Another encouraging data point is helping home builder ETFs erase some of their second-quarter losses. The SPDR S&P Homebuilders ETF (XHB) and the iShares Dow Jones US Home Construction Index Fund (ITB) are each up 2.4% Thursday after the National Association of Realtors said its pending home sales index jumped 6.7% to 112.3 last month. Signed contracts are up 12.1% in the past year.
If XHB holds steady for the rest of Thursday’s session, the ETF will knock its second-quarter loss down to about 1.1%, giving the fund a chance at closing the quarter in the green. ITB needs more help. Even if that fund, which is more heavily allocated to home builder stocks than XHB, closes with a 3% gain on Thursday it will need to jump 4.5% Friday to finish flat for the quarter.
Still, investors that are bullish on home builder stocks will take Thursday’s gains. After being two of top-performing non-leveraged sector ETFs for over a year, ITB and XHB have fallen on hard times over the past month as rising interest rates have push mortgage rates higher. Zillow on Tuesday reported that 30-year fixed mortgage rates surged 50 basis points in the latest week to 4.38%. [Rising Mortgage Rates Could Raze Home Builder ETFs]
A rosy assessment of rising mortgage rates says that those higher rates will push undecided buyers off the proverbial fence and into buying home before rates rise even more. The other side of that coin is that 30-year mortgage rates at 4.5% could price many would-be buyers out of the market.
That would make ITB the more vulnerable of the two home builder ETFs because eight of its top-10 holdings are pure play home builders. ITB’s top-10 holdings represent nearly 63% of the ETF’s weight, according to iShares data.
XHB, as the past month indicates, is by no means immune to rising mortgage rates. However, the $2.4 billion ETF is less levered to home builders. Rather, XHB combines home builder exposure with substantial allocations to housing retail plays such as Home Depot (HD), Williams-Sonoma (WSM) and Bed Bath & Beyond (BBBY).
SPDR S&P Homebuilders ETF
ETF Trends editorial team contributed to this article. Tom Lydon’s clients own shares of XHB.
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