Exchange traded funds that invest in real estate jumped 4% last week amid early signals of a potential housing recovery and optimism generated by the government's plan to buy $1 trillion of troubled bank assets.
While these positive developments suggest that happy times are here again, investors might be wise to wait for stronger signs that real estate is on the upswing. Homebuilders, which rely on sales of newly constructed homes, might face a prolonged recovery as the glut of cheap properties for sale shrinks. In addition, cut-rate prices will reduce revenue and put downward pressure on margins.
The iShares Dow Jones U.S. Home Construction Index Fund (ITB) and the SPDR S&P Homebuilders ETF (XHB) were the top-performing ETFs in the category, rising 14% and 13%, respectively. The S&P 500 Index advanced 6.2% during the same period. The funds have lost more than 45% in the past year.
ETFs that invest in homebuilders benefited from industrywide stock gains. KB Home (KBH - Get Report) energized investors last week with a lower-than-expected quarterly loss. The company's shares increased 27% last week.Shares of rival Ryland Group (RYL - Get Report) climbed 20% during the period. Toll Brothers (TOL - Get Report) rose 11%. The three stocks have lost more than 10% in the past year. For more information, check out an explanation of our ratings.