Two of the most popular U.S. homebuilder ETFs are delivering vastly different results this year. Disparity isn’t that unusual between the two portfolios, but the gap in returns hasn’t been this wide since 2012.
The reason is directly tied to portfolio construction.
Broadly speaking, homebuilder ETFs comprise more than purely homebuilder stocks. They also invest in other segments like construction supplies, furnishings and even retailers such as Bed Bath & Beyond and Williams-Sonoma.
Both homebuilder funds iShares U.S. Home Construction ETF (ITB) and SPDR S&P Homebuilders ETF (XHB) are outperforming the broader market as measured by the SPDR S&P 500 (SPY) this year. But ITB is up roughly twice as much as XHB—24% versus 12% year-to-date.
‘Small & Top Heavy’
“The issue both of these funds have to address is that the homebuilding industry is small and top-heavy,” FactSet ETF analyst Scott Burley said.
There are less than 20 publicly traded homebuilder companies in the market, and the segment is heavily concentrated in terms of market capitalization by names like DR Horton and Lennar.
To diversify portfolios, both funds “branch out” into other industries related to homebuilding, Burley said.
“XHB goes a step further and equally weights its portfolio to reduce concentration. That means its exposure to homebuilders is greatly diluted: only 29%, versus ITB's 61% on average year-to-date,” he added.