Summary
- Favorable home prices and a sharp recovery in housing starts have driven housing-related investments higher in 2021.
- However, SPDR S&P Homebuilder ETF (XHB) has outperformed peer iShares U.S. Home Construction ETF (ITB) in 2021 by a wider gap than the funds’ expense ratios.
- These similar-sounding ETFs are constructed differently, with ITB having approximately a double weight toward homebuilding stocks, such as R. Horton (DHI), compared to XHB.
Home prices are hitting records in nearly every part of the country. The S&P CoreLogic Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices that track changes in the value of residential real estate. The June 29 release for the 20-City Composite reported a 14.9% annual increase for April data, up from 13.4% in the previous month, with Phoenix (+22%), San Diego (+22%), and Seattle (+20%) showing the highest gains. With 196 million U.S. households that are not moving, CFRA Equity Analyst Ken Leon thinks the wealth effect is real with rising home prices. Leon believes households frustrated with shortages of existing homes for sale will likely do mortgage refinancing to take cash out from higher home equity values. In 2021-2022, mortgage refinancing is likely to outpace new mortgage originations. According to Leon, this leads to a boost for available funds that are likely to be spent on the home due to families gaining a deeper appreciation for their homes due to Covid-19.
New home construction is another important source of home spending. There has been strong growth from the homebuilders that procure appliances, flooring, bathroom cabinets/fixtures, and kitchen cabinets. From the June 16 release by the U.S. Census Bureau, building permits and housing starts were up 50% year-over-year. Leon thinks 2021-2022 new housing starts may increase from the current 6%-7% to represent 10% of total residential sales, with a sharp decline in existing home sales inventory.
Housing-focused investors have preferred XHB over ITB in 2021. XHB pulled in approximately $270 million of new money year-to-date through July 6, per CFRA’s ETF database, to push its assets to $1.9 billion. In contrast, the $2.4 billion ITB incurred approximately $75 million of redemptions this year. There has been a notable gap between the performance of these similar-sounding ETFs beyond the seven basis-point spread in expense ratios like prior years. Year-to-date through July 6, XHB rose 27%, ahead of the 24% gain for ITB. While XHB also outperformed ITB in 2020 by approximately 160 basis points, it lagged by more than 700 basis points in 2019.
What is inside peer ETFs can be quite different, and these differences affect past and future performance. Despite having homebuilder in its name, XHB had only 33% of its June 2021 assets in the sub-industry, while homebuilder companies like DHI represented 65% of assets in ITB. Meanwhile, XHB had more exposure to building product companies (38% of assets) like Johnson Controls (JCI) than homebuilders. While both ETFs had an 11% stake in home improvement retailers, XHB also had a larger weighting in home furnishing companies (7% vs. 3%) like Tempur Sealy International (TPX).
ITB and XHB are constructed differently, resulting in distinct records, but CFRA thinks both will outperform the broader U.S. sector equity ETF universe over the next nine months. We favor the reward potential for XHB but see ITB providing higher risk mitigation.
Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.
