What Is the PHLX Housing Sector Index (HGX)

The Philadelphia Stock Exchange (PHLX) Housing Sector Index (HGX) tracks several dozen housing development companies working directly in the U.S. construction market. Companies in the building and prefabrication of residential homes, mortgage insurers, and suppliers of building materials make up the index. The index trades on the Nasdaq.

Key Takeaways

  • The Philadelphia Stock Exchange Housing Sector Index (HGX) tracks housing development companies in the U.S. construction market.
  • Created in January 2002, it began trading in July of the same year with an initial value of 250.
  • The index, which trades on the Nasdaq, uses two methods to calculate its value: The price return index and the total return index.
  • The top underlying components include Armstrong World Industries, M.D.C. Holdings, and Weyerhaeuser Company, among others.
  • Recalculation of the index occurs throughout the trading day, and its value updates every second. The index is rebalanced every quarter.

Understanding the PHLX Housing Sector Index (HGX)

The Creation of the HGX came in January of 2002 and trading began on July 17 of the same year. The initial value of HGX was 250. In February of 2006, the HGX experienced a 2-for-1 split. When comparing the current value of the index to its initial base value, investors must consider this split. Further, at the market's closing on June 30, 2011, the total return index (XHGX) was synchronized to match the value of the price return index (HGX).

Historically, if home prices are on the climb, builders sign more construction contracts. This increase in contracts results in increased revenue for home builders and a spike in their portion of the index. Theoretically, rises in home building numbers should also lift the index into higher territory.

Factors that affect the housing market, such as changes in lumber prices, often lead to corresponding changes in the index.

The Philadelphia Stock Exchange (PHLX) Housing Sector Index (HGX) uses two methods to calculate its value. These two methods are the price return index (Nasdaq: HGX) and the total return index (Nasdaq: XHGX). The calculation of the price return index does not include the value of cash dividends on Index Securities. Conversely, the total return index consists of the reinvestment of cash dividends, on the ex-dates, in its figures.

Underlying Components of the PHLX Housing Sector Index (HGX)

The Nasdaq lists many requirements for the structure of the PHLX HGX. The index is a modified market capitalization weighted index. Weighting indicates the underlying components have adjustments based on the total value of all outstanding shares of that company. As the value of the outstanding shares changes due to daily market activity, the weighting of that element in the index will also change.

Recalculation of the index occurs throughout the trading day, and its value updates every second. In the case where an underlying component should halt trading on its listed market, the index will use the "last safe price" for the security in its calculations. Further, no one stock will have more than a 15% weight, and the index will rebalance each quarter.

Some of the top underlying components of the PHLX Housing Sector Index, along with the trading ticker symbol of each company, are:

  1. Armstrong World Industries (AWI)
  2. Vulcan Materials Company (VMC)
  3. Weyerhaeuser Company (WY)
  4. PennyMac Financial Services, Inc. (PFSI)
  5. M.D.C. Holdings, Inc. (M.D.C)
  6. Lennox International Inc. (LIL) 
  7. LGI Homes, Inc. (LGIH)
  8. Mueller Water Products, Inc. (MWA)
  9. M/I Homes, Inc. (MHO)
  10. D.R. Horton, Inc. (DHI)

Real-World Example

Many events impact the value of the Philadelphia Stock Exchange (PHLX) Housing Sector Index (HGX). Perhaps none more than changes in the interest rate. As an example, the Federal Reserve initiated three interest rate hikes throughout 2018 and projected several more hikes throughout 2019.

This higher-rate campaign pushed 30-year mortgage rates to multi-year highs. Consequently, new home sales nosedived, falling for two consecutive months in June and July, which are traditionally strong months for home sales. 2018 was a rough year for housing sector investors, as the HGX dropped a whopping 42% from its January highs, by the end of the year.

Amidst the COVID-19 pandemic in 2020, the index saw a boom as the housing market picked up after a long period of decline. The price of the index in the summer of 2021 was higher than the price before the pandemic began in March 2020.