Some of last week's headlines highlight the reasons:rising
confidence in the space and positive surprises in home starts.
Falling mortgage delinquencies and continuing low mortgage rates
also help the outlook.
To be sure, the homebuilders industry has been ugly for the
better part of five years. One can only hope that the latest
promising signs amount to a recovery with legs.
The ETF landscape for this industry is narrow but deep. It's
narrow because only two funds cover the space, but deep because
each fund boasts significant assets and real liquidity. This makes
either choice viable from an accessibility standpoint.
The two ETFs are the iShares Dow Jones U.S. Home Construction
Index Fund (NYSEArca:ITB) and the SPDR S&P Homebuilders ETF
(NYSEArca:XHB).
Since the Oct. 3, 2011 nadir through May 17, 2012, ITB has
outperformed XHB, returning 84.6 percent to XHB's 68.6 percent. For
reference, the SPDR S&P 500 ETF (NYSEArca:SPY) returned 22.1
percent.
Bed, Bath & Beyond-a retailer that doesn't exactly leap to
mind when you think homebuilders-lands at No. 2 in XHB's
portfolio.
Meanwhile, ITB holds hefty positions in building industry
heavies like Toll Brothers, DR Horton and Lennar.
To be fair, ITB holds home-related retailers too, but its
position in furniture seller Ethan Allen, for example, is less than
1 percent of the portfolio compared with about 4 percent for the
equal-weighted XHB.
Still, the snapshot above reveals something important:Investors
with strong views on the homebuilders industry might be
disappointed to know that XHB has less than a third of its weight
in bona fide homebuilders.
ITB lost 53.8 percent for the five-year period, while XHB lost
"only" 33.6 percent.
ITB's underperformance over the mostly down five-year period and
its outperformance in its recent leg up sounds like high beta.
But when I regressed five-year net asset values for each fund on
the broad market using SPY, the resulting poor fit makes it hard to
talk about beta with any conviction.
The flip side is that the five-year correlations for each fund
with the broad market are relatively low:0.76 for ITB and 0.80 for
XHB.
That means that either of these funds delivers a bit of
diversification benefit in a portfolio context-assuming the returns
don't clobber you first.
I think ITB is the better fund here. It delivers better exposure
that's well worth the 12 basis point fee differential in my view.
ITB comes with an annual expense ratio of 0.47 percent vs. 0.35
percent for XHB.
The market will decide in the end, of course, but forgive me for
rooting for both funds to do well.
Homebuilders have taken a pounding, and a continued leg up
should mean more jobs with more paychecks and more consumer
spending.
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