ITB iShares US Home Construction ETF

Homebuilder ETFs have been sitting on the fence early this earnings season. While a frigid winter with temperatures touching the lowest in a decade passed by and the spring selling season arrived to cheer investors, not-so-encouraging data points soured their mood to an extent (read: The Comprehensive Guide to Housing ETFs).

On the bullish sides, all homebuilder stocks rallied on April 24 with D. R. Horton (DHI) posting the steepest gain of 8.34% (though the stock fell 2.77% the very next day) amid mixed-bag sector results this quarter. D.R. Horton’s sales climbed 22%, earnings expanded about 19%, gross margins grew 210 bps and net sales orders rose 9%.

D. R. Horton’s adjusted earnings of $0.38 per share in the second quarter of fiscal 2014 beat the Zacks Consensus Estimate of $0.34 by 11.8% while its revenues of $1.70 billion climbed 22.3% year over year and surpassed the Zacks Consensus Estimate of $1.61 billion by 5.6%.

This optimistic result foreshadowed what was to come for the entire space as well. Prior to this, Lennar Corp. (LEN) and KB Home (KBH) too came up with strong results outperforming their respective Zacks Consensus Estimates.

Some analysts touted that ‘cautious’ optimism propelled the recent rally and put most of the blame for many players’ underperformance in Q1 on inclement weather, hinting at otherwise decent underlying fundamentals of the industry.

Moreover, even when the U.S. was muddling through the record chills, new building permits rose 7.7% in March, their highest rate since October, and more importantly, the second highest rate since the middle of 2009. All these have contributed to the positive vibes in the homebuilder ETFs late last week.

There is bearish note as well though. Of the entire pack, only DHI outstripped the Zacks Consensus Estimate on both lines, while PulteGroup (PHM), NVR (NVR) and Meritage Homes (MTH) fell short of the expectations and noticed a decline in orders. Sales of both new (down 14.5%) and existing homes dropped in March (read: Are Housing ETFs in Trouble?).

Higher prices for even low-end segments and sluggish inventories have held back the housing market's recovery.  Per a Sterne Agee analyst, stringent mortgage underwriting standards were the concerns of the industry.

Market Impact

Thanks to wavering industry dynamics, associated stocks gained or lost mainly on their inherent strength or weakness.  Investors should also note that on April 25, some of the stocks shed their earlier gains on broader market weakness.

LEN rose 1.53% last week, KBH lost 3%, DHI gained 4.21%, PHM fell 1.50%, NVR was up 0.04% and MTH plunged 9.6%. All these stocks have decent weights in the ETFs like SPDR S&P Homebuilders ETF (XHB), iShares U.S. Home Construction ETF (ITB) and PowerShares Dynamic Building & Construction Fund (PKB).

All three ETFs currently have Zacks ETF Rank of 3 (Hold) with a high risk outlook and the above-mentioned stocks are operating in an industry which stands at bottom 23% of Zack industry classifications.  These ETFs are discussed in detail below:

XHB in Focus
 
The most popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. The fund manages about $1.74 billion in assets, and the fund charges 35 bps in fees per year from investors.
 
In total, the fund holds about 37 securities in its basket with none holding more than 3.43% of total assets. In-focus DHI and PHM have made their place in the top-10 holdings. The product focuses more on mid cap securities with 50% share, followed by 36% in small caps.

XHB lost 1.56% last week and 4.38% so far this year (read: Is XHB a Better Housing ETF Play?). 
 
ITB in Focus

This fund provides a pure play to the home construction sector by tracking the Dow Jones US Select Home Builders Index. It holds a small basket of 34 stocks and is heavily concentrated on the top 10 holdings with about 50% of total assets. LEN gets the top priority in the portfolio with about 9.98% of focus followed by DHI (9.66%) and PHM (9.48%).

The fund is skewed toward mid cap securities (60%), followed by small cap (29%), and charges 45 bps in fees and expenses. The product is rich with AUM of nearly $1.60 billion. 

The ETF was off 0.63% last week (read: 3 Sector ETFs Benefiting from Plunging Interest Rates).
 
PKB in Focus

This product follows the Dynamic Building & Construction Intellidex Index, holding 30 stocks in its basket. The fund has managed assets worth $125.7 million while it sees light volume, and the net expense ratio comes in at 0.63%.

The product is somewhat concentrated on the top 10 firms at under 47% of total assets. Here again, the ETF is tilted toward mid caps which make half of the portfolio while small and large caps take the remainder. PKB was down 1.42% last week.

Bottom Line

No doubt the homebuilding sector remains gridlocked presently, badly waiting for some positive drivers. The supply scenario must improve to bring things back in course. The first-quarter was really slow and many are hoping for a better Q2 as construction of new condominiums is increasing, new projects are flourishing and foreign buyers are willing to invest in the sector.

If you anticipate this case, consider the aforementioned ETFs for some quality exposure to this corner of the investing world as you can always rule out company-specific risk through the basket approach.

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D R HORTON INC (DHI): Free Stock Analysis Report
 
ISHARS-US HO CO (ITB): ETF Research Reports
 
KB HOME (KBH): Free Stock Analysis Report
 
LENNAR CORP -A (LEN): Free Stock Analysis Report
 
PWRSH-DYN BLDG (PKB): ETF Research Reports
 
SPDR-SP HOMEBLD (XHB): ETF Research Reports
 
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