It’s What’s Inside the Homebuilder ETFs That Counts

March 14th at 1:00pm by Tom Lydon

Real Estate. Thinking about the sector and its exchange traded funds (ETFs) might be giving you mixed feelings. The sector has been beaten down and dragged around, but it also presents an opportunity for growth in the future.

The housing sector is highly cyclical and sensitive to economic and credit conditions. Homebuilding ETFs have rallied nicely in the last year, up more than 100% since the market’s March 9 low. That doesn’t mean, however, that they’re done struggling. It might continue to be a year of fits and starts for the sector as unemployment stays high and homeowners foreclose, but you can use ETFs to diversify and mitigate risk while you wait for that firm recovery. [How to Follow the Trends.]

Asset allocators might note that over the past three years SPDR S&P Homebuilders (NYSEArca: XHB) and iShares Dow Jones U.S. Home Construction Index Fund (NYSEArca: ITB) have displayed 56% and 64% correlation to the S&P 500, reports John Gabriel for Morningstar. [Why Homebuilders Are Surging Ahead.]

For more stories about homebuilders, visit our homebuilders category.

  • SPDR S&P Homebuilders (NYSEArca: XHB): Here, only about 35% of the fund’s assets (or eight out of the 26 holdings) are invested in homebuilders. The fund also invests in other sub-industries such as building products, home furnishings, home-improvement retail, and home-furnishing retail. This is an equal-weighted market cap index.

  • iShares Dow Jones U.S. Home Construction Index Fund (NYSEArca: ITB): Only half of the fund’s constituents are actual homebuilders,┬ábut these companies account for about 70% of the portfolio. This is a market cap-weighted index that caps non-homebuilder related companies at 40%. [Big Improvements, Big Challenges In Real Estate.]

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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