While the media is hyping Tuesday’s better-than-expected housing starts numbers as a surprise, the reality is that homebuilder exchange traded funds have been anticipating a pick-up in strength going all the way back to October.
The rally in housing-related ETFs has been impressive given that the group on average is a lot closer to levels seen before the summer sell-off than any other broad market in the world. Much of this is due to incredibly low interest rates in the U.S., which have the benefit of the Federal Reserve and European investors pushing prices up.
While certainly possible that homebuilder ETFs continue their run, it would seem to make sense that the next industry to exhibit outperformance is timber suppliers.
I say this because a true pickup would likely result in increased demand for wood which is a leading indicator for economic growth and a housing recovery.
Take a look below at the price ratio of the Guggenheim Timber ETF (NYSEArca: CUT) relative to the iShares S&P 500 (NYSEArca: IVV). As a reminder, a rising price ratio means the numerator/CUT is outperforming (up more/down less) the denominator/IVV.
Notice the utter collapse in the ETF relative to the broader market since April of this year. The underperformance has been unrelenting and very consistent month after month.
If a true recovery is at hand in homebuilding, then the above ETF should benefit directly making this a potential great buying opportunity for longer-term investors. With the ETF around levels last seen around the flash crash of 2010, now might be an interesting time to bet on mean reversion in the group.
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