Homebuilder ETFs In Focus As Market Stalls

by on July 21, 2010 | ETFs Mentioned:

Score another point for the bears. Recent data releases have painted a dismal picture for the U.S. housing industry, as sales plummet, construction grinds to a halt, and inventories soar. After housing sales declined 33% in May after the expiration of a critical tax credit, the sector was further battered with the release of June’s results. Housing starts fell 5% last month, far worse than the 3.2% decline that economists had forecast. KB Home, one of largest publicly-traded homebuilders, reported that second quarter orders declined by 23%, the latest setback for an industry that had seemingly clawed back from the brink of collapse in recent months. “Housing’s struggle to recover is fighting weakness in the overall economy,” writes Jeff Bater. Sky-high unemployment remains a major obstacle, and an unexpected tumble in consumer sentiment measures further highlighted the issues facing the market.

The drop in housing starts brought the industry back to levels last touched in October of 2009. After skyrocketing between 2000 and 2006, prices began to tank for several years, bottoming out during the depths of the recent recession. Although many sectors of the economy are showing signs of life, home prices are yet to recover, with the last 3 years being particularly volatile. Many have lost their faith in homebuilders, fleeing to safer sectors. “In major markets across the country, home sales are deteriorating, inventories of unsold homes are piling up and builders are scaling back construction plans,” writes Nick Timiraos [see ETF Plays To Invest Like Buffett, Fisher, Paulson].

But against this depressing backdrop, there may be a few reasons to hope. Permits for new construction rose in the latest report, potentially signaling a pickup in the not-so-distant future. June building permits increased by 2.1% to an annual rate of 586,000; economists had been expecting an increase of only 0.7% to 578,000. Still, the outlook for the housing market is dismal, with no signs of an imminent turnaround.

For investors seeking to make a play on the housing market–either long or short–we outline two interesting ETF options [for more ETF ideas, sign up for our free ETF newsletter]:

iShares Dow Jones U.S. Home Construction Index Fund (ITB)

This iShares ETF tracks the Dow Jones U.S. Select Home Construction Index, a benchmark that measures the performance of the home construction sector of the U.S. equity market. Holding 27 securities, names like NVR, KB Home, Home Depot, and Lowes, all appear in this fund’s top ten holdings. ITB keeps its hands in generally smaller companies, with a focus on mid and small cap stocks. From a sector standpoint, it is no surprise that industrial materials (82%) dominates this ETF. Thus far in 2010, the fund has lost roughly 7% [see charts of ITB].

SPDR Homebuilders ETF (XHB)

State Street’s XHB seeks to replicate the performance of the S&P Homebuilders Select Industry Index, a benchmark that represents the homebuilding sub-industry portion of the S&P Total Markets Index. In addition to homebuilding companies, XHB includes stocks of companies whose performance and profitability is generally linked to the housing market. Included in XHB’s holdings are water heater manufacturer A.O. Smith, kitchenware retailer Williams-Sonoma, and even luxury bedmakers Tempur-Pedic. One other interesting note on XHB: the underlying index is equal-weighted, meaning that this fund avoids big concentrations in any mega cap companies [see Guide To ETF Index Weightings].

Disclosure: No positions at time of writing.