ETF Trends
ETF Trends

Mortgage rates are rising. Young first-time buyers are scarce in the market, but those factors are not preventing homebuilders exchange traded funds from soundly outpacing the S&P 500 over the past several months.

Over the past 90 days, the SPDR S&P Homebuilders ETF (NYSEArca: XHB) and the iShares U.S. Home Construction ETF (NYSEArca: ITB) are up 9.6% and 6.5%, respectively, while the S&P 500 is higher by just 1.5%.

Short covering, or short sellers buying to cover shares they borrowed to short, has been a key driver of those returns. At least in the case of XHB. Since mid-October, the ETF has thumped the S&P 500 by 14% while short interest in the fund has plunged 56% from a six-year high, report Anna-Louise Jackson and Anthony Feld for Bloomberg.

While waning short interest could be the sign of a catalyst leaving because short covering can drive securities higher, it is worth noting that XHB and ITB have been on the receiving end of solid inflows this year. XHB, the equal-weight homebuilders ETF with more exposure to the discretionary side of residential real estate, has added $586.4 million in new assets this year. ITB, which is more heavily allocated to pure play homebuilders, has hauled in $345 million in new assets. [Stimulation for Homebuilders ETFs]

As was seen with futures-based oil ETFs last year when that commodity plunged, an ETF’s assets rise in unison with an increase in short interest because short sellers force the creation of new shares to be borrowed, giving the impression that an ETF is growing.

What that means for XHB is that the money that is currently coming into the fund, at least some of it, is dedicated to true long exposure, not short covering. That much can be gleaned from the ETF’s rising assets and declining short interest.

Still, homebuilders equities have other concerns. Mortgage rates have increased to their highest level of the year, and loan applications plunged 13.2% for the week ended Friday, reports Dian Olick for CNBC. Mortgage applications to purchase a home also fell 7% for the week.

Recently, Fannie Mae and Freddie Mac introduced 3% down payment loans while the U.S. Department of Housing and Urban Development also lowered insurance premiums that low-down-payment borrowers have to pay. [Lower Down Payments Could Stimulate Homebuilders ETFs]

SPDR S&P Homebuilders ETF

ETF Trends editorial team contributed to this post.

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.