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It seems that the residential construction sector is in a nice recovery with tremendous upside potential going forward. This trend, should it continue, will also provide a strong boost to overall economic growth (Best Construction ETF to Ride the Housing Upswing?).

New residential construction or housing starts reported growth of 12.1% in December indicating that housing starts are close to a five-year high. The industry has thus bottomed out and is all set to surge higher thanks to low-mortgage rates, smaller housing inventory and a growing population.

With improved buyers’ confidence in the market due to modest housing prices and interest rates, pent-up demand for housing will be on the rise. This will keep the housing sector in recovery mode for the next months, if not years (Three ETFs for the January Effect).

In fact, homebuilder ETFs have been one of the top performing sectors in 2012 attributable to improving housing and job data. Homebuilder ETFs which recovered almost 50% in 2012 have continued with their strong performance in 2013. And with the Fed expected to keep interest rates low, the sector could continue with its bullish run further into 2013 (Housing ETFs Rally on Solid Data).

For investors maintaining their bullish stance on the broad housing market, hoping that the segment will continue to book solid gains further in the year, here we would highlight the Zacks top ranked ETF providing exposure to homebuilding companies.

SPDR S&P Homebuilders ETF (XHB - ETF report) is ranked Zacks Rank 2 or Buy and we expect it to outperform its peers in a timeframe of one year meaning it could be an excellent pick for investors seeking more exposure to this slice of the market.

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely, Low, Medium, or High.

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, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk.

For investors seeking to apply this methodology to their portfolio in homebuilders, we have taken a closer look at the top ranked XHB below:

SPDR S&P Homebuilders ETF (XHB - ETF report)

The SPDR S&P Homebuilders ETF, before expenses, seeks to closely match the returns and characteristics of the S&P Homebuilders Select Industry Index.

XHB appears to be rich in an asset base of $2.66 billion and offers liquidity as revealed by its trading volume of more than 7 million shares a day. The fund charges a fee of 35 basis points a year (4 Best ETF Strategies for 2013).

The fund’s asset base is spread across 36 securities. However, it should be noted that investors looking for direct exposure to residential real estate companies, XHB is not the one they are looking for.

XHB has just 30.3% of its asset base of $2.7 billion in homebuilding while the rest is spread across building products, home furnishing retail, home improvement retail and household appliances.

Apart from the core housing market there are other sectors closely allied to it. The positive sentiment for housing has also influenced these related sectors as evidenced by the performance of XHB in 2012.

The fund does well to minimize company-specific risk thanks to its equal weighting. It invests 36.6% of its asset base in the top ten holdings. Among individual holdings, Tempur Pedic (TPX - Snapshot Report), Standard Pacific (SPF - Snapshot Report), and Mohawk Industries (MHK - Snapshot Report) form the top line of the fund with respective shares of 3.89%, 3.80%, and 3.77%.

The fund delivered a return of 5.59% in the year-to-date period while the 2012 gain was a whopping 57.15% -- a testimony to the housing market recovery. In fact, in the last few days, the ETF has been posting solid gains and setting new highs, suggesting that the future could continue to be bright for this all-star fund.

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