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Except for the most extreme optimists, a mild but long-hoped-for July reversal in exchange-traded funds that focus on residential construction stocks should not be taken as a signal of a new bull market trend for the sector.

Someday, the trio of residential ETFs in the accompanying table is likely to sport above-average returns. But with the huge current overhang of unsold new homes, combined with tighter credit, rising unemployment and menacing inflation, it seems a stretch to imagine that their July bounce signals the beginning of a bull market for the group.

Investments tend to anticipate the future rather than react to the past, but predicating a secular uptrend in the home construction industry from a one-month uptick is tantamount to assuming the record U.S. births from last year will be clamoring to buy new homes before the 2030s.

Still, the strength of the group during a difficult market month is a signal that the relentless selling pressure that it has endured might be easing. As weak builders drop out of the picture and the mortgage imbroglio starts to unfurl, housing construction will turn around, almost certainly when least expected to do so.

Aside from

Federal Reserve

and Congressional/president's efforts to ease the credit crunch and foreclosure torrent, analysts have been giving a somewhat more benign treatment to the industry. Credit Suisse recently assigned an "overweight" recommendation to the homebuilding sector.

When things do turn around in housing, the three diversified ETFs in the adjoining table will reflect the re-emergence of the homebuilding sector.


iShares Dow Jones U.S. Home Construction Index ETF

(ITB) - Get iShares U.S. Home Construction ETF Report

contains in its portfolio the big boys of the homebuilding industry. Its largest holdings include

Toll Brothers

(TOL) - Get Toll Brothers, Inc. Report



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TheStreet Recommends

(NVR) - Get NVR, Inc. Report


Pulte Homes

(PHM) - Get PulteGroup, Inc. Report



(LEN) - Get Lennar Corporation Class A Report



FocusShares ISE Homebuilders Index ETF

( SAW), in addition to Horton, Toll Brothers and NVR as top portfolio holdings, contains

Pulte Homes

(PHM) - Get PulteGroup, Inc. Report


Although the

SPDR S&P Homebuilders ETF

(XHB) - Get SPDR S&P Homebuilders ETF Report

contains a builder,

Beazer Homes USA

(BZH) - Get Beazer Homes USA, Inc. Report

, as one of its top holdings, its major portfolio components are also diversified with stocks of firms that produce furnishings for dwellings. They include

Furniture Brands International



Ethan Allen

(ETH) - Get Ethan Allen Interiors Inc. Report


Mohawk Industries

( MFK) and home furnishings component supplier

Leggett & Platt

(LEG) - Get Leggett & Platt, Incorporated Report


Richard Widows is a senior financial analyst for Ratings. Prior to joining, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.