Playing the rebound in housing with ETFs involves two broad approaches, according to IndexUniverse ETF analyst Paul Baiocchi—homebuilders and real estate investment trusts—and each approach is imperfect but each offers unique rewards for investors.
However, that rebound in housing is increasingly real, as the S'P Case/Shiller Home Price Index is making perfectly clear. The index has been rising for the better part of a year, and the latest report showed the sharpest increases in price since 2006 .
At the top of the list are equity funds that focus on homebuilders themselves such as the $2.5 billion iShares Dow Jones U.S. Home Construction Index Fund (ITB) and the $2.9 billion SPDR S'P Homebuilders ETF (XHB), Baiocchi said on a CNBC "Fast Funds" segment this week.
"In our opinion, ITB is the better choice. It's a cap-weighted portfolio, so you get the biggest exposure to the biggest homebuilders—62 percent of the portfolio is in homebuilders," Baiocchi said. He notes that XHB is equal weighted, which dilutes exposure to homebuilders, and moreover, the ETF also owns companies like Bed, Bath ' Beyond and La-Z-Boy that don't really belong in a homebuilders portfolio.
Baiocchi also cautioned investors looking to get a piece of improving residential home prices via REITs from rushing to the Vanguard REIT ETF (VNQ), saying that while there's nothing wrong with the $19.7 billion fund, its portfolio only has 17 percent exposure to REITs focused on residential real estate.
"The only ETF that will really get you targeted exposure to really profit off this real estate/housing boom as it relates to residential real estate is REZ," Baiocchi said, referring to the iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ), noting REZ's exposure to residential REITs is about 44-45 percent.
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