US homebuilder ETFs boom as house prices and sales rebound

Aug 27th, 2012 | By | Category: Equities

Exchange-traded funds (ETFs) with exposure to the US homebuilding industry have been boomed this year, as US house prices and home sales have rebounded.

US homebuilder ETFs boom as house prices and sales rebound

US homebuilder ETFs, such as the iShares Dow Jones US Home Construction Index ETF (ITB), have rallied strongly this year as house prices and sales have rebound.

Leading the pack has been the highly targeted iShares Dow Jones US Home Construction Index ETF (ITB), which has rallied over 51% year to date. Meanwhile the SPDR S&P Homebuilders ETF (XHB), the largest homebuilder ETF by assets, has gained 37%.

Recent data on the homebuilding industry suggest the strong performance will continue.

Statistics released by the Department of Commerce show that new home sales in the US increased 3.6% in July to a seasonally adjusted annual rate of 372,000. Sales were up more than 25% from July last year.

Home prices have also continued to climb, increasing 0.5% in July according to the latest Zillow Real Estate Market Report. Home values are up 1.2% year-over-year. Most (62%) of the metropolitan areas covered in the report saw home values climb during the month, with only 49 of the 167 metropolitan areas experiencing declines.

Of the 30 largest metropolitan areas tracked by Zillow, the Phoenix area experienced the largest monthly increase, with home values rising 2.2%. Other large areas with notable monthly increases include the San Francisco (1.2%) and the Denver (1%).

US rents also continued to rise, climbing 0.2% month-over-month and 5.4% year-over-year. Across the US, rents have increased in six out of the past 2 months, with most area (70%) experiencing rent increases from June to July.

“This summer, the housing market continued to heal, as home values experienced their eighth consecutive month of increases,” said Dr Stan Humphries, Zillow Chief Economist. “Tight inventory levels are leading to bidding wars and multiple offers across the country.”

The Department of Commerce and Zillow data confirm the positive trend seen in the most recent readings of the S&P/Case-Shiller Home Price Indices, a widely watched house price index series. The S&P/Case-Shiller indices showed that average home prices increased by 2.2% in May for both the 10- and 20-City Composites.

David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices, said: “With May’s data, we saw a continuing trend of rising home prices for the spring. On a monthly basis, all 20 cities and both Composites posted positive returns and 17 of those cities saw those rates of change increase compared to what was observed for April. Seventeen of the 20 cities and both Composites also saw improved annual rates of return.

“We have observed two consecutive months of increasing home prices and overall improvements in monthly and annual returns; however, we need to remember that spring and early summer are seasonally strong buying months so this trend must continue throughout the summer and into the fall.”

For investors looking to capitalise on these trends, a number of NYSE-listed ETFs offer exposure to the US homebuilding and construction industries. The two most popular are the aforementioned  SPDR S&P Homebuilders ETF (XHB), which has over $1.5 billion in assets, and the iShares Dow Jones US Home Construction Index ETF (ITB), which has almost $1.1 billion in assets. A third option is the PowerShares Dynamic Building & Construction Portfolio ETF (PKB), which has just $29 million in assets.

They are detailed below:

iShares Dow Jones US Home Construction Index ETF (ITB)
The iShares Dow Jones US Home Construction Index ETF tracks the Dow Jones US Select Home Construction Index. This index represents the Home Construction, Furnishings, Home Improvement Retailers and Building Materials and Fixtures sub-sectors. Companies classified as Furnishings, Home Improvement Retailers and Building Materials and Fixtures will be restricted to an aggregate maximum weight of 40% of the index, thereby giving more weight to home builders. The fund currently comprises 27 holdings, the top five of which are all home builders: Lennar (9.9%), DR Horton (9.7%), PulteGroup (9.5%), Toll Brothers (9.3%) and NVR (7.9%). NYSE Arca. Expense ratio 0.47%.

SPDR S&P Homebuilders ETF (XHB)
The SPDR S&P Homebuilders ETF tracks the S&P Homebuilders Select Industry Index. This index represents the homebuilding sub-industry portion of the S&P Total Markets Index, and includes Homebuilding, Building Products, Home Furnishings, Home Improvement Retail, Home furnishing Retail and Household Appliances. The fund currently comprises 37 holdings, the top five of which are: PulteGroup (4.3%), Lumber Liquidators (4.0%), Standard Pacific Homes (3.8%), USG (3.7%) and Toll Brothers (3.6%). NYSE Arca. Expense ratio 0.35%.

PowerShares Dynamic Building & Construction Portfolio ETF (PKB)
The PowerShares Dynamic Building & Construction Portfolio is based on the Dynamic Building & Construction Intellidex Index. The index is comprised of stocks of US building and construction companies. These are companies that are primarily engaged in providing construction and related engineering services for building and re-modelling residential properties, commercial or industrial buildings, or working on large-scale infrastructure projects, such as highways, tunnels, bridges, dams, power lines, and airports. Index weights are assigned based on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action, and value. The fund comprises 30 holdings, the top five of which are: Home Deport (5.1%), Vulcan Materials (5.0%), DR Horton (4.9%), Ingersoll-Rand (4.9%) and Quanta Services (4.7%). NYSE Arca. Expense  ratio 0.63%.

UK and Continental European investors are less well served, and are currently unable to gain targeted exposure to the US homebuilding industry. For broader access to the US and North American property markets, however, which includes non-residential, investors could consider the following:

iShares FTSE EPRA/NAREIT US Property Yield ETF (IUSP)
iShares FTSE EPRA/NAREIT US Property Yield ETF aims to track the performance of the FTSE EPRA/NAREIT US Dividend+ Index, providing exposure to listed US real estate companies and REITs, which have a one-year forecast dividend yield of 2% or greater. Listed on LSE. Expense ratio 0.40%.

iShares STOXX Americas 600 Real Estate Cap ETF (EXI6)
The iShares STOXX Americas 600 Real Estate Cap ETF aims to track the performance of the STOXX Americas 600 Real Estate Cap Index. This index provides exposure to the Canadian and United States Real Estate sector. Listed on Deutsche Borse. Expense ratio 0.73%.

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