Wednesday’s ETF To Watch: Construction Fund (PKB)

by on December 1, 2010 | ETFs Mentioned:

In 2007, one of the first indicators, and causes, of the coming recession emerged; subprime mortgages. Roughly 80% of U.S. mortgages issued to subprime borrowers were set with adjustable rates, which led to disaster. After the housing market hit its peak in 2006, it began a rapid decline, and rates began to skyrocket. That meant that all of those who borrowed on with an adjustable rate, were now subject to hefty payments that they could not afford, sending delinquency rates through the roof. And so began the worst recession in U.S. history since the Great Depression, with housing at the center of it all [see also Three ETFs For Obama’s Public Works Plan].

Now, housing is looking to recover from several rough years as it works its way through still high levels of mortgage defaults and a flood of unsold properties. Today, will mark the release of construction spending data from the U.S. government, figures that will either point to or away from a general recovery in the building and construction sector. Construction spending is the dollar value of new construction activity on residential, non-residential, and public projects. So a higher value means that companies have spent more on building and construction over the past month, and likewise a low figure points to smaller levels of spending and construction, which translates to lower levels of growth for this beaten down sector [see also Homebuilder ETFs Face A Tough Road Ahead].

August of 2010 saw a 0.2% dip from the previous month, but spending rebounded in September with a gain of 0.5% from August. Today’s release will be for October’s construction spending, and the outlook is not good but predictions are currently spread across a wide range. Analyst predictions currently fall in a range from -0.8% to 0.4%, with the general consensus being that spending will drop by 0.4% from September. Inside of the overall percentage change, several factors are taken into account. For example, in September, private residential spending increased 1.8%, but private nonresidential spending fell 1.6%. The total changes across various sectors of the industry can vary widely and could help to show investors which sectors of the market are rebounding quicker than others [see also Introduce Yourself! (ETFdb Now Has Dead Simple, Fast Commenting)].

In light of this data release, the PowerShares Dynamic Build & Construction Fund (PKB) will be today’s ETF to watch. Tracking the Dynamic Building & Construction Intellidex Index, this fund is comprised of stocks of U.S. building and construction companies. Top holdings include industry bellwethers like Home Depot, Lowes, and NVR. Though it features big names, PKB is directed towards smaller firms, as small and micro cap companies account for over 45% of the ETF’s assets. From a performance standing, this fund has gained just over 4% on the year but has made a smaller surge in past quarter posting a gain of 12%. If the construction spending numbers come in low as expected, PKB may take a dip on the day, but if results surprise and are positive, look for PKB to have a strong day.

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Disclosure: No positions at time of writing.