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It's A Merry Christmas for Homebuilder ETFs

Zacks Equity Research

This year, Santa has a couple of exciting gifts for the homebuilders. Most of the homebuilding stocks and related ETFs are surging, easily outpacing the broad market in the process. Let’s see what gifts Santa has brought for this sector.
Here are the Gifts….
First, the Federal Reserve committed to keep the interest rate at lower levels for some time despite its plan to curtail the ongoing stimulus program by $10 billion beginning next month. Low interest rates will continue to encourage buyers to purchase more homes and keep the mortgage rates at attractive levels, driving the space higher (read: Fed Tapers Bond Purchases: 3 ETFs in Focus on the News). 
Second, the streak of upbeat data is fueling additional growth to the sector. New construction jumped 22.7% to an annualized rate of 1.09 million units in November, buoyed by higher single-family homes and apartments. This represents the highest jump in nearly six years and is well ahead of market expectations.
While building permits fell 3.1% in November to an annual rate of 1.01 million, it is above the market expectation of 990,000 and breached the one million mark for the second month in a row. Homebuilder confidence bounced back strongly in December, suggesting that the growing demand will overcome the rising mortgage rates seen in the past few months.
A gauge of homebuilder confidence, as indicated by the National Association of Home Builders/Wells Fargo housing market index, matched the eight year high, climbing to 58 in December from 54 in November. According to the latest data from Zillow, the value of homes in the U.S. is up 8% year over year at $25.7 trillion this year, representing another annual gain (see: all the Industrial ETFs here).
Finally, robust earnings for the fourth quarter of fiscal 2013 from homebuilders like Lennar (LEN) and Toll Brothers (TOL) ahead of Christmas are an added advantage for the sector. Both the companies outpaced the Zacks Consensus Estimate on top and bottom lines driven by strong volume and prices.
The housing market will continue to show strong growth in 2014 as improving job markets continue to lift demand for houses. Further, rising home prices and surging production would fuel strong growth approaching 2014. Thus, Santa Claus has brought good fortune to this sector and investors could ride this recent surge with any of the following ETFs (read: 3 Hot Sector ETFs for 2014):
SPDR S&P Homebuilders ETF (XHB)
The most popular choice in the homebuilding space, XHB follows the S&P Homebuilders Select Industry Index. The fund manages about $1.88 billion in asset base and trades in heavy volume of more than 5.7 million shares a day.
The ETF charges 35 bps in fees per year from investors. In total, the fund holds about 37 securities in its basket with none holding more than 3.60% of total assets.
The product focuses more on small cap securities with nearly 44% share, followed by 40% in mid-caps. The ETF provides a nice mix of sectors with homebuilding, building products, home furnishing retail and home furnishing making up for double-digit exposure. XHB gained 4.35% in the past five trading sessions and has a decent Zacks ETF Rank of 3 or ‘Hold’ with ‘Medium’ risk outlook.
iShares U.S. Home Construction ETF (ITB)
This fund provides pure play to the home construction sector by tracking the Dow Jones US Select Home Builders Index. It holds a small basket of 33 stocks and is heavily concentrated on the top 10 holdings with 63% of total assets (read: Taper Concerns Put Focus on Homebuilder ETFs).
The fund is skewed toward mid cap securities (57%) and charges 45 bps in fees and expenses. The product is rich with AUM of over $1.5 billion and average daily volume nearly 6.1 million shares. The ETF added over 5% over the past five days and has a Zacks ETF Rank of 2 or ‘Buy’ rating with ‘Medium’ risk outlook.
PowerShares Dynamic Building & Construction Fund (PKB)
This product follows the Dynamic Building & Construction Intellidex Index, holding 30 stocks in its basket. The fund has managed assets worth $97.2 million while sees light volume. Expense ratio came in at 0.63%. The product is a little bit concentrated on the top 10 firms at under 46% of total assets (read: 3 Homebuilder ETFs Leading the Pack this Earnings Season).
In terms of market cap, the ETF has a nice mixture of mid caps (42%), small caps (34%) and large caps (25%). The top three sectors include engineering and construction (23%), specialty retail (15%) and construction materials (13%). PKB surged over 4% in the past five days and has a decent Zacks ETF Rank of 3 or ‘Hold’ with ‘Medium’ risk outlook.
Bottom Line
The good tidings in the homebuilding sector ahead of Christmas are likely to continue in the New Year as well. The solid housing market recovery is sure to spread cheer not just in the sector, but also among investors heading into 2014.
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Read the analyst report on LEN

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