It had been a pretty rough stretch for homebuilder stocks over
the past few weeks, as a number of concerns were beginning to
build over the space. These worries included overbought
conditions, fewer sales due to higher rates, and uncertain
earnings, all of which led to losses in the segment.
In fact, after the horrendous past few weeks, many
homebuilders are now down YTD, a pretty incredible statement
given the broadly positive trends in the housing market as of
late. This is even more depressing when one considers the solid
performance of the space in 2012, as many homebuilders added more
than 50% in the time frame, suggesting to many that the space has
topped out for the time being.
Enter the Fed
This could be especially true if rates continue to rise and
threaten the housing recovery. We have already begun to see some
evidence of this in weeks past, though its impact has been muted
at best (read
Protect Against Rising Rates with Floating Rate
The trend towards higher rates was largely expected to
continue, at least given some recent data points on the jobs and
GDP front, though the latest Federal Reserve meeting may have
thrown a wrench into this theory. In this meeting, Ben Bernanke
and company reduced their assessment of the U.S. economic growth
picture from 'moderate' growth to 'modest' growth.
While this may seem like a very minor distinction, it was
enough to move markets and push stock prices higher. This is
because the slight downgrade is viewed as extra caution from the
Fed and a
that bond purchases may not be slowing down as soon as many
investors may have thought (see
the Best ETFs in the Market's Top Sector
With more stimulus staying in the markets, bond yields may
have trouble breaking above the 2.75% mark, while stocks could be
supported in the near term. While this helped stocks across the
board, it was particularly important for the beleaguered
homebuilder industry as these were among the biggest winners from
These securities were starting to really feel the pain from
the rising rates and the possible impact this was going to have
on home purchases. But now, with the prospect of a longer period
of stimulus, home sales and interest in the real estate market
may stay firm, causing many investors to jump back into the
While there are a number of ways to play this trend in stock
form, an ETF approach could also be an excellent idea. These
funds offer broad exposure to the space and were heavily impacted
by the news. Below, we briefly highlight the two main choices for
this space and how their performed after this bullish news
SPDR S&P Homebuilders ETF (
This ETF tracks the S&P Homebuilders Select Industry
Index, following about three dozen companies in the broad
homebuilders space. The product charges investors 35 basis points
a year in fees, while volume comes in well above six million
shares a day on average.
The ETF uses an equal weight methodology for its exposure, so
no single security dominates the portfolio. In fact, no single
firm makes up more than 4% of assets, suggesting a well
diversified portfolio (read
Homebuilder ETFs: Can the Rally Continue?
However, it is worth noting that the ETF, despite its name,
isn't exclusive to homebuilders, holding just 25% in that
segment. Instead, building products (26%), home furnishing retail
(17.8%), and home furnishing (12.6%) companies comprise to form
the bulk of the fund.
The ETF is flat over the past month, though it added a little
over 1.4% in the Wednesday session.
iShares U.S. Home Construction ETF (
This fund follows the Dow Jones US Select Home Builders Index,
following about three dozen firms in the home builders market.
The product is a bit pricier than its counterpart, charging 45
basis points a year in fees, though volume is still excellent at
over one million shares a day.
This product doesn't use an equal weight strategy though, as
the fund weights by market cap. This leaves some level of
concentration-60% in the top ten holdings-including +8% weights
to four companies.
The fund is much more concentrated than its competitor though,
as over 60% of the holdings are in the home construction segment.
The remainder goes to building materials, home improvement and
furnishings, suggesting a more focused portfolio.
ITB has lost about 2.9% in the past 10 day trading period, but
in Wednesday trading the fund surged, adding about 2.1%.
Concerns were building that the run for homebuilders was over.
Rates were beginning to rise while demand for homebuilder stocks
was beginning to fizzle out (see
3 Sector ETFs to Profit from Rising Rates
However, Bernanke has arguably injected new life into the
market with the latest economic growth projection. With QE likely
to remain intact for a bit longer, homebuilders may now have a
bit more room to run, suggesting that either XHB or ITB could be
solid picks for at least a while, so long as monetary policy
remains extremely accommodative and rates remain at tolerable
levels for home buyers.
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ISHARS-US HO CO (ITB): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
SPDR-SP HOMEBLD (XHB): ETF Research Reports
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