Homebuilder-related exchange traded funds recently retreated and may experience further weakness ahead as we hit a seasonally poor period for the industry.
According to Goldman Sachs’ options team, homebuilders typically fall behind in the summer months, with the SPDR S&P Homebuilders ETF (NYSEArca: XHB) trading “consistently lower” and falling seven of the past nine years over the May-to-August period for a median drop of 7.5%, reports Alex Rosenberg for CNBC.
Erin Gibbs, equity chief investment officer at S&P Capital IQ, contends that homebuilders exhibited an even stronger down trend in May and June when “there’s a clear negative return, both in relative terms versus the S&P 500, and in absolute terms. … So those are the months to go ahead and short or to use your options” for bearish positions.
However, with XHB rising 2.1% over the first nine days of May, Goldman’s options team warned that housing market investors may be overly complacent.
“Options investors are not pricing in downside risks to homebuilder stocks ahead of summer,” Goldman’s options team said.
The research team argues that the historical underperformance is a result of investors buying into the typically highly correlated group ahead of an overly optimistic Spring selling season, but then sell once poor data comes in.
“With the spring selling season coming to a close and some new concerns about rising yields and mortgage rates, we think it could be difficult for the shares to find a meaningful positive catalyst in the early summer,” Megan McGrath of MKM Partners said on CNBC.
If investors are willing to sit out the seasonal trend, XHB may be a better play as the ETF includes more consumer names, which may have allowed the fund to do better than the iShares U.S. Home Construction ETF (NYSEArca: ITB) in recent months. For instance, XHB declined 2.7% over the past three months while ITB fell 4.2%.
“XHB has 67% of its portfolio in non-home construction industries versus 33% for its largest competitor, and offers a more well-rounded exposure to the housing market with higher weights to housing retail and building products industries,” State Street Head of Research Dave Mazza said in an email. [Building Something With a Homebuilders ETF]
Looking more toward the long-term, the housing sector could still perform.
“There are some clear conditions in place that offer the sector the potential to perform well looking ahead,” Morningstar‘s Manager Research Analyst Robert Goldsborough said. “These include still-tight home inventories, cheap credit, growth in the household formation rate, and strong employment trends.”
SPDR S&P Homebuilders ETF
For more information on the housing market, visit our homebuilders category.
Max Chen contributed to this article.