Speculation that new President Donald Trump could benefit homebuilder equities and the related exchange traded funds is showing signs of coming to fruition.
To start 2017, the SPDR S&P Homebuilders ETF (NYSEArca: XHB) and the iShares U.S. Home Construction ETF (NYSEArca: ITB) are up average of 4.8%.
ITB and XHB surged Tuesday after D.R. Horton (NYSE: DHI), the largest U.S. homebuilder, reported its highest growth in orders in over a year, revealing the underlying strength of the housing market.
D.R. Horton and other homebuilders also strengthened on data showing U.S. home resales dipped more than expected in December as the supply of houses on the market fell to levels last seen in 1999, reports Arunima Banerjee for Reuters.
Horton revealed that orders, an indicator of future revenue for homebuilders, increased 14.6% to 9,241 homes in the quarter ended December 31. The company saw good sales trend in January very early into Spring.
The equal-weight XHB mixes stocks such as Tempur Sealy (NYSE: TPX), Williams-Sonoma (NYSE: WSM) and Restoration Hardware (NYSE: RH) with pure play homebuilders such as Lennar (NYSE: LEN) and Toll Brothers (NYSE: TOLL) among others. Conversely, ITB is more of direct play on dedicated hombeuilders stocks.
Erin Gibbs, equity chief investment officer at S&P Global, said Tuesday on CNBC’s “Power Lunch” that “homebuilders “one of the better industry bets,” saying they are expected to see 15 percent earnings growth for next year, beating out that of the S&P 500’s 12.3 percent. She also said their forward price-to-earnings ratio is 10.5, versus 18 times for the overall S&P 500,” reports CNBC.
Some investors believe Trump will follow through on campaign promises to reduce corporate taxes, cut back on regulations and throw billions of dollars into the U.S. economy. However, the expansionary rhetoric has caused the Federal Reserve to tighten its monetary policy, which could push up mortgage rates.
“From a technical perspective, homebuilder names look poised for gains, according to Chris Verrone, head of technical analysis at Strategas Research Partners,” according to CNBC.
Traders looking for a bearish play on homebuilders stocks can consider the Direxion Daily Homebuilders & Supplies 3x Bear Shares (NYSEArca: CLAW), which attempts to deliver triple the daily performance of the index XHB tracks.
For more information on the housing sector, visit our homebuilders category.