After Surging, Homebuilder ETFs Look Pricey

Thanks to improving house and jobs data, a pair of the best-performing sector ETFs in 2012 have been those with heavy exposure to the residential real estate market. Through 10 months of trading, the iShares Dow Jones U.S. Home Construction Index Fund (NYSE:ITB) and the the SPDR S&P Homebuilders ETF (NYSE:XHB) have blown other high-flying sectors.

The $1.5 billion iShares Dow Jones U.S. Home Construction Index Fund has surged 78 percent this year, including paid dividends. The $1.9 billion SPDR S&P Homebuilders ETF has jumped 58 percent. Said another way, if one chooses to ignore ITB and that ETF's amazing run, there is still no ignoring some of the other marquee ETFs XHB has outperformed.

XHB has offered nearly quadruple the gains of the SPDR S&P 500 (NYSE:SPY). High-flying biotech ETFs have been no match for XHB and ITB, either. XHB has done better than twice as well as the SPDR S&P Biotech ETF (NYSE:XBI) this year.

XHB is up nearly five times as much as the iShares Dow Jones U.S. Technology Sector Index Fund (NYSE:IYW), the ETF with the largest weight to Apple (NASDAQ:AAPL). The oft-overlooked PowerShares Dynamic Building & Construction Portfolio (NYSE:PKB) has even gotten in on the act with a 39.3 percent year-to-date gain.

All that good cheer has ITB and XHB looking quite pricey on a valuation basis. Technology is often the sector most pointed as being home to elevated price-to-earnings and other valuation metrics. A look at IYW shows that ETF has a P/E ratio of 19 and a price-to-book ratio of 4.77.

ITB, an ETF that allocates over 28 percent of its weight to Lennar (NYSE:LEN), Pulte (NYSE:PHM) and DR Horton (NYSE:DHI), has a P/E ratio north of 30. That is even above the P/E on the First Trust Dow Jones Internet Index Fund (NYSE:FDN), an ETF that devotes 17.4 percent of its weight to Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN).

The P/E ratios for SPDRs are calculated differently than on iShares ETFs, but ITB still sports a P/E ratio of almost 21 and price-to-book ratio of 2.66. That ETF has a price/cash flow ratio of nearly 15, according to State Street data.

It may be stretched valuations that has prompted some recent bearish options activity in the two ETFs as Street One Financial highlighted in a recent note.

"It is feasible that the recent bearish looking speculation in ITB options as well as in related ETF XHB, is perhaps a valuation call' by fundamentally focused investors that are looking for a potential correction in the Homebuilders/Construction sector. It will be interesting to watch funds such as these heading into the final weeks of the trading year of 2012 to see if investor behavior is altered at all in terms of a possible acceleration of activity given any year end tax considerations," said Street One in the note.

With ITB trading around $21, open interest in the November $21 puts is almost 1,200 contracts while open interest in the November $20 puts is over 2,250 contracts, according to Options Monster data.

XHB is flirting with $27, so can be perceived as interesting that open interest in the November $24 puts is over 32,600 contracts and open interest in the November $25 puts is nearly 10,000 contracts, according to Options Monster.

For more on high P/E ETFs, click here.