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Are Housing ETFs Back on Track?

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The homebuilder space has been one of the strongest performers over the past year, as more strength has been seen in this corner of the economy. However, like many sectors that were bid up to start the year, homebuilders suffered through a sell-off in May, leaving their performance over the past three months flat, severely underperforming the overall market.

Recent trading though, has been much better for the space, as a flurry of solid data has more than cancelled out any worries over higher rates curtailing demand. First, new home sales for April came in well above expectations, while recent Case-Shiller data was also extremely favorable (read Homebuilder ETFs Lead the Market Higher).

This lead some to believe that a near term bottom was at hand in the housing market, and that better days would once again be here for the space. An extremely rosy outlook was further confirmed by the most recent housing market index report which surged to levels unseen in more than a decade.

Housing Market Index Data in Focus

The NAHB housing market index came in at a reading of 44 for the prior month—after a downward revision—and it was expected that the figure would rise to 45 for May. Instead, however, the actual came in at 52, marking the first time since 2006 that the index was above 50.

Beyond the solid headline number, many were pleased with other aspects of the report as well. In particular, the six-month outlook came in at 61 while current sales hit 56, suggesting a very bullish outlook for the segment and that more gains could definitely be had in this important sector.

How to Play

While a look to individual homebuilder stocks is definitely an option, a broad approach to the space could definitely be a good idea in this market. This way, investors can play the broad trends in the space without worrying about getting dragged down by company specific issues.

For investors seeking to take this broad approach to the market, there are a couple of homebuilder ETFs that could make for ideal investments. Below, we briefly highlight two of the top funds in the space which could be great picks for investors who believe that the housing market will take off in the months ahead:

iShares Dow Jones US Home Construction ETF (ITB - Free Report)

This popular homebuilder ETF follows the Dow Jones US Select Home Builders Index, giving exposure to about 30 companies in the space. The product uses a cap-weighted approach to select stocks, giving big weightings to the largest names in the space (see the Best Construction ETF to Ride the Housing Upswing?).

Still, large caps aren’t exactly dominating the housing market, as just 12% of the stocks in ITB have this classification. Instead, mid caps dominate while pure homebuilders account for about two-thirds of the assets, leaving a bit for retail firms and building material companies.

ITB has struggled in the past three months, adding about 1.9% in the time frame, underperforming SPY by a wide margin. Over the past year though, ITB has been an all-star, adding about 63.3% compared to a 24.4% gain for the S&P 500 in the same time period.

SPDR S&P Homebuilders ETF (XHB - Free Report)

This ETF follows the S&P Homebuilders Select Industry Index, giving investors exposure to about 36 companies in the space. The fund uses an equal weight strategy, so no single security makes up over 5% of assets, ensuring a good level of diversification.

The equal weight approach also skews the fund towards small and mid cap securities, as just 14% of the ETF is in large cap stocks. Meanwhile, investors should also note that the ETF goes beyond just homebuilders, holding companies that are in the retail segment or household appliances corners of the housing market too (read Is XHB a Better Housing ETF Play?).

This has been a winning approach in the last three months as the ETF has gained about 5.7%, easily beating out ITB in the time frame. Over the past year though, the ETF has lagged ITB, adding about 55.5% in the time frame.

Bottom Line

Both of these ETFs were leading the market higher to open up the week on very solid volume levels. This continues a recent trend in the space after a pretty weak stretch for the in-focus market (also see Timber ETFs: The Best Housing Recovery Plays?).

Now, thanks to a string of great data releases, many investors are growing more optimistic about a continuation of the bull market in housing. If you are a believer in this trend, either XHB or ITB could make for solid picks, as both seem well-positioned to benefit from a new surge higher in the increasingly strong housing market story.

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