Hothouse ETFs: Homebuilders

May 21, 2012

Homebuilder ETFs have outperformed the broad market by double digits year-to-date, which merits a closer look.

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.

SPY 10.3.2011 Bottom

This wide performance difference makes sense: The two funds offer very different baskets of stocks.

XHB equal-weights its broad take on the industry while ITB weights its more-defined industry slice by market cap.

A peek at each fund’s top three holdings highlights these differences.


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.


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