ETF Of The Week: Tale Of 2 Homebuilder Funds

October 26, 2018

Historically, the housing market has been a canary in the coal mine, a leading indicator for rough times to come in the broader economy. Right now, that bird isn't looking so healthy.

Annual home sales have suffered nine-straight months of declines, as reported by CNBC, as housing affordability continues to weigh on potential homebuyers. Meanwhile, housing starts fell more than expected last month, as rising mortgage rates, higher prices, hurricanes and other climate disasters weighed on homebuilding activity.

It's been a rough year for homebuilder ETFs as well, as the iShares U.S. Home Construction ETF (ITB) and the SPDR S&P Homebuilders ETF (XHB) have fallen year-to-date 31% and 24%, respectively.

 

Source: StockCharts.com; data as of 10/25/2018

 

Given ITB's lousy performance, we've made it our ETF Of The Week, though to understand why it’s fallen so much farther than its competitor requires a quick peek at the portfolios of both funds.

2 Homebuilder ETFs Alike In Dignity

Currently there are only four homebuilder ETFs, two of which are leveraged products. However, the two ETFs that aren't—ITB and XHB—are large, liquid funds with significant assets invested.

To date, ITB has $914 million in assets under management, while XHB has $689 million. Both trade extremely well, sporting daily average volumes above $100 million and minimal spreads of 0.03%.

Under the hood, however, these two ETFs couldn't be more different.

XHB: More Diversity, Fewer Homebuilders

For starters, ITB is a vanilla market-cap-weighted index, whereas XHB selects its components based on market cap, but ultimately equal-weights them within the index.

That matters, because XHB also pulls from a much broader pool of potential securities than ITB. Most of XHBH's holdings actually fall outside the homebuilding segment. Homebuilders comprise just 28% of XHB's portfolio, followed by construction supply companies (16%) and home improvement stocks (10%).

In fact, at 4.7%, Lowe's (LOW) is XHB's largest holding, and it carries almost the same weight as D.R. Horton (DHI), the country's largest homebuilder, which is only XHB's seventh-largest holding.

ITB: Purer Play On Home Construction

As such, XHB offers the more diverse take on the business of constructing and furnishing homes, but ITB is the purer play on homebuilders themselves. Homebuilders comprise 61% of ITB's portfolio, and its top three holdings are all mega-builders: D.R. Horton (DHI), Lennar Corp (LEN) and NVR (NVR), which make up 14%, 14% and 8% of the portfolio, respectively.

However, the lesson here is that pure-play exposure isn't always a good thing.

Cost-conscious investors probably also ought to note that XHB is substantially cheaper than ITB, with a price tag of 0.35% compared with ITB's 0.43%.

That may have something to do with why XHB has suffered fewer outflows than ITB this year (though both have lost money year-to-date): XHB has seen net outflows of $400 million, while ITB has seen outflows of $1.2 billion.

Contact Lara Crigger at [email protected]

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