Homebuilder ETFs Lead the Market Higher


Despite concerns over Treasury bond demand and the volatile trading in the Japanese stock market, stocks managed to rise broadly in Thursday trading. Major benchmarks rose more than 1.2%, with the broad S&P 500 adding close to 1.5% on the day.

A big reason for this move higher was thanks to more solid data on the consumer front. Jobless claims came in better-than-expected, while retail sales also were ahead of expectations, suggesting that the American market is still holding up quite strong even with increased global worries.

Big winners in the rally

This is especially apparent when investors consider trading in the homebuilder market during the session. The space surged nearly three times higher than the overall market—percentage wise—suggesting to many that the sector was leading the rally (also read Homebuilder ETFs in Focus on More Solid Data).

Homebuilders are somewhat of a surprising leader in the rally given how poorly the space has performed in the last month. The sector is down close to double digits in that time frame, as fears over higher rates and profit taking proved to be a lethal combination for the space.

Clearly, at least today, investors are putting these worries on the backburner, and buying homebuilders on the dip. Technical traders may have also played a role too, as major stocks and funds in the space are having significant trouble falling much lower than their current level, meaning that there might a new resistance level built in for the important sector.

How to play

For investors seeking to make a bet on a continued resurgence for the space, a single stock approach could be a way to go. However, a broader play on the segment can easily be accomplished with ETFs, and we have highlighted two of the most important in the segment below for those looking to bet on a continued bounce in the sector:

SPDR S&P Homebuilder ETF (XHB)

This is the most popular ETF targeting the space, following the S&P Homebuilders Select Industry Index. The fund has over 5.5 million shares of volume a day and it has assets under management above $2.6 billion (see Homebuilder ETFs: Can the Rally Continue).

The ETF utilizes an equal weight methodology so no single company dominates the fund’s risk return profile. Investors should also note that the ETF doesn’t focus purely on homebuilders and instead holds a number of household appliance companies and retailers in addition to its building material and homebuilder segments.

In terms of performance, the ETF added about 3.8% in Thursday trading, easily outpacing the market. This move also helps to put XHB firmly above ITB in the past six month time frame, as now XHB has added 19.8% compared to a gain of 15.8% for the S&P 500.

iShares Dow Jones US Home Construction ETF (ITB)

This ETF also gives investors exposure to the homebuilder space, targeting the Dow Jones US Select Home Builders Index. The fund is an extremely popular one as well, as 4.2 million shares move hands on a normal day, while the assets under management come in at $2.2 billion.

Unlike its counterpart, this ETF has a cap weighted strategy so there is some concentration in the biggest names in the industry. Additionally, the fund focuses much more heavily on homebuilders, meaning it might be more of a ‘pure play’ on the space, and thus a better choice for some (read Is XHB a Better Housing ETF Play?).

This turned out to be a winning approach for Thursday trading as the ETF added just under 4.2% for the day. The burst higher also allowed ITB to move ahead of SPY for the trailing six months, though it is now underperforming its counterpart with a 17.4% gain in the time period.

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Read the analyst report on XHB

Read the analyst report on ITB

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