ETF Trends
ETF Trends

Homebuilders stocks and exchange traded funds face a dichotomy. On one hand, there are obvious headwinds facing the industry, notably the lowest rate of U.S. home ownership since 1994 and depressed purchase levels among younger Americans.

On the other hand, some analysts see lower oil prices reducing input costs for homebuilders and low interest rates, which facilitate low mortgage rates, potentially stoking a new wave of home buying. Household durables companies and the ETFs that hold some of those names have been highlighted as tactical avenues for consumer discretionary sector exposure.

“There is, nonetheless, a divergence in gross margins and profitability among household durables sub-industries, with the biggest outlier found in the homebuilders. Not only do homebuilders have the lowest gross margins, they are also among the most volatile over the business cycle,” said S&P Capital IQ in a new research note. [A Foundation for Homebuilders ETFs]

The PowerShares S&P SmallCap Consumer Discretionary Portfolio (NasdaqGM: PSCD) is one such idea. PSCD, which tracks consumer discretionary sectors from the S&P SmallCap 600 Index, features an almost 11% weight to household durables names, making that group the ETF’s fourth-largest industry weight.

“Household durables also make up 11% of PowerShares S&P SmallCap Consumer Discretionary Portfolio (PSCD). Smaller companies such as household appliance company iRobot (IRBT) and homebuilder Ryland Group (RYL) are among those in the ETF,” said S&P Capital IQ.

Although broader small-cap indexes have lagged their large-cap counterparts over the past year, PSCD is up 17.2% compared with a 9.4% gain for the Russell 2000. PSCD has also outpaced the Vanguard Consumer Discretionary ETF (NYSEArca: VCR) by 70 basis points over that period.

As its industry weights indicate, PSCD is much more than a play on the housing market. Rather, the ETF is a bonafide play on eating out with a 28.2% weight to restaurants and hotels. Buffalo Wild Wings (NasdaqGS: BWLD) and Jack in the Box (NasdaqGS: JACK), a combined 6.6% of PSCD’s and the ETF’s two largest holdings, are up an average of 58% over the past year. [Upside for Small-Cap Consumer ETFs]

“The household durables industry is a component of the consumer discretionary sector, though it is smaller than retailing and media. The sector represents 12% of the S&P 500 and the S&P 1500 index, as of January 2015,” according to S&P Capital IQ.

PowerShares S&P SmallCap Consumer Discretionary Portfolio

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.