Newbies Show Up Old Homebuilding ETF

The old hand around the homebuilders ranch is being shown up by two new homebuilder ETFs.

Last November, I wrote about the then-new PowerShares Dynamic Building & Construction Index Portfolio(PKB Quote). It was the first ETF related to homebuilding. I was generally negative on the fund, because it is far from a pure play on the homebuilding sector. Then, as now, the fund did not have that much in homebuilding stocks. In November, 27% of the fund was in the builders; it is still 27%.

The rest of the fund is in related industries: Home Depot(HD Quote) and Lowe's(LOW Quote) combine to make up 9% of the fund.

Since that column, a couple of new homebuilder ETFs have been listed. In February, State Street Advisors listed the Homebuilders SPDR(XHB Quote), which is tied to the S&P's Homebuilders Index. Last week, iShares listed the Dow Jones U.S. Home Construction Index Fund(ITB Quote), which mimics an index of the same name. Perhaps still more products will come from other ETF providers, who can say?

The Homebuilders SPDR is a much purer product than the PowerShares homebuilding ETF. Beyond a combined 10% in Home Depot and Lowe's and 5% in Sherwin Williams(SHW Quote), the rest of the fund is just homebuilders. The iShares product is purer still, with 100% of the fund in homebuilding stocks.

For now, the market prefers the Homebuilders SPDR. According to Yahoo! Finance, the SPDR has by far the largest volume of the three, with an average of 367,000 shares per day compared to just 41,000 for PKB. ITB, at only a week old, comes in averaging 27,000 shares per day.

One of the great things about ETFs is the ability to short them without an uptick. Of course, the shares need to be available, which can be a hit-or-miss proposition. If there are no shares to short, both the XHB and PKB have options, but I'd use limit orders and patience because the open interest and volume are thin and the spreads are wide.

My concern about PKB six months ago was that it might not capture the homebuilders very well. According to the PowerShares Web site, 53% of the fund is in the industrial sector; the housing names are included in consumer discretionary.

Industrial Leanings PowerShares Dynamic Building & Construction Index Portfolio more closely tracks the Industrial SPDR than the Homebuilding SPDR

Source: BigCharts.com

PKB has favored the industrial sector when compared, as in the chart above, to the Industrial Sector SPDR(XLI Quote) and the purer Homebuilders SPDR. Clearly, PKB has been the better performer since Homebuilders SPDR listed in February, but that analysis misses the point.