A Tale of Two Homebuilder ETFs

January 21st at 9:30am by Tom Lydon

There are actually three exchange funds offering exposure to homebuilders and companies related to residential real estate, but two, the SPDR S&P Homebuilders ETF (NYSEArca: XHB) and the iShares U.S. Home Construction ETF (NYSEArca: ITB), attract most of the attention in this ETF genre.

While the $1.96 billion XHB and the $1.55 billion ITB both have “homebuilders” in their names, the pair stand as one of the more relevant case studies regarding why investors need to look beyond ETF labels. [Get to Know Your ETFs]

“Both have plenty of liquidity and reasonable expense ratios. Where they part is in their definition of ‘homebuilding.’ Is it erecting a structure that people will live in? Or is it erecting a structure and then furnishing it with couches, a fridge, bath towels, perhaps a hot tub?,” writes Eric Balchunas for Bloomberg.

Said differently, the investor that wants exposure to actual homebuilders, think Pulte Group (NYSE: PHM), Lennar (NYSE: LEN), and related fare, should opt for ITB. Eight of ITB’s top-10 holdings are pure play homebuilders.

On the other hand, XHB is an equal-weight ETF and while it does hold shares of homebuilders, it also mixes in derivatives plays like USG (NYSE: USG), Lumber Liquidators (NYSE: LL), Whirlpool (NYSE: WHR) and Pier One (NYSE: PIR).

XHB has an almost 37% combined weight to home furnishings, home furnishings retail and home improvement names. Those are generally considered consumer discretionary stocks and that has been a good sector to be involved with over the past year. It is that discretionary exposure that explains why XHB is up 13.5% over the past 12 months while ITB is higher by 6.3%. [Improving Sentiment Lifts Homebuilder ETFs]

“A big reason for the divergence is the ETF’s extra exposure to those retail companies, which collectively were up over 30 percent in the past year. In addition, XHB weights all of its holdings equally so that small- and mid-cap companies, which have been doing better than large-cap stocks since 2012, have a louder voice than they do in ITB, which is market-cap weighted,” according to Balchunas.

ITB and XHB do share some traits in common. For example, neither fund, despite impressive performances over the past 24 months, are anywhere close to their pre-crisis highs. Additionally, both ETFs have been outperformed by the oft-overlooked PowerShares Dynamic Building & Construction Portfolio (NYSEArca: PKB) to start 2014. [Overlooked Homebuilders ETF Ready to Rally]

SPDR S&P Homebuilders ETF

 

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of XHB.

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.