Tax Uncertainty Hits Homebuilder ETFs

by on November 20, 2009 | ETFs Mentioned:

The U.S. housing market, having been battered and bruised during the recent recession, had staged an impressive recovery in recent months as belief that the market has finally hit bottom seemed to gain support. But new data reveals the true fragility of the housing recovery, and indicates that the potential for a “double dip” in this industry is very real.

Homebuilder ETFs Are Under PressureNew home construction fell sharply in October, as housing starts declined 10.6% compared to the previous month to a seasonally adjusted 529,000. When compared to last October, the results reflect a disastrous 30.6% drop. The steep decline came as a surprise to many analysts who had been anticipating an uptick for the month. The surprise loss shows the true impact that uncertainty over whether Congress would extend the $8,000 tax credit for first-time home buyers beyond its initial November 30 deadline.

Earlier this month, Congress did indeed extend the credit through April of next year (and even expanded the program to include “move-up” buyers as well), giving the homebuilding industry a short-term boost. But the fact that results from October, when the extension of the program was very much in doubt, were so poor indicates that the industry is still very much dependent on government subsidies to get by.

Likely linked to the unimpressive data, builder confidence continues to be severely depressed. The National Association of Home Builders/Wells Fargo Housing Market Index showed that builder confidence in sales remained at 17 for November. Anything above 50 indicates more positive feelings among builders, meaning that there is a long way to go before the industry is on solid ground once again.

ETF Plays On Homebuilders

For investors looking to make a play on the homebuilding sector, there are several ways to do so through ETFs. Unlike mutual funds, ETFs can be sold short, so investors who think a downward correction is imminent have several options as well. For more actionable ETF investment ideas delivered to your inbox, be sure to sign up for out free ETF newsletter.

  • SPDR S&P Homebuilders ETF (XHB): This SPDR invests in about 27 stocks, including homebuilders such as NVR, DR Horton, and Pulte Homes. This ETF also has significant allocations to providers of homebuilding supplies, including Home Depot (4.1%), Lowe’s (4.2%), Bed Bath & Beyond (4.2%), and Sherwin Williams (4.2%). XHB is based on an equal-weighted index, meaning that it avoids concentration in a few mega-cap companies.


  • iShares Dow Jones U.S. Home Construction Index Fund (ITB): There is significant overlap between the holdings of ITB and XHB, although weightings to many stocks included in both funds are materially different. ITB has been relatively volatile, with a beta relative to the S&P 500 of almost 1.8, and comes in with a slightly higher expense ratio (0.48%) compared to XHB (0.35%).


  • PowerShares Dynamic Building & Construction Portfolio (PKB): This ETF tracks an “Intellidex” benchmark that selects companies for inclusion based on an evaluation of numerous factors, including fundamental growth, stock valuation, and investment timeliness. In addition to homebuilders, PKB also includes stocks of engineering firms such as Fluor, Jacobs, and Michael Baker Corp.


Disclosure: No positions at time of writing.