Despite some sluggish employment growth, the all-important
housing market appears to be back on track. The segment has been
soaring higher all year as great data has come in regarding a
number of key housing stats, adding optimism to the sector.
Also, the Federal Reserve's lax policies have further
stimulated demand by keeping interest rates low and buying up MBS
to ensure a liquid and cheap mortgage market. If that wasn't
enough, consumer confidence is at a post-recession high
suggesting that many are finally starting to feel better about
their economic situation (read
Best Construction ETF to Ride the Housing
With this backdrop, housing focused investments have been
fantastic for much of 2012. Many stocks in this corner of the
equity world have crushed broad benchmarks and have risen
significantly off of their subprime-induced lows.
the iShares Dow Jones US Home Construction ETF (
has been among the best unleveraged ETF performers in the entire
market this year. Since the start of 2012, ITB has added more
than 67%, easily beating out the S&P 500 over the same time
frame as the benchmark was 'only' able to muster a 10% gain in
the same time period.
If that impressive long term performance wasn't enough,
investors should also note that the ETF has added over 35% in the
past six months and 15% in the past quarter, suggesting that the
strength has been ongoing throughout the year. No wonder the ETF
has earned a Zacks ETF Rank of 1 or 'Strong Buy' and has been
classified as such for quite some time now (read
Four ETFs Up More Than 30% YTD
Yet as incredible as this housing rebound has been, one has to
wonder if the space is starting to get into overbought territory,
at least in the near term. ITB has suffered a pretty significant
sell-off in November, although it bounced back quickly, so there
could be some more tax-selling in the underlying securities if a
fiscal cliff compromise is not reached.
The housing boom story-at least from the builders'
perspective-could be getting a little overheated as well. It is
still somewhat hard to believe that the housing market is
entirely back on track given the issues with shadow inventory and
weak job growth still hanging over the overall market.
At the same time, builders could still have plenty of room to
run in order to get back to something close to pre-recessionary
levels so it is hard to argue for entirely abandoning the sector
at this time, especially when there are still some solid data
points to underline the sector (also see
Three Low Beta Sector ETFs
This could mean that it is time to look at another housing ETF
play instead that may be better positioned for the 'second leg'
up in the housing swing. This ETF is the
SPDR S&P Homebuilders ETF (
, and while it shares some similarities with its iShares
counterpart, there are a host of differences as well.
First off, XHB is a tad older and has a bit more in volume and
AUM. Additionally, XHB also sports a lower expense ratio than its
counterpart, at just 35 basis points a year compared to 47 for
ITB. This means that XHB will probably have a tighter bid ask
spread and thus is almost guaranteed to have a lower total cost
Beyond these structural differences, investors should note
that although XHB has a better yield, the fund has greatly
underperformed its counterpart in a year-to-date look. XHB has
added 'only' 50% in the YTD time frame, which is obviously still
respectable, but nothing compared to ITB's nearly 70% gain (see
Two ETFs that Have Surged from Their Lows
This enormous differential has shrunk to practically nothing
in the trailing three month period though, as ITB has just barely
outperformed its State Street counterpart, suggesting that XHB
could be on the right track heading into the final part of the
year. Personally, I believe that this shift in the housing ETF
market could be due to how different the two funds' holdings are,
and this reason could be why XHB may take leadership from ITB
heading into 2013.
This is because ITB is entirely focused on homebuilders-like
-while XHB has a much more holistic approach to the space. This
may come as somewhat of a surprise given that both ITB and XHB
have similar names for their funds, but XHB actually puts just
about a quarter of its assets in home builders and another 30% in
The rest of XHB hones in on household appliance makers and
retail firms, giving the fund a very different holdings picture.
are the two biggest holdings in the fund at time of writing,
while Lennar and Pulte don't crack the top ten.
While this different focus has clearly been to the fund's
detriment to start the year, it could actually help XHB as we
turn the calendar over. That is because many of the
'discretionary' sections of the homebuilder industry have not
seen their prices surge by as much as their builder counterparts
Thanks to this, these retail-type firms are arguably better
positioned and are trading at more reasonable valuations as well.
If that wasn't enough, the aforementioned consumer strength could
help these stocks anyway-irrespective of housing-suggesting that
if current trends hold this could be the way to go instead (also
Biotech ETFs: A Fiscal Cliff Safe Haven?
Plus you still get some 'pure' homebuilder exposure in XHB so
you won't be missing out if that segment continues to soar
heading into the new year. So for investors considering a housing
play but are worried about valuation levels, take a closer look
at XHB. The fund could be a more fairly valued way to target the
space that still has a great deal of upside thanks to some of the
key trends hitting the consumer this quarter.
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ISHARS-DJ HO CO (ITB): ETF Research Reports
LENNAR CORP -A (LEN): Free Stock Analysis
LOWES COS (LOW): Free Stock Analysis Report
PULTE GROUP ONC (PHM): Free Stock Analysis
WHIRLPOOL CORP (WHR): Free Stock Analysis
SPDR-SP HOMEBLD (XHB): ETF Research Reports
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