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TheStreet Open House

Why I Like Homebuilders This Fall -- But Hate the ETFs

Stocks in this article: TOLLENNVRXHBITB

Like the other two homebuilders I've mentioned, Lennar is in solid financial shape, with $1.4 billion in cash and investments offsetting a $4 billion building debt position. And that balance sheet is likely way more conservative than the short sellers are willing to admit. The firm's blockbuster second quarter earnings are evidence of that.

Don't Buy Homebuilder ETFs

With the price action homebuilding stocks have seen so far this year, homebuilding ETFs have been getting a lot of attention. The SPDR S&P Homebuilders ETF (XHB) and the iShares Dow Jones US Home Construction ETF (ITB) are two popular funds that a lot of people have been looking at. Don't buy them.

Both of these funds own homebuilding stocks, but they also own a bunch of randomly related businesses, from home improvement retailers to mattress companies. Ironically, maybe half of the stocks in each of these funds aren't homebuilders at all, but I get that "The Homebuilders and Some Other Stuff ETF" doesn't have the same ring to it. Managing such a big portfolio is a big job -- and the ETFs charge you management fees for their trouble.

If you want real homebuilder exposure, skip the ETFs and stick with the stocks.

To see my homebuilder stocks in action, check out the Homebuilder Stocks Portfolio on Stockpickr.

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At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.

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