Housing ETFs Lag Home Price Ascent

Housing ETFs Lag Home Price Ascent

Despite the sector’s slow and steady climb, housing ETFs are not reflecting that.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

A home in the U.S. today costs, on average, 5.4% more than it did a year ago. Generally speaking, that means home prices are back to levels seen in early 2007, and only 11-13% below their peak in 2006. That’s good news, not that ETF investors may have noticed.

Since the housing market found itself at the epicenter of the credit crisis in 2008, it has gone through great lengths to recover. In fact, the latest S&P/Case Shiller Home Price report showed U.S. home prices have risen some 36% from their 2012 lows in a steady—albeit slow—uptrend.

If a recovery in housing was imperative for future U.S. growth, well … it basically has recovered. But that apparent resilience hasn’t shown up in housing ETFs in recent months.

Housing ETFs Underperforming

The two largest housing-focused equity ETFs in the market, the iShares U.S. Home Construction ETF (ITB | A-72) and the SPDR S&P Homebuilders ETF (XHB | A-49), have now bled twice as much as the SPDR S&P 500 (SPY | A-98) in the past three months, as the chart below shows:

Chart courtesy of Stockcharts.com

That disparity in performance between the broad index and housing ETFs is also evident in six-month and 12-month charts.

Part of the problem could be the pace of the recovery, or better yet, what that pace does to investor confidence.

To quote David Blitzer, managing director and chairman of the index committee at S&P Dow Jones, “While home prices continue to rise, the pace is slowing a bit.”

In a market environment where more and more investors are concerned about the possibility of recession on a global scale, resilience goes a long way in fostering confidence. And according to Blitzer, there’s plenty of good news in housing: Housing construction is “beginning to show some serious strength;” higher home prices should contribute to that trend; and housing starts—the formation of new households—have exceeded 1 million starts per year.

Housing Confidence Wanes

But confidence in the segment—or lack thereof—could be weighing on these funds. Year-to-date, ITB has faced $255 million in net redemptions, while XHB bled nearly $100 million.

“U.S. housing is still strong, and the employment picture remains positive. So there seems to be some divergence between U.S. fundamentals and the financial markets,” Brett Wander, chief investment officer, Fixed Income for Charles Schwab Investment Management, said in a recent commentary.

“The risk, of course, is that the financial market’s recent performance leads to pessimism and fear, and that in turn could have a real impact on fundamental conditions,” he added.

It could also be that equity market volatility along with sector-specific performance are at play. If you look at the composition of these ETFs, they are heavily tilted toward consumer discretionary names—one of the worst-performing sectors in the S&P 500 so far this year.

ITB’s five biggest holdings are all discretionary companies: D.R. Horton, Lennar Corp., NVR Inc., PulteGroup and Toll Brothers, according to the fund’s website. XHB, similarly, has Whirlpool, PulteGroup, Masco Corp., Home Depot and Williams Sonoma as its top holdings.

Contact Cinthia Murphy at [email protected].

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.