McCall’s Call: Is The Time Ripe For Homebuilder ETFs?

July 02, 2010

Data on housing may not look encouraging lately, but contrarians and those looking to buy and hold before a full rebound is upon us ought to take stock of the choices of homebuilder ETFs now available.

Just when you thought real estate was poised to rebound with the U.S. economy, new home sales in May plunged 33 percent from April to a record low. That may have been surprising, but I still think it’s worth looking more closely at the numbers with a view to possibly owning a homebuilder ETF.

Matthew D. McCall While the seasonally adjusted number came in at 300,000 homes, well below the estimates and the lowest number since the Commerce Department started keeping numbers in 1963, I’m not ready to dismiss the idea of owning one of the three homebuilder ETFs I’ve been eyeing. The question is when?

What I’m saying is that before you fall off your chair, keep the following in mind: The U.S. government’s homebuyer incentive—as much as $8,000 for first-time buyers and $6,500 for repeat buyers—ceased at the end of April, and therefore almost surely cannibalized May’s sales figure.

An average of 380,000 new homes sold per month through the first quarter of 2010. That number spiked to 446,000 in April before falling to 300,000 in May. If you take the average of April and May the number is 373,000, just below the average of the first quarter of 2010. Suddenly the May number doesn’t look so bad.

That said, with the statistics I just laid out above, why would an investor even consider looking at homebuilder ETFs? Possibly as a contrarian play or a long-term bet that the housing market won’t be caught in the middle of a double-dip recession. It’s also possible investors are looking for a bounce in homebuilder ETFs, which have fallen 20 percent in the past two months.

Homebuilder ETFs

The largest of the three homebuilder ETFs, with more than $800 million in assets, is the SPDR S&P Homebuilders ETF (NYSEArca: XHB). This ETF has a reasonable expense ratio of 0.35 percent and is composed of 26 stocks. The top holdings, perhaps surprisingly, aren’t actual homebuilders, but rather industrial materials and consumer goods companies. USG Corp (NYSE: USG), the maker of Sheetrock that’s used to build most homes, is the largest holding at 5.5 percent. Only two of the fund’s top 10 holdings are pure-play homebuilders: Lennar Corp (NYSE: LEN) and Pulte Homes (NYSE: PHM).

No. 2 in the sector is the iShares DJ US Home Construction ETF (NYSEArca: ITB). The expense ratio is slightly higher than XHB’s at 0.47 percent, and it has one more stock (27) than XHB. But that’s where the similarities end. ITB is a much more a pure-play: eight of the top 10 holdings are homebuilders. The two largest holdings, NVR (NYSE: NVR) and Pulte Homes (NYSE: PHM), make up 21 percent of the entire allocation.

As far as performance, XHB has been the clear winner over the past three years, beating ITB each calendar year. The three-year annualized return for XHB is -20.3 percent versus a drop of 27.7 percent for ITB.

The PowerShares Dynamic Building & Construction ETF (NYSEArca: PKB) is another option for investors that differs even further from XHB. It’s more expensive, with an expense ratio of 0.60 percent, has 31 holdings and only $44 million in assets. The allocation focuses not only on materials companies, but also engineering firms that don’t have large exposure to the residential housing market. This makes PKB the least exposed of the three ETFs to the residential housing market.


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