It had been a pretty rough stretch for homebuilder stocks over the past few weeks, as a number of concerns were beginning to build over the space. These worries included overbought conditions, fewer sales due to higher rates, and uncertain earnings, all of which led to losses in the segment.
In fact, after the horrendous past few weeks, many homebuilders are now down YTD, a pretty incredible statement given the broadly positive trends in the housing market as of late. This is even more depressing when one considers the solid performance of the space in 2012, as many homebuilders added more than 50% in the time frame, suggesting to many that the space has topped out for the time being.
Enter the Fed
This could be especially true if rates continue to rise and threaten the housing recovery. We have already begun to see some evidence of this in weeks past, though its impact has been muted at best (read Protect Against Rising Rates with Floating Rate ETFs).
The trend towards higher rates was largely expected to continue, at least given some recent data points on the jobs and GDP front, though the latest Federal Reserve meeting may have thrown a wrench into this theory. In this meeting, Ben Bernanke and company reduced their assessment of the U.S. economic growth picture from ‘moderate’ growth to ‘modest’ growth.
While this may seem like a very minor distinction, it was enough to move markets and push stock prices higher. This is because the slight downgrade is viewed as extra caution from the Fed and a possible signal that bond purchases may not be slowing down as soon as many investors may have thought (see the Best ETFs in the Market’s Top Sector).
With more stimulus staying in the markets, bond yields may have trouble breaking above the 2.75% mark, while stocks could be supported in the near term. While this helped stocks across the board, it was particularly important for the beleaguered homebuilder industry as these were among the biggest winners from the news.
These securities were starting to really feel the pain from the rising rates and the possible impact this was going to have on home purchases. But now, with the prospect of a longer period of stimulus, home sales and interest in the real estate market may stay firm, causing many investors to jump back into the space.
While there are a number of ways to play this trend in stock form, an ETF approach could also be an excellent idea. These funds offer broad exposure to the space and were heavily impacted by the news. Below, we briefly highlight the two main choices for this space and how their performed after this bullish news release:
SPDR S&P Homebuilders ETF (XHB)
This ETF tracks the S&P Homebuilders Select Industry Index, following about three dozen companies in the broad homebuilders space. The product charges investors 35 basis points a year in fees, while volume comes in well above six million shares a day on average.
The ETF uses an equal weight methodology for its exposure, so no single security dominates the portfolio. In fact, no single firm makes up more than 4% of assets, suggesting a well diversified portfolio (read Homebuilder ETFs: Can the Rally Continue?).
However, it is worth noting that the ETF, despite its name, isn’t exclusive to homebuilders, holding just 25% in that segment. Instead, building products (26%), home furnishing retail (17.8%), and home furnishing (12.6%) companies comprise to form the bulk of the fund.
The ETF is flat over the past month, though it added a little over 1.4% in the Wednesday session.
iShares U.S. Home Construction ETF (ITB)
This fund follows the Dow Jones US Select Home Builders Index, following about three dozen firms in the home builders market. The product is a bit pricier than its counterpart, charging 45 basis points a year in fees, though volume is still excellent at over one million shares a day.
This product doesn’t use an equal weight strategy though, as the fund weights by market cap. This leaves some level of concentration—60% in the top ten holdings—including +8% weights to four companies.
The fund is much more concentrated than its competitor though, as over 60% of the holdings are in the home construction segment. The remainder goes to building materials, home improvement and furnishings, suggesting a more focused portfolio.
ITB has lost about 2.9% in the past 10 day trading period, but in Wednesday trading the fund surged, adding about 2.1%.
Concerns were building that the run for homebuilders was over. Rates were beginning to rise while demand for homebuilder stocks was beginning to fizzle out (see 3 Sector ETFs to Profit from Rising Rates).
However, Bernanke has arguably injected new life into the market with the latest economic growth projection. With QE likely to remain intact for a bit longer, homebuilders may now have a bit more room to run, suggesting that either XHB or ITB could be solid picks for at least a while, so long as monetary policy remains extremely accommodative and rates remain at tolerable levels for home buyers.
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