How Building Materials ETFs Can Benefit From Construction Sector Growth

The U.S. construction sector has proven remarkably stable throughout 2023, maintaining momentum despite broader economic challenges. Building materials ETFs and construction-focused funds stand positioned to capture opportunities as the industry continues its upward trajectory. This resilience reflects multiple tailwinds, from steady material costs to robust demand across both residential and nonresidential projects, creating an attractive backdrop for investors seeking exposure to this cyclical sector.

Construction Spending Reaches New Heights in 2023

Total construction outlays expanded by 0.5% in August 2023, marking the eighth consecutive month of growth. On an annualized basis, this translated to a 7.4% year-over-year increase—a substantial performance given elevated inflation and interest rate environments. Notably, the Producer Price Index for building materials and components actually declined by 0.2% over the 12-month period ending in August, providing margin relief for builders and contractors. This favorable cost structure has made this an opportune time for investors to consider building materials ETF options like 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).

Residential Housing Market Accelerates Construction Investment

Single-family housing has emerged as a primary growth engine, with this segment boasting its fourth consecutive monthly increase in August 2023. Residential construction spending climbed 0.6% that month as inventory constraints lifted and demand remained steady. In contrast, multifamily construction has moderated somewhat, as substantial apartment unit deliveries are scheduled in the coming years. This divergence suggests that building materials ETF portfolios should closely track single-family developments, as this category will likely drive the majority of residential investment moving forward.

Infrastructure and Manufacturing Drive Nonresidential Growth

The nonresidential construction sector has maintained particularly strong momentum, with total outlays climbing for 15 consecutive months through August 2023, up 0.4% that month. Private sector projects in lodging and manufacturing have performed especially well, while retail and warehouse construction has cooled. On the public side, conservation initiatives and infrastructure investments—particularly in power, highway, street, and transportation projects—have generated substantial outlays. These infrastructure-related categories accounted for 75% of the monthly increase in public nonresidential spending, suggesting that building materials ETF exposure to infrastructure themes remains compelling.

Strategic Building Materials ETF Options for Construction Exposure

SPDR S&P Homebuilders ETF (XHB) This fund tracks the S&P Homebuilders Select Industry Index, focusing specifically on the homebuilding sub-industry. With a maximum single position of 4.16%, XHB offers diversified exposure. The fund charges 35 basis points annually, making it cost-effective for homebuilding-focused investors.

iShares U.S. Home Construction ETF (ITB) ITB follows the Dow Jones U.S. Select Home Builders Index, a market-cap weighted benchmark that captures the home construction sector’s performance. The underlying index maintains a free-float adjustment for accuracy. At 40 basis points in annual fees, ITB provides a balanced building materials ETF alternative for those seeking Dow Jones-indexed exposure.

Invesco Building & Construction ETF (PKB) PKB utilizes the Dynamic Building & Construction Intellidex Index, which incorporates fundamental growth metrics, valuation, timeliness, and risk evaluation. With a maximum position weight of 5.26%, PKB evaluates building companies across multiple criteria. The 57 basis point fee reflects its more actively-managed approach to stock selection compared to passive building materials ETF alternatives.

iShares U.S. Infrastructure ETF (IFRA) IFRA provides broad infrastructure exposure through the NYSE FactSet U.S. Infrastructure Index, capturing companies benefiting from domestic infrastructure activities. Its exceptionally low 30 basis point fee combined with a maximum single position of just 0.91% makes IFRA an excellent diversified building materials ETF for infrastructure-heavy portfolios.

Positioning for Continued Construction Growth

Building materials ETF investors should consider their specific exposure preferences. Those seeking pure-play homebuilding exposure might favor XHB or ITB, while investors wanting broader construction and infrastructure themes should explore PKB and IFRA. The sector’s demonstrated resilience, combined with favorable building material costs and robust nonresidential spending, suggests continued opportunities ahead for those positioned in construction-focused ETF strategies.