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Monday, December 12th, 2011
the homebuilders

Let’s say you wanted to buy “the homebuilders.”  How would you do it?

Most people would use the SPDR S&P Homebuilders ETF (XHB), given the name and all.  But the stocks of homebuilders make up only a quarter of that fund.  The rest is building products, appliances and furnishings, and retailers of one sort or another.  I’m surprised that the fund name was allowed by the regulatory authorities, since it really isn’t what it says it is.

Another option is the iShares Dow Jones U.S. Home Construction Index Fund (ITB).  It has about 65% of its assets in homebuilders.

Above you see the returns over the last year on the consumer cyclical ETF (XLY) and the two homebuilder ETFs.  Shown in orange is the performance of the homebuilders alone if they were stripped out.  (It is market value weighted.)  The additional highlighted returns on the right axis are those of the largest twelve homebuilder stocks.  You can see that there has been quite a spread in performance among them.

This is one small example of how confusing the land of ETFs can be.  A cursory look by someone interested in the homebuilders would see that XHB is the bigger of the two ETFs and has “performed better,” although what that means is that it actually has less exposure to the business itself.

Whether it is the right time to buy any of the stocks is another matter entirely, especially since they are up almost 50% since the bottom in October.  In absence of a significant economic improvement, it seems more likely that it will be a winners-and-losers game where individual stock picking is rewarded and the last thing you’d use is an ETF that gives you little exposure to what you really want.  (Chart:  Bloomberg terminal.)