S&P Bearish on Home Builders ETF

Coming off a year in which it was one of the top-performing ETFs of any stripe, the iShares Dow Jones U.S. Home Construction Index Fund (NYSE:ITB) has kept the good times going in 2013. In fact, the $2.2 billion ITB was one of just a handful of ETFs sporting double-digit year-to-date returns prior to Wednesday's loss.

In the past year, ITB has surge over 78 percent, but the good times may be coming to an end in the eyes of S&P Capital IQ. The research firm has a negative fundamental outlook for the homebuilding sub-industry for the next 12 months and has an Underweight rating on ITB.

S&P Capital IQ equity analyst Michael Souers "believes most publicly traded builders are in a stable competitive position after cutting costs, retiring debt and growing cash positions," according to a new research note issued by the firm. However, Souers foresees an uptick in foreclosure activity this year, which could "pressure home prices and stall improvement in new single-family home sales."

Should that scenario play out, it would almost certainly pressure ITB, which features eight homebuilders among its top-10 holdings. The outliers are Home Depot (NYSE:HD) and Lowe's (NYSE:LOW), which combine for about 7.6 percent of the ETF's weight.

ITB's top-five holdings are PulteGroup (NYSE:PHM), Lennar (NYSE:LEN), DR Horton (NYSE:DHI), Toll Brothers (NYSE:TOL) and NVR (NYSE:NVR). Combined, those stocks represent approximately 45.5 percent of ITB's weight.

Ryland Group (NYSE:RYL), MDC (NYSE:MDC) and KB Home (NYSE:KBH) are the other homebuilders featured among ITB's top-10 holdings. That trio represents 10.5 percent of ITB's weight. Souers has sell ratings on KB Home and Pulte.

"We think the housing market will improve over the next year, but shy of consensus views for stronger growth. Souers also thinks it will take time before buyers' confidence and the job market improve enough to support a more favorable view of home ownership," according to S&P Capital IQ.

The research note did not mention ITB's primary rival, the SPDR S&P Homebuilders ETF (NYSE:XHB). In the past year, XHB has returned over 53 percent and the ETF was up 6.6 percent heading into Wednesday's trading session. With $2.66 billion in assets under management, XHB is larger than ITB, but the SPDR offering is not as heavily allocated to homebuilder equities.

While six such names, including D R Horton, Pulte, Ryland and Toll Brothers, are featured among XHB's top-10 holdings, those companies are not as prominent in XHB as they are in ITB. The six homebuilders in XHB's top-10 lineup combine for just 22.5 percent of the ETF's weight.

XHB, which has an annual expense ratio of 0.35 percent compared to 0.46 percent on ITB, offers exposure to housing derivative plays such as Tempur-Pedic (NYSE:TPX) and Lumber Liquidators (NYSE:LL).

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