Wide Dispersion In 3 Homebuilder ETFs

The segment is seeing pretty varied returns as the housing market improves.

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Reviewed by: Cinthia Murphy
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Edited by: Cinthia Murphy
Investing in homebuilder ETFs is looking more profitable thanks to an improving housing market. But the gains delivered by the three main strategies in this segment aren’t equitable.

The latest S&P/Case-Shiller U.S. National Home Price Index showed that an average home in the U.S. in January cost 5.4% more than it did a year ago, putting home prices back at 2007 levels, and about 35% above the 2012 lows. However, total returns on homebuilder strategies are varied and disperse.

For the two largest ETFs in this segment, both with about $1.5 billion in assets—the SPDR S&P Homebuilders (XHB | A-48) and the iShares U.S. Home Construction (ITB | A-73)—the ongoing recovery has translated into significant gains in the past four years, as the chart below shows:

Chart courtesy of StockCharts.com

Return Dispersion Tied To Portfolio

While these funds have rallied significantly from 2012 lows, ITB has shelled out 24 percentage points more in gains than XHB—or 40% more in total returns in that four-year period.

That difference hinges largely on portfolio allocation. ITB tracks a market-cap-weighted index of companies involved in the production and sale of materials used in home construction. It’s a more traditional approach to homebuilding stocks than XHB, which invests heavily in other segments more tied to consumer goods.

For instance, about 60% of ITB is invested in homebuilders, compared with 30% for XHB, which tracks a broad-based, equal-weighted index of U.S. companies involved in the homebuilding industry.

About 23% of XHB is tied to home-furnishing-related companies and retailers; 10% is in home improvement names; and 6% is in home appliances and tools. Whirlpool is one of XHB’s largest holdings.

ITB, too, owns names in the furnishings and even commodity chemicals, but the fund’s top holdings are homebuilders like D.R. Horton, Lennar Group and PulteGroup.

Single-Stock Dispersion

From a single-security perspective, dispersion in performance is also notable. Consider that among homebuilders, D.R. Horton is up nearly 12% in the past 12 months, while Lennar Group is down nearly 4% and Toll Brothers is down some 25% in the same period.

ITB has DR Horton at 12%—its biggest holding—and Toll at 7%, but XHB has a modified equal-weighted allocation to Toll Brothers, Lennar and D.R. Horton, each coming in at about a 4.5% allocation.

And these dispersions can be magnified by different portfolio rebalancing schedules—variations on when a stock was bought and sold.

Another Take On This Segment

Beyond these two large ETFs, and a small lineup of leverage and inverse strategies, there’s one other exchange-traded product in the homebuilder segment that’s relatively new and has yet to gain much traction: the Etracs ISE Exclusively Homebuilders ETN (HOMX).

What’s interesting about this ETN—as it compares to ITB and XHB—is that it offers the most pure-play access to homebuilders.

The strategy tracks an index of U.S.-listed stocks in the homebuilding sector that are selected by market capitalization and weighted in tiers.

In this portfolio, there’s no Home Depot or companies like it, but there’s plenty of D.R. Horton, Lennar and PulteGroup. The index it tracks tries to capture at least two-thirds of the homebuilder industry’s market capitalization, according to UBS.

Since HOMX came to market about a year ago, the ETN has struggled to rise. The chart below shows the dispersion in performance between HOMX, ITB and XHB in the past year:

While ITB is down 4% and XHB is down 8%, HOMX is down a whopping 19% in the last 12 months, according to Bloomberg data.

Portfolio differences, again, are at play in this dispersion. It’s also worth noting that HOMX is an ETN, meaning investors don’t have a claim on the underlying stocks, but are promised the returns of its index, backed by the issuing bank UBS.

Fees Plays A Role On Returns

This security is also pretty illiquid, particularly compared with ITB and XHB, making it less appealing for traders.

HOMX, which has $23 million in assets, trades, on average, about $8,000 a day with an average spread of 0.46%. That wide spread translates into cost for investors, which in the end dents total returns. Combined with an expense ratio of 0.40%, the cost of ownership of this strategy is roughly 0.86%, or $86 per $10,000 invested.

XHB, for instance, sees average daily volume of about $109 million with a spread of 0.04%. With an expense ratio of 0.35%—the lowest in the segment—XHB costs investors under 0.40% a year.

ITB, meanwhile, trades on average nearly $92 million a day with spreads of 0.04%. The fund has an expense ratio of 0.45%—the highest among the three—but total cost of ownership here sits around 0.49%, or $49 per $10,000 invested. The more you pay, the less you keep.

What’s Ahead For Homebuilder ETFs

The housing market sat at the epicenter of the credit crisis that in 2008 sent the U.S. into its worst downturn since the Great Depression. Its recovery has been highly watched, and directly linked to the overall recovery of the U.S. economy.

But since the Federal Reserve raised rates in December 2015, the market had been weighed by concerns over the possibility of a global recession and expectations that the Fed might have to rethink its pace for increasing rates amid a highly volatile U.S. stock market.

Still, as Robert Shiller put it, the housing market is a “positive market” right now.

“The price climb has been pretty steady since 2012,” the Nobel Prize–winning economist and co-creator of the S&P/Case Shiller Index, told Yahoo Finance. “In a lot of cities, prices are up over 30%. I think people are cautiously optimistic.”

According to the S&P/Case Shiller report, home prices are rising at more than twice the rate of inflation, making the business of building homes more profitable at a time when there’s pent-up demand.

Inventories of homes for sale are low, the report said, and “the recovery of the sale and construction of new homes has lagged the gains seen in existing home sales,” said David Blitzer, chairman of the index committee at S&P Dow Jones.

But all of this seems to be changing as the market recovers, and investor confidence in housing improves.

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.