After a five-year bear market, there are signs that the residential real estate market is coming back to life.
This week, we got some evidence: The S&P/Case-Shiller index showed a 1.3% increase in April (on a month-over-month basis), and we saw some positive earnings reports out of the sector.
So might it be worth taking a look at the homebuilders — particularly, as a group through an exchange-traded fund? Perhaps.
“Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while ‘doubling-up’ may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.”
But there are some other drivers. For example, the number of foreclosures has been trailing off. In California, the number of distressed sales in May hit the lowest levels in 4 1/2 years. There also have been improvements in other hard-hit states like Arizona and Florida.
At the same time, new housing starts remain depressed. They went from 1.3 million units in 2005 to about 300,000 last year. Thus, with growing demand and meager supply, the situation looks ideal for homebuilders.
But rather than trying your luck by picking one or two of the main operators out there, a better way might be to hedge your bet and play the whole sector through an ETF.
One of the biggest-name funds out there is State Street’s SPDR S&P Homebuilders ETF (NYSE:XHB), which has about $1.3 billion in assets. It’s not a pure play — close to 30% of the portfolio is in homebuilders, like Lennar (NYSE:LEN) and PulteGroup (NYSE:PHM) — but the rest of the investments are in businesses related to real estate.
Some of these “splinter” holdings include home improvement product manufacturer Masco (NYSE:MAS), and retailers of said Masco products, like Home Depot (NYSE:HD). These holdings might not be a direct line to homebuilding success, but they do help to hold down the fund’s volatility.
In all, the EHB ETF has 35 stocks with an average market cap of about $3 billion. The expense ratio also is reasonable, at 0.35%
Another solid homebuilder ETF is the iShares Dow Jones US Home Construction (NYSE:ITB) fund, which has about $752 billion in assets. If you want to get much more exposure to the sector, then this is your pick, as more than two-thirds of the portfolio is in homebuilder stocks.
However, ITB is a bit pricer than XHB, with an expense ratio of 0.47%. Also, volume is on the light side, coming to about 2 million shares per day vs. the State Street fund’s 8.5 million.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.