Going Home With Homebuilders ETFs

It is not a 2007 redux, but the iShares U.S. Home Construction ETF (NYSE:ITB) and the SPDR S&P Homebuilders ETF (NYSE:XHB) have been sharply outperforming the broader market in recent months.

Over the past 90 days, ITB and XHB are up an average of 4 percent while the S&P 500 is off 5 percent over that period. Homebuilders stocks and these ETFs are being buoyed by strong data. For example, through July, existing home sales climbed for three consecutive months. The S&P/ Case-Shiller National Home Price index rose a seasonally-adjusted 4.5 percent year-over-year in June following a 4.4 percent jump in May.

S&P Capital IQ expects homebuilder industry revenues to increase 15% in 2015 and 11% in 2016, driven by both price hikes and higher unit sales volume. S&P Capital IQ covers 12 homebuilder stocks, with 9 Buy recommendations and 3 Holds, said the research firm in a new note.

S&P Capital IQ is bullish on D.R. Horton Inc. (NYSE:DHI), a stock that is almost 12.4 percent of ITB's weight, making it that ETF's largest holding.

Buy-recommended D. R Horton expects to close and deliver about 36,500 homes in fiscal 2015 (ends Sept.), up more than 27% from fiscal 2014. Based on DHI's prior history of meeting expectations, and S&P Capital IQ's view that the U.S. housing market is steadily improving in fits and starts, Equity Analyst Erik Oja expects DHI will deliver on this guidance. In-line with Oja expectations of an industry-wide price increase slowdown, he projects a 5.1% increase in average selling price for DHI in fiscal 2015, said S&P Capital IQ.

Although it is XHB's second-largest holding, D.R. Horton is just 3.6 percent of that ETF's weight, a data point that underscores important differences between the SPDR and iShares offerings. Investors looking for pure play homebuilders exposure should lean toward the $2.27 billion XHB.

The $2.05 billion XHB, which does not allocate more than 3.68 percent of its weight to any of its 36 holdings, features just four homebuilders among its top 10 holdings. Rather, XHB is more levered to the retail side of residential real estate by way of stakes in companies such as Tempur Sealy International Inc. (NYSE:TPX), Dow component Home Depot Inc. (NYSE:HD) and Restoration Hardware Holdings Inc. (NYSE:RH). Home Depot is one of just four members of the Dow Jones Industrial Average that are up at least 10 percent year-to-date.

"Both XHB and ITB also have double-digit percentage exposure to building product companies such as Owens Corning (NYSE:OC) and home furnishing retailers," said S&P Capital IQ.

Year-to-date, ITB has slightly outpaced XHB, but as S&P Capital IQ, the equal-weight XHB has a lower standard deviation than ITB. Over the past three years, XHB has outperformed ITB by 330 basis points while being 410 basis points less volatile.