A recurring investment theme so far this year has been the resurgence of markets and sectors hit hardest by the recent global economic downturn. Japanese equities, the unquestioned laggard of the global economy during 2009, have shown signs of life in the first three months of this year. Financial ETFs have continued to rally into 2010, bolstered by soaring profit margins and reduced anxiety over the potential impact of a regulatory overhaul.
The homebuilding sector has also showed surprising strength in 2010, outperforming the broad market by a significant margin. The surge has come as the industry has shown signs of recovering from the brink of collapse in late 2008. While median home prices and home sales remain far below pre-recession levels, they have recovered nicely over the last year.
The homebuilder rally was tested on Tuesday after the National Association of Realtors reported existing home sales data for the month of February. Sales of existing homes declined for the third consecutive month, falling 0.6% to an annual rate of 5.02 million. But economists had been anticipating a decline of about 2.0% to 4.95 million, so Tuesday’s better-than-expected results fueled hopes of a continued recovery in the still-fragile sector. Home sales surged last fall after the government introduced an $8,000 credit for first time homebuyers, but dropped off sharply in December and January. Now that the credit has been extended to include sales that close before July 1, realtors and builders are hoping for another surge in sales.
Homebuilder ETFs Jump
After the data release Tuesday, homebuilder ETFs initially headed higher before slumping in late morning trading. Despite their impressive rally over the last year, homebuilder ETFs remain far below levels touched in 2008. For investors looking to gain exposure to the homebuilding sector, there are two primary ETF options:
- iShares Dow Jones U.S. Home Construction Index Fund (ITB): This ETF is linked to the Dow Jones U.S. Select Home Construction Index, and includes about 27 stocks of constructors of residential homes, including manufacturers of mobile and prefabricated homes. ITB is up about 13% on the year.
- SPDR S&P Homebuilders ETF (XHB): This ETF tracks the performance of the S&P Homebuilders Select Industry Index. For investors looking to avoid market cap-weighted ETFs that are often dominated by holdings in a few big names, XHB may be an interesting option. Based on an equal-weighted index, no one component accounts for more than 4.4% of assets. XHB is up nearly 11% on the year.
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Disclosure: No positions at time of writing.