Recent data releases have been quite positive for the market.
With the exception of the recent consumer sentiment, we saw both
retail and industrial production data come in positive while
strong growth was also seen in housing starts, indicative of a
recovery in the housing sector (
Best Construction ETF to Ride the Housing
Upbeat housing data led to a rally in homebuilder
in the past few trading sessions, continuing their remarkable
run. It seems that the residential construction sector is on the
verge of recovery with tremendous upside potential going forward,
potentially acting as a catalyst to the broad economy at large as
New residential construction or housing starts reported a
sharp increase of 12.1% in December indicating that housing
starts are close to a five-year high. This indicates that the
industry may have bottomed out and is all set to rebound fueled
by low-mortgage rates, smaller housing inventory and a growing
With improved buyers' confidence in the market triggered by
low housing prices as well interest rates, demand for housing
will keep rising on the back of pent-up demand. This will keep
the housing sector in a recovery mode for the next few years.
In fact, homebuilder exchange traded funds have been one of
the top performing sectors in 2012 attributable to improving
housing and job data. And with Fed expected to keep interest
rates low, the sector could continue to perform well in 2013 (
4 Best ETF Strategies for 2013
With housing start numbers remaining high, both iShares Dow
Jones U.S. Home Construction Index Fund (ITB) and the SPDR
S&P Homebuilders ETF (XHB) surged higher in the initial hours
of trading. ITB closed at $22.7, higher 2.71% while XHB posted a
gain of 1.85% to close at $28.15.
ITB has been the best performing ETF in 2012, delivering a
return of 78.9%. However, the fund still has to go a long way to
catch the highs of 2007. Right now it is trading 50% below that
level. XHB has also ridden a bull rally in 2012, recording a gain
of almost 58% on the year (
Two Sector ETFs to Buy in 2013
Investors looking to capitalize on 2012's best performing
sector should invest in ETFs that have heavy exposure to the
residential real estate market. And for a direct exposure to U.S.
homebuilding companies, ITB represents an excellent option to
ITB offers a pure play into the sector as evidenced by its
allocation of 65.37% of its asset base of $2 billion to home
construction companies. Among building materials, home
improvement and furnishing the allocation is limited to 40%.
The fund also offers exposure to 29 companies in which
established homebuilders like Lennar Corp, Pulte Group and DR
Horton Inc take up the top line of the fund.
All of these companies could be poised to deliver strong gains
going forward thereby providing a boost to the performance of the
ETF. The fund charges an expense ratio of 46 basis points.
Although the SPDR ETF is somewhat larger and a more liquid
option to play in the sector it is probably not the right choice
for investors looking for a direct exposure to residential real
XHB has just 31.8% of its asset base of $2.3 billion in
homebuilding while the rest is spread across building products,
home furnishing retail, home improvement retail and household
Is XHB a Better Housing ETF Play?
However, related sectors have reaped the benefits from the
resurgence in housing as exemplified by XHB's performance in
XHB also offers a wider exposure to companies than ITB. XHB
has its asset base invested in 37 companies. Lastly, the fund has
an edge in expenses, charging 35 basis points annually.
The Bottom Line
Housing start numbers are expected to continue their uptrend.
However, builders remain a tad cautious given some fundamental
challenges very much at work, which include a still fragile
economy, obstacles related to project funding and limited number
of buyers qualifying for mortgage funding.
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ISHARS-DJ HO CO (ITB): ETF Research Reports
LENNAR CORP -A (LEN): Free Stock Analysis
SPDR-SP HOMEBLD (XHB): ETF Research Reports
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