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Fiscal 2012 has been a mixed story for the markets. Stocks have been able to post solid gains in the year-to-date time frame, but huge risks—in the form of China and Europe—still threaten to send the market lower as we enter the final part of the year.
In order to pacify the markets and keep prices relatively high in this high fear environment, the Federal Reserve has engaged in a third round of QE with a focus on MBS at this juncture (read Commodity ETFs in Focus as Fed Unleashes QE3). With this decision, some are maintaining their bullish stance on the broad housing market, hoping that the segment can continue its solid gains from earlier in the year.
After all, the industry has been rebounding slowly but surely. Lower mortgage rates, an increase in consumer confidence in the housing market and increased demand are some of the positives for the industry.
Also, with the implementation of QE3, coupled with the ongoing operation twist, the sector should gain from further reduction of interest rates. Moreover, most of the companies from this sector have implemented tighter cost control mechanisms which have, in turn, led to an increase in margins, suggesting that stocks and ETFs in the home construction segment could still be interesting picks (see Long Term Treasury ETFs: Ultimate QE3 Play?).
About Zacks ETF Rank
A look at top ranked Construction ETFs can be done by using the Zacks ETF Rank. This technique provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors as well.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, Zacks Rank reflects the expected return of an ETF relative to other ETFs with similar level of risk (see more in the Zacks ETF Center).
Using this strategy, we have found one ETF which is Ranked 1 or ‘Strong Buy’ with this model in the construction segment which we have highlighted in greater detail below:
iShares Dow Jones US Home Construction (ITB)
Launched in May of 2006, the iShares Dow Jones US Home Construction ETF (ITB - ETF report) tracks the Dow Jones U.S. Select Home Construction Index. The index seeks to provide exposure to stocks of the construction industry from the U.S equity markets.
Since it belongs to an industry which is highly sensitive to economic trends, the ETF did not have the smoothest of rides this year. It was negatively impacted during the broad market slump when the Euro zone crisis had caught the limelight, but has come roaring back in recent months.
In fact, the ETF has had among the best rebounds of any stock or ETF this year as it is up by almost 140% from its 52 week low. Also, ITB’s mid and small cap focus (almost 77%) has helped it to outperform the broader market as a whole, given the recent positives of economic developments in the domestic as well global front which have led to a risk on trade (read Two ETFs that Have Surged from Their Lows).
ITB has a small portfolio of 27 securities and charges investors 47 basis points in fees and expenses. The fund pays out a dividend yield of 0.50% and has been able to amass an asset base of $1.28 billion. On an average around 2.28 million shares of ITB exchange hands each day.
However, the ETF has an annualized standard deviation of 33.07% and has a ’Medium’ risk outlook. It has a 3 year R-Squared value of just 65% against the S&P 500 Index.
As of September 17th, the ETF has added about 63% on a year-to-date basis. Meanwhile, from a one year look, ITB has more than doubled, gaining over 104% and suggesting it is a strong momentum play in addition to being a top ranked ETF.
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