlays have climbed for 15 straight months, gaining 0.4% in August. The real drivers here? Manufacturing projects and infrastructure initiatives are pulling the weight. Private developers are plowing money into lodging and manufacturing facilities, though retail and warehouse construction remains under pressure. Public spending is accelerating faster, with three-quarters of August’s monthly bump coming from conservation efforts and infrastructure investments in power, transportation, and highway projects.

Material Costs Provide a Tailwind

Builders are catching a break on costs. The Producer Price Index for construction materials dipped 0.2% year-over-year in August, providing relief from the cost pressures that plagued the sector earlier in the cycle. This pricing stability supports margin expansion for construction companies and makes their valuations more attractive.

Four Building Products ETFs to Consider

Given this constructive backdrop for the sector, several building products ETF options merit attention:

SPDR S&P Homebuilders ETF (XHB) tracks homebuilding companies within the S&P Total Markets Index with a 35 basis point expense ratio. The fund maintains diversification with no single holding exceeding 4.16% of assets.

iShares U.S. Home Construction ETF (ITB) follows the Dow Jones U.S. Select Home Builders Index, employing a market-cap weighted approach. With a 40 bps fee, it offers pure-play exposure to the home construction sector.

Invesco Building & Construction ETF (PKB) casts a wider net across the entire building and construction industry using a rules-based methodology that emphasizes growth metrics, valuations, and timing factors. The 57 bps fee reflects its active approach, with no single stock exceeding 5.26% of the portfolio.

iShares U.S. Infrastructure ETF (IFRA) provides broader exposure to companies benefiting from infrastructure spending, carrying the lowest fees at 30 bps. Maximum single-position concentration is just 0.91%, ensuring a well-diversified holding.

The construction sector’s resilience and the tailwind from infrastructure investments and housing demand create compelling opportunities for building products ETF investors to gain exposure to this cyclical strength.