Different Strokes With Homebuilders ETFs

One of the better performing corners of the consumer discretionary sector this year are homebuilders stocks. For example, the iShares Dow Jones US Home Const. (ETF) (NYSE:ITB) is up 15.3 percent, more than double the year-to-date returns offered by the Consumer Discretionary SPDR (ETF) (NYSE:XLY).

ITB's primary rival, the SPDR S&P Homebuilders (ETF) (NYSE:XHB), is also outpacing XLY with a year-to-date gain of about 8.8 percent. As is usually the case with ITB and XHB, data is supporting upside for these exchange-traded funds.

Homebuilding, Housing-Related ETFs

Top-down data supports our positive view on the homebuilding sub-industry and other housing related sub-industries. U.S. home prices rose 5.9 percent and reached a 31-month high in January, according to the latest S&P/Case-Shiller U.S. National Home Price Index release, said CFRA Research in a note out Monday. The index measures all nine U.S. census divisions. Meanwhile, single-family home building, which is the biggest driver of the residential housing market, climbed 6.5 percent to 872,000 units in February, the highest level since October 2007. Further supporting the industry's prospects are contracts to buy previously owned U.S. homes, which jumped the most since July 2010.

Pure-Play Option Vs. Discretionary-Exposed ETFs

Obviously, ITB and XHB are delivering vastly different returns this year and the reason for that is well-documented. Quite simply, ITB is more of a pure play on homebuilders stocks while the equal-weight XHB offers more of a play on the retail/discretionary side of the residential real estate trade.

ITB tracks the Dow Jones U.S. Select Home Construction Index and holds 44 stocks. All of the ETF's top holdings are homebuilders or related fare such as Dow component Home Depot Inc (NYSE:HD). Conversely, home furnishings and retail names combine for over 21 percent of XHB's lineup and just two of that ETF's top 10 holdings are pure play homebuilders.

Breaking Down The Numbers

The performance differential stems largely from the distinct exposure. Building products (35 percent of assets) stocks are larger than homebuilding (29 percent) stocks, and home furnishings/household appliances (18 percent vs. ITB's 4 percent) constituents provide additional sub-industry diversification, said CFRA. According to data on etf.com, XHB's 12-month median tracking difference of -0.38 percent is only moderately lower than ITB's -0.44 percent. Given the expense ratio differences, we think this suggests both iShares and SSGA do a strong job tightly tracking the indices behind these ETFs.

CFRA has Overweight ratings on ITV and XHB.

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