Mark Twain once said "climate is what we expect, but weather is what we get." In much the same vein, unwitting investors who are looking to capitalize on a timely theme may be in for a surprise when looking to tap into the housing recovery.
"In ETFs, a lot of it is all about the name," Lutz says, before highlighting that the top holding in the home builders ETF is currently mattress maker Select Comfort (SCSS).
"This [the XHB] is really a home consumer ETF," he says, pointing out that other names like Pier 1 Imports (PIR) and Williams-Sonoma (WSM) also make the list, which includes such names as carpet-maker Mohawk Industries (MHK), retailer Home Depot (HD), and air conditioning giant Lennox International (LII).
At the same time, Lutz says the XHB's rival, the ishares Home Construction ETF (ITB), is really a pure play on builders. Yahoo! Finance data shows the top five holdings include Pulte (PHM), Lennar (LEN), DR Horton (DHI), Toll Brothers (TOL) and NVR Inc. (NVR) and account for 45% of the assets.
Branding aside, Lutz actually does like the builders here, and thinks recent comments by hedge fund honcho John Paulson suggesting investors should buy a house right now should be listened to.
"The trade that (Paulson) has absolutely nailed over the last five years is the homebuilder trade and the housing trade," Lutz says, acknowledging that Paulson's terrible gold trade has eclipsed his career-making real estate call. "As long as we continue to see rates dropping lower these homebuilders have a tremendous amount of tailwind to them, especially as this economy picks up."
As such, he's recommending a pair-trade of going short the XHB and going long the ITB, as long as rates stay contained.
"The biggest risk for the entire sector, whether it's single-family or multi-family, is if we continue to have a spike higher in rates."
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