Confidence Report Weighs On Homebuilder ETFs

by on October 20, 2009 | ETFs Mentioned:

The National Association of Home Builders’ (NAHB) gauge of confidence of new home sales fell for the first time in four months in October, declining to 17 from a reading of 18 in September. All three components of the index slipped – a first since the peak of the recession in November 2008. The component measuring current sales conditions fell from 18 to 17, while a measurement of traffic of prospective buyers declined from 17 to 14. A gauge of sales expectations over the the next six months came in at 27, down from 29.

Single Family HomeThe pessimism in the survey seems to be related to the pending expiration of an $8,000 tax credit for first time home buyers, according to the Wall Street Journal. But the credit, which has been largely successful in stimulating new home purchases, is set to expire at the end of November. The NAHB has called for an extension, arguing that the expiration of the credit would result in steep sales declines.

Wall Street had expected the gauge to rise to 20 for the month, a major setback for an industry that has faced its fair share of challenges over the last year. Homebuilders ETFs were among the hardest hit during the recession, as huge gluts of houses on the market and plummeting residential real estate prices made further building unnecessary and/or unprofitable. But many of these funds had posted strong recoveries in 2009 on hopes that the recession had passed and a brighter future for the industry lay ahead. The iShares Dow Jones U.S. Home Construction Index Fund (ITB) lost more than 60% of its value between the beginning of 2008 and the bear market low in March 2009, but has gained more than 90% since bottoming out.

Homebuilder ETFs Have Rebounded Sharply

Home Builder ETFs

The survey results are the latest reminder of just how fragile the current recovery is, and an indication that the U.S. housing market faces significant risk of a double dip. The news could also put pressure on stocks of homebuilders, and ETFs that track this sector. But if the credit is extended – as some believe it will be – these stocks could see a quick rebound.

Below is an look at three ETFs that invest heavily in companies focusing on the construction of new homes. For more ETF plays on current news and events, sign up for our free ETF newsletter.

  • iShares Dow Jones U.S. Home Builders Index Fund (ITB): Designed to track the performance of the home construction sector of the U.S. equity markets, this ETF has about 25 holdings with a median market cap under $2 billion. ITB has major holdings in NVR (8.7%), DR Horton (7.9%), and Pulte Homes (7.8%).


  • SPDR Homebuilders ETF (XHB): While XHB’s top ten holdings include NVR (4.2%), DR Horton (3.8%), and Pulte (3.5%), this ETF also has significant allocations to home improvement stores Home Depot, Lowe’s and Bed Bath & Beyond (these three stocks make up almost 12% of the ETF’s assets). With an expense ratio of just 0.35%, XHB is one of the cheapest ways to gain exposure to the home building sector.


  • PowerShares Dynamic Building & Construction Portfolio (PKB): This ETF is part of the PowerShares’ line of funds that track “intelligent” indexes that seek to outperform traditional market cap-weighted benchmarks through the use of proprietary screening processes. Since its inception, the Intellidex underlying PKB has outperformed the S&P Super Composite Homebuilders Index by more than 20%.


Disclosure: No positions at time of writing.