Three ETFs To Watch As The Housing Market Crumbles

by on August 24, 2010 | ETFs Mentioned:

The last several months have provided an abundance of conflicting economic indicators. A stellar earnings season and surge in M&A activity gave investors hope that corporate profits were on the rebound. But stubbornly high unemployment and sagging consumer confidence have remained as major roadblocks to prolonged growth. With U.S. markets treading water recently, many investors have been looking for a catalyst to give equities direction heading into the fall quarter. Be careful what you wish for; that catalyst may have finally appeared in the form of a disastrous housing report. 

According to The National Association of Realtors, the seasonally adjusted annual rate of sales was 3.83 million units in July, a 27.2% drop from the downwardly revised 5.26 million-unit rate in June and a 25.5% drop from the 5.14 million-unit level in July 2009. This figure represents the lowest sales level since 1999 and the lowest rate for single-family homes in more than 15 years. More importantly, the level reported Tuesday was close to one million units less than analyst expectations. “From our vantage point, the first time home buyers credit pulled forward demand–by definition this is what stimulus measures achieve–however the issue this time is that there was so little demand to be pulled forward, the credit has left no demand for the summer,” Dan Greenhaus, chief economic strategist for Miller Tabak + Co. , wrote in a research note Tuesday morning. “The result is exactly what we’re seeing; a near, if not outright, collapse in housing.”

With home sales tumbling, the inventory of previously owned homes for sale rose 2.5 percent to 3.98 million units from June, representing a supply of 12.5 months — the highest since at least 1999 and a dramatic increase from June’s 8.9 months. Most economists believe that five to six months represents a healthy housing supply, so an inventory level nearly double that figure suggests that the housing market is experiencing extreme weakness and is unlikely to recover soon [also read Five ETFs For A Double Dip Recession].

This disastrous development sent equity markets reeling in mid-morning trading, sending the S&P down by 1.1% and pushing investors into the relative safety of Treasury bills, which saw yields fall again today. This news has also had a big impact on many ETFs whose fate is tied to the health of the homebuilding industry. Look for the following three funds to remain in focus should housing continue its slide to unprecedented levels:

SPDR Homebuilders ETF (XHB)

With such anemic levels of demand for housing, homebuilders have endured a rough 2010 as new housing struggles to compete with the plethora of existing homes on the market. One way to play this trend is by looking at XHB, which tracks the S&P Homebuilders Select Industry Index. That benchmark includes all the stocks listed on the NYSE, AMEX, NASDAQ National Market and NASDAQ Small Cap exchanges that are included in the homebuilders industry. The underlying index is an equal weighted benchmark that currently contains 26 securities in total. Somewhat surprisingly, the fund has managed to hold onto gains today despite the gloomy data. This is possible due to the vast number of auxiliary homebuilder companies that dot the holdings of XHB; water heater maker A.O. Smith (4.4%), bed manufacturer Tempur-Pedic (4.2%),  and flooring producer Mohawk Industries (4.1%). The fund charges an expense ratio of just 35 basis points and has lost close to 15% over the past three months thanks to sagging demand and the fallout from the expiring government tax credit [also read Homebuilder ETFs Head-To-Head: XHB vs. ITB].

iPath Dow Jones UBS Copper Total Return ETN (JJC)

Copper is a very useful metal and it currently finds its way into a variety of products including cookware, cars, and power transmission applications. However, its most popular use is in the construction industry, which currently accounts for roughly 35% of global copper demand. In this setting, copper is used in everything from plumbing fixtures to home wiring to heating/cooling systems. With homes sitting on the market for more than a year, there is likely to be a significant slowdown in new home construction, which could reduce U.S. demand for this important base metal. As demand falls in the U.S. look for prices to moderate as well; JJC was down by roughly 1.6% in today’s trading session and has fallen by 5.4% so far in 2010 [see Many Uses Of Commodity ETFs].

Claymore/Clear Global Timber Fund (CUT)

This fund tracks the Beacon Global Timer Index, a benchmark that includes global timber companies that own or lease forested land and harvest the timber from such forested land for commercial use and sale of wood-based products, including lumber, pulp or other processed or finished goods such as paper and packaging. Companies in this industry are likely to be heavily impacted by a sharp downturn in the housing market as the immense supply of existing homes is likely to temper wood demand for new homes. The fund currently consists of 27 stocks, many of which are mid cap equities. The fund, which charges an expense ratio of 0.65%, was down sharply in Tuesday trading, falling by 2.2% [also see Do You Need A Timber ETF?].

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Disclosure: No positions at time of writing.