Homebuilders were among the hardest hit sectors during the recent recession, as steep declines in demand for new properties brought this once-booming industry to a standstill. However, the combination of legislative initiatives (such as the home buyer tax credit) and record low interest rates have breathed life into a sector that was recently left for dead. This optimism is visible in the performance of two homebuilder ETFs that are currently available to U.S. investors; the SPDR Homebuilders ETF (XHB) and iShares Dow Jones U.S. Home Construction Index Fund (ITB). Both of these funds have gained at least 10% so far this year, outpacing broad markets by a wide margin. While these two funds are similar in many ways, they are far from identical; below, we take a look at how XHB and ITB stack up side-by-side.
XHB tracks the S&P Homebuilders Select Industry Index, a benchmark that represents the homebuilding sub-industry portion of the S&P Total Markets Index. The index tracks all the U.S. listed common stocks through an equal weighted market cap methodology. ITB follows the Dow Jones U.S. Select Home Construction Index, which tracks the performance companies that are based in the U.S. and focus on the homebuilding segment of the market. The fund tracks companies that are constructors of residential homes, including manufactured and prefabricated units.
Both funds hold roughly the same number of stocks; XHB holds 28 compared to 27 for ITB. However, the use of different weighting methodologies translates to some major differences in exposure. XHB equally distributes its assets among its holdings while ITB employs a cap weighted approach. As such, ITB has slightly more than two-thirds of its assets in its top ten holdings, while XHB has only 43%in the ten biggest components. Furthermore, XHB is slightly more skewed towards larger cap assets, with just over 7% of the fund going to large cap stocks. Just over 3% of ITB is in large caps. Both ETFs focus primarily on medium cap stocks; both funds have more than half of their assets in mid-cap stocks and both have a mean market cap of under $3 billion.
Performance and Fees
Despite impressive performances in recent months, neither of these funds has even come close to recovering from the most recent downturn; XHB is down almost 65% since inception while ITB has lost nearly 75% since it started trading in trading began in May 2006. However, for investors who got in last year around the market bottom in mid-March, XHB and ITB have delivered some big returns, producing gains of about 70% over the last 52 weeks (see the ten best performing ETFs since the March bottom here).
From an expense perspective, XHB is more attractive, charging a ratio of 0.35% compared to ITB’s 0.48%.
Although both funds provide exposure to the volatile housing sector with roughly the same number of securities, there are some key differences that investors should be aware of before choosing a fund. For investors who are concerned about cost, liquidity, and balanced exposure XHB is probably a better pick; this fund has over ten times the daily volume of its counterpart and an equal-weighting methodology that avoids concentrated allocations.
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Disclosure: No positions at time of writing.