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Homebuilder ETFs in Focus on More Solid Data

Zacks Equity Research

After years of turmoil from 2007 to 2009, the housing market is showing huge recovery, with tremendous upside potential going forward. In fact, 2012 proved to be a strong year for the market attributable to improving housing and job data.

This upward trend is continuing in 2013 as well, topping the highest levels witnessed before the subprime crisis (read: Homebuilder ETFs: Can the Rally Continue?). As such, the homebuilder ETFs, which recovered almost 50% in 2012, have been among the top performers this year as well.

Housing Data & Outlook

Recent existing home sales hit the highest level since November 2009 though data showed that seasonally adjusted annual rates were shy of five million. Total supplies was below the year-ago figure at 5.2 months, down by 1.4 months.

This suggests that supplies are increasingly tight in the market and that prices may begin to rise across the space. In fact, median prices increased 8.3% from March, bringing the year-over-year rate to just under 11%, the best since 2008 (read: Real Estate ETFs--Real Winners in 2013?).

It should also be noted that the inventory of foreclosed homes and short sales are declining, thus stabilizing the prices of new homes. Additionally, many buyers are selecting larger and more upscale homes with energy-efficient features, which are increasing the average sales price.

Good news was further confirmed by new home sales data that rose 2.3% in April to a seasonally adjusted annual rate of 454,000. This marks the second-highest sales post-recession figure buoyed by pent-up demand, low interest rates and tight inventories.

Further, the mortgage interest rates, which are currently hovering near record lows, and building permits, which rose to the highest level in nearly five years, suggest a robust future for the housing sector. Also, an improving labor market and rising consumer confidence are adding bullishness into the sector (read: The Best ETFs for the Housing Recovery?).

How to Play

Clearly, the housing sector is performing well and is outpacing the broad markets by a wide margin. A broad look at the space could help in erasing some company specific risks, and reduce volatility. In order to do this, investors currently have two solid ETF options, which we have highlighted in detail below (see more in the Zacks ETF Center):

SPDR S&P Homebuilders ETF (XHB)

Launched in January 2006, this fund follows the S&P Homebuilders Select Industry Index, providing equal weight exposure to 37 companies. Volume on this ETF is really good, coming in just under six million shares a day. The expense ratio is also quite solid at 35 basis points a year.

Despite these features of high volume and low expenses, investors should note that it isn’t a ‘pure play’ on homebuilders. Instead, the ETF has just 28.59% of its portfolio in homebuilders while the rest is spread across building products, home furnishing retail, home improvement retail and household appliances (read: 2 Forgotten REIT ETFs to Buy Now).

For individual securities, the ETF is heavily skewed towards small and mid caps, as large cap firms make up only 14% of assets. And, due to the equal weight nature of the fund, no single company dominates the holdings profile, as each security makes up for less than 4.09% of assets.

In terms of performance, the ETF added more than 19% in the year-to-date timeframe. The product amassed over $2.9 million in its asset base so far in the year, making it the most popular fund in the segment. Currently, XHB has a Zacks ETF Rank of #3 or Hold rating with a medium risk outlook.

iShares Dow Jones US Home Construction ETF (ITB)

This ETF tracks the Dow Jones US Select Home Builders Index, providing concentrated exposure to about 29 companies. The fund has a huge volume of about 4 million shares a day and charges investors 45 basis points a year in fees. It has attracted over $2.5 billion in AUM since its launch in May 2006.

For investors seeking direct exposure to U.S. homebuilding companies, ITB represents an excellent option. Unlike its XHB counterpart, the fund is almost entirely focused on the actual builders of homes, as these constitute about two-thirds of the exposure. Beyond that, specialty retail makes up another 10% while building materials account for another 8%.

In terms of individual stocks, most fall into the mid cap category, with small caps taking up about 30%, leaving large caps with just 11% of assets. The product is highly concentrated in its top 10 holdings with 63.49% of assets, suggesting larger company-specific risk. The top three holdings – Pulte Homes (PHM), Dr Horton (DHI) and Lennar (LEN) – collectively account for nearly 30% of ITB.

ITB gained 20.56% so far in 2013 and has a Zacks ETF Rank of #1 or Strong Buy rating with a medium risk outlook (read: Top Zacks Ranked Construction ETF- ITB).

Bottom Line

Upbeat housing data led to a rally in homebuilder ETFs, continuing their remarkable run. These have run up quite a bit in the past few months, but these solid trends are likely to continue, suggesting more gains ahead for these two ETFs given the bullish trends that are going strong in the housing market.


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