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
. 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:
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
, which is tied to the S&P's Homebuilders Index. Last week, iShares listed the
Dow Jones U.S. Home Construction Index Fund
, 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
, 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.
PKB has favored the industrial sector when compared, as in the chart above, to the
Industrial Sector SPDR
and the purer Homebuilders SPDR. Clearly, PKB has been the better performer since Homebuilders SPDR listed in February, but that analysis misses the point.
All of the narrow-based ETFs -- and more are coming -- are meant to capture a specific exposure. An investor who doesn't look under the hood may end up with something different from what he thought he ordered.
Another tell that PKB may not be a good pure bet are some of the nitty-gritty numbers. One of the positives the homebuilder bulls tout is the group's low price-to-earnings ratios; historically, this group trades at single-digit multiples. But PKB can't claim this advantage. Its average P/E ratio is 16.69, compared with XHB's P/E ratio of 6.8. The price-to-book value ratio for PKB is 3.35, vs. just 1.76 for XHB.
Homebuilding stocks aren't known for their dividends, so it's not surprising that XHB has no dividend to speak of. But it is surprising that despite PKB's tilt to the industrial sector, there is no real yield to be had there either. Because ITB just listed last week, fundamental data for that fund are not yet on the iShares Web site.
If you want pure homebuilder exposure, long or short, it looks like ITB and Homebuilders SPDR are better bets. You should expect PKB to do better for as long as industrials outperform homebuilders.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider PowerShares Dynamic Building & Construction Index Portfolio, Homebuilders SPDR and Dow Jones U.S. Home Construction Index Fund to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
At the time of publication, Nusbaum had no positions in the stocks mentioned, although positions may change at any time.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
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