U.S. Markets closed

Shaky Foundations for Homebuilder ETFs

This article was originally published on ETFTrends.com.

Exchange traded funds with exposure to residential home construction, including the SPDR S&P Homebuilders ETF (XHB) and the iShares U.S. Home Construction ETF (ITB) , are struggling this year and some market observers believe those struggles will linger.

ITB, which is heavily exposed to homebuilders, is down more than 15% year-to-date. The equal-weight XHB is lower by nearly 10%. XHB features significant exposure to consumer discretionary and retail stocks that are tied to the residential real estate trade.

XHB “seeks to provide exposure to the homebuilders segment of the S&P TMI, which comprises the following sub-industries: Building Products, Home Furnishings, Home Improvement Retail, Homefurnishing Retail, and Household Appliances,” according to the issuer.

“While leading indicators, except the inventory of new homes, have been fairly positive, other metrics are more mixed looking into 2019. On the plus side, household formation is solid, the existing-home inventory is near record lows, residential construction jobs are on the upswing, and credit continues to ease,” reports Teresa Rivas for Barron's.

Lower Forecasts

Last week, ITB and XHB slumped after JPMorgan analyst Michael Rehaut downgraded a number of home construction companies on a pessimism over housing market fundamentals.

Rehaut pared “his 2018 and 2019 forecasts for single-family housing starts to 900,000 and 950,000, respectively, or roughly 6% growth for each year. He previously had pegged housing starts for this year and next to grow 9% and 10%, respectively, to 930,000 and 1.025 million,” according to Barron's.

Rehaut cited J.P. Morgan’s lower growth projection of 150,000 jobs per month on average for 2019, compared to the 207,000 monthly job growth average so far this year, as a potential contributing factor to lower demand.

Year-to-date, investors have pulled almost $350 million from XHB and $1.18 billion from ITB, respectively.

Leveraged plays on homebuilder stocks include the bullish Direxion Daily Homebuilders and Supplies Bull and Bear 3X Shares (NAIL) , which attempts to deliver triple the daily returns of the Dow Jones U.S. Select Home Construction Index.

For more real estate trends, visit ETFTrends.com