ETF Trends
ETF Trends

Homebuilder ETFs should directly benefit from the Federal Reserve’s decision to step up its purchases of mortgage-backed securities in an effort to support the market for home loans and keep mortgage rates low.

However, hot-performing builder funds have lagged the S&P 500 in the wake of the Fed pulling the trigger on QE3.

“Homebuilders have been stunningly powerful following the October low of last year,” says Michael Gayed, chief investment strategist at Pension Partners.

SPDR S&P Homebuilders (NYSEArca: XHB) and iShares DJ U.S. Home Construction (NYSEArca: ITB) are up 88.9% and 117.3% over the past year, according to Morningstar. However, the sector may be poised to cool off.

“The Fed’s open ended purchasing of mortgage backed securities has sent 30 year fixed rates to another historic all time low, which one would think would cause homebuilders to continue leading markets. The problem is that homebuilders may be tired. It seems the group has discounted a lot of good news already, given the magnitude and duration of the move,” Gayed wrote at Seeking Alpha.

“The implication here is that any kind of further advance in equities may NOT result in continued leadership by the industry even though QE3 directly targets it fundamentally,” he added.

Options traders are taking a cautious stance on homebuilder ETFs, pending home sales are down and the sector funds are facing key resistance levels that could derail the rally. [Builder ETFs Sliding]

“What it boils down to now is if the trend in homebuilders strength breaks from here, coinciding with continued strength in bonds, high dividend paying sectors, and a return of deflation fears,” Gayed writes. “Should the corrective hesitation turn to a full blown decline, do not be surprised to see homebuilders take it on the chin.”

iShares DJ U.S. Home Construction

The opinions and forecasts expressed herein are solely those of John Spence, 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.