HOMZ: A Low-Yielding Micro-Cap Real Estate Fund

~ by Snehasish Chaudhuri, MBA (Finance)

ETF Series Solutions - Hoya Capital Housing ETF (NYSEARCA:HOMZ) is an exchange traded fund that invests in stocks of companies operating across housing industry business that goes beyond real estate operations, home building and construction. This fund also invests in companies engaged in the business of home improvement and furnishings, housing finance, residential REITs, renting operations, technology & services in the housing sector, etc. HOMZ has a small asset base of $37 million, but relatively low expense ratio of 0.3 percent, which works to its advantage. 0.3 percent may not seem very low, but considering the size of this micro-cap fund, it can be said to be low enough. A very high expense ratio could have been detrimental to this ETF.

HOMZ Offered Low Payout, But Generated Strong Price Growth Over Years

Hoya Capital Housing ETF was launched by ETF Series Solutions. The fund is co-managed by Hoya Capital Real Estate, LLC and Penserra Capital Management LLC. Normally, at least 80 percent of its net assets are invested in real estate and housing-related companies. HOMZ uses full replication techniques to create its portfolio which is based on the Hoya Capital Housing 100 Index. This implies HOMZ invests in all of the component securities of the benchmark index in approximately the same proportion of that of the index. Hoya Capital Housing 100 Index is composed of 100 companies which collectively represent the performance of the U.S. residential housing industry. Interestingly more than 46 percent of these companies are mid-cap stocks, and another 40 percent is invested in small-cap equities in the US markets.

Hoya Capital Housing ETF was formed on March 19, 2019 and has been paying monthly dividends since then. The fund generates a low yield around 2 percent, and its annual average total return has been highly uncertain. In 2022, the return stood at negative 28 percent while the year-to-date return in 2023 has been only 4 percent. However, during 2020 and 2021, the fund generated an annual average total return of 33.4 percent. over the long run. Total return is primarily driven by HOMZ's price growth in the stock market, which again is dependent upon the price performance of its top investments. As HOMZ's top 25 investments comprise almost half of its entire portfolio, the performance of these stocks decides the fate of HOMZ's investors to a large extent.

Price Performance of Top REIT Investments of Hoya Capital Housing ETF

Notable investments in REITs included major healthcare facilities providers like Ventas, Inc. (VTR) and Welltower Inc. (WELL); one among the top three owners and operators of self-storage properties CubeSmart (CUBE); and a bunch of residential REITs such as Essex Property Trust, Inc. (ESS), Equity LifeStyle Properties, Inc. (ELS), UDR, Inc. (UDR), Sun Communities, Inc. (SUI), Independence Realty Trust, Inc. (IRT), Apartment Income REIT Corp. (AIRC), AvalonBay Communities, Inc. (AVB), American Homes 4 Rent (AMH), Mid-America Apartment Communities, Inc. (MAA), and NexPoint Residential Trust, Inc. (NXRT). Like the broader market, REITs also had a very poor 2022.

However, the past three months have been encouraging, as all these stocks generated positive price growth. Moreover, VTR, WELL, CUBE, ELS, SUI, IRT, AMH, MAA, NXRT - all these nine stocks had double-digit price growth. Barring healthcare REITs, VTR, and WELL, the other seven stocks also had recorded a price growth in excess of 6 percent CAGR over the less than four years of HOMZ's existence. Healthcare REITs, as we all know, had suffered immensely due to the outbreak of Covid-19 pandemic and were excessively volatile.

Although Covid-19 pandemic benefitted healthcare stocks, the lack of occupancy and enhancement of rates in case of healthcare REITs didn't help them. Other REIT stocks, mostly belonging to the residential real estate sector, had an average growth. Lack of investments in office REITs, retail REITs and hospitality REITs, surely have benefitted this fund during the time of pandemic and economic slowdown thereafter, as those were the real estate segments that suffered the most from lack of economic activities.

Price Performance of Top Investments in Homebuilders & Home Furnishings

Top 25 investments of Hoya Capital Housing ETF also included home improvement retailers such as Lowe's Companies, Inc. (LOW), The Home Depot, Inc. (HD); and a bunch of homebuilders such as Meritage Homes Corporation (MTH), Toll Brothers, Inc. (TOL), PulteGroup, Inc. (PHM), Taylor Morrison Home Corporation (TMHC), KB Home (KBH), Lennar Corporation (LEN), M.D.C. Holdings, Inc. (MDC), D.R. Horton, Inc. (DHI), and NVR, Inc. (NVR). As the US economy is recovering and the REITs have started registering strong price growth, these homebuilders are also expected to follow the same trend. Surprisingly, all these 12 stocks of homebuilders and home furnishing firms had a double-digit price growth during the past three months. Over less than four years of HOMZ's existence, all these stocks grew at a CAGR in excess of 10 percent.

Homebuilders are primarily engaged in the business of developing homes and selling them to customers. On the other hand, real estate investment trusts are primarily engaged in owning, operating, financing, and renting real estate properties to different types of customers. In general, REITs have the potential of offering higher-than-average payouts and generating a higher price growth. On the flip side, REITs are relatively more sensitive to interest rate fluctuations. HOMZ's diversification over a broad spectrum of real estate related stocks, that goes beyond the REITs, surely has been helpful for this fund. Even when the REITs were not performing well, returns from other stocks enabled HOMZ to register a price growth on a consistent basis. HOMZ recorded a price growth of 18.4 percent over the past 3 months, and 10 percent CAGR since its inception 47 months back.

Impact of Recent Banking Crisis And SVB Fallout in Various REIT Sub-Sectors

2022 was a very poor year for the real estate sector as well as the REITs. In 2023, although this sector made significant improvement, still the YTD growth has been negative. Real Estate Select Sector SPDR ETF lost 2 percent in 2023. Office REITs continued to decline in value, having lost 21.73 percent in 2023. Mortgage REIT and retail REIT sub-sectors also generated losses within a range of 8 to 11 percent. On the contrary, industrial REIT, data center REIT and self-storage REIT sub-sectors recorded positive growth on YTD basis. During this period, self-storage REITs recorded a growth of 9.3 percent, which is exceptionally high when compared to 2 percent growth generated by S&P 500 and negative 3.17 percent growth generated by FTSE Nareit All Equity REITs.

Difficult market conditions and the ongoing banking crisis have made the recovery in Office REITs much more difficult. However, office REIT is the only sub-sector that had direct exposure to Silicon Valley Bank. Ripples of SVB's bankruptcy are unlikely to impact the overall real estate sector. On the contrary, this crisis may turn beneficial for the real estate sector, as the Federal Reserve may chalk out policies that will stabilize the interest rates. So, we can assume Hoya Capital Housing ETF to be hardly impacted by the recent financial crisis. Moreover, despite HOMZ being named as a housing ETF, only 37.7 percent of its assets are invested in stocks of the real estate sector. Remaining assets are invested in housing-related companies, mostly belonging to Consumer Cyclical, industrial, and financial sectors.

Investment Thesis

Hoya Capital Housing ETF invests in stocks of companies operating across housing industry business that includes home building and construction, home improvement & furnishings, residential REITs, renting operations, housing finance, technology & services in the housing sector, etc. The fund generates a low yield of 2 percent, but a strong annual average total return over the long run. On the back of strong price performance of HOMZ's top investments, the fund also registered strong price growth both in the short term and in the long term. As the US economy is recovering, it will keep on providing stimulus to the REITs and homebuilders, and thus, the component stocks of Hoya Capital Housing 100 Index possess a high growth potential in the coming years. HOMZ is currently trading at $36.7, at a marginal 0.3 percent discount to its Net asset value.

Hoya Capital Housing ETF invests in 100 stocks, 86 percent of which are mid-cap and small-cap equities. This makes this fund a little risky, but HOMZ's relatively low expense ratio works to its advantage. Moreover, HOMZ's diversification over a broad spectrum of real estate related stocks, makes this fund less risky, because even if REITs fail to perform when the economy slows down, there is a high chance of those home furnishing and related stocks to generate growth. However, low yield and lack of large-cap stocks in HOMZ's portfolio are likely to discourage income-seeking investors. But at the same time, price growth of its top equity investments both in REITs and homebuilding companies, as well as HOMZ's ability to generate high average total return may encourage long-term growth-seeking investors.

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