Gap Between Homebuilder ETFs Widens

Performance disparity is huge in a segment dominated by two funds. 

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.

Homebuilders Fueling Gains

And that’s the crux of the performance divergence because this year it’s the homebuilder names that are having a stellar run, while “related industries have had mixed results.”

“XHB missed out on much of that rally,” Burley notes.  

ITB, which market-cap-weights 44 holdings led by names DR Horton, Lennar, NVR and PulteGroup, has some $1.5 billion in total assets. XHB, with 35 equally weighted holdings, has roughly $1 billion in assets. 

The difference in portfolio holdings and weighting schemes is the source of a perennial gap in performance, but that doesn’t mean ITB always has the upper hand. Sometimes the allocation and weighting differences benefit ITB, other times they benefit XHB—in 2013, for example, XHB led by 8 percentage points.  

2012 Was A Good Year

The gap in returns between ITB and XHB hasn’t been as wide as this year since 2012, when ITB shelled out 22 percentage points more than XHB in a year when both funds rallied, and ITB went on to gain nearly 80% in 12 months.

In the past five years, however, buying into the U.S. housing recovery story through either of these popular ETFs hasn’t been a bad idea. The funds have significantly outperformed SPY.   

Charts courtesy of StockCharts.com

Contact Cinthia Murphy at [email protected]