The iShares Dow Jones U.S. Home Construction Index Fund (NYSEArca: ITB) was the best-performing exchange-traded fund in 2012, tallying gains of some 80 percent, in a reflection of an improving U.S. housing market and economy.
The fund has been trading most recently just above $20 a share, its highest price in five years and about three times what it was worth in early 2009, when it traded at all-time lows around $6 a share.
Rising average home prices—up nearly 7 percent this year in the largest year-to-date gain since 2005, plus growing demand for homes and an uptick in housing starts—helped the $1.65 billion fund shoot higher.
What’s more, ITB, which competes with the $2.25 billion SPDR S&P Homebuilders ETF (NYSEArca: XHB)—this year’s third-best-performing ETF with gains of more than 58 percent—also saw sizable net inflows this year, reinforcing that its price action was not merely a reflection of broad equity market gains but also of investor confidence in the sector.
In the past 12 months, investors poured a net of nearly $800 million into ITB as shares of the fund climbed to their highest levels since April 2008, according to data compiled by IndexUniverse. Similarly, XHB pulled in $860 million in the same period.
Housing prices across the U.S. have rallied some 9 percent since they forged a new cycle low earlier this spring, and as of October, were 4.3 percent higher year-on-year, according to recent data on the housing market. Today an average home in the U.S. is still worth about 30 percent less than it was just six years ago, but that’s a significant—and consistent—improvement from values seen just nine months ago.
Sharp gains for ETFs focused on the real estate market are of course noteworthy because housing was at the center of the credit crisis that eventually led the entire U.S. economy into a recession by 2008. Analysts widely believe that stability in housing will be key for the recovery to morph into sustained expansion.
Strength In Underlying Securities
ITB comprises some of the market’s largest homebuilders, including Lennar Corp, PulteGroup, DR Horton and Toll Brothers. All together, home construction companies represent 65 percent of the portfolio, according to data provided by the fund’s sponsor, BlackRock’s iShares.
Some of these names have delivered even more impressive price performances in 2012. Take Lennar Corp., for instance, which is ITB’s single largest holding, representing just over 10 percent of the total portfolio. Its stock price has rallied more than 90 percent year-to-date and, in the past five years, Lennar’s stock price has more than doubled.
Meanwhile, PulteGroup, the $6.77 billion-in-market-cap homebuilder that’s also among ITB’s top 10 holdings, has seen its stock price shoot up 177 percent since the beginning of the year.
Homebuilding retailers such as Home Depot and Lowe’s are also among the fund’s top holdings, with the segment making up just over 12 percent of the mix.
Still Off The Highs
It’s worth noting that however impressive ITB’s run has been in 2012, the fund remains only a hint of what it once was during the golden days of the housing boom in 2006, right before home values peaked that summer and corrected sharply downward in a decline that stripped homes of more than two-thirds of their value.
The fund traded at its highest-ever mark—at $50.10 a share—on its very first week after inception in May 2006, and shortly thereafter started a decline that eventually led it to a closing price of just over $6 a share by March 2009. That 2006 peak to 2009 trough amounted to an 87 percent decline.
Since that March 2009 closing low of $6.40 a share, the fund has had its ups and downs every time the housing market flirted with a recovery before losing steam. Headed into 2013, the fund, which closed most recently at $20.70 a share, remains nearly two-thirds below its all-time high.
But recent price action suggests investors seem to think ITB now stands its first real chance at a rally in six years if the housing market indeed delivers on its promise of a recovery.
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