NEW YORK ( TheStreet) -- Better-than-expected earnings from Lennar ( LEN) lifted shares of the homebuilder this morning and also helped boost the iShares Dow Jones U.S. Home Construction ( ITB) ETF, in contrast to weakness in the major averages.

Lennar reported a loss of 4 cents per share, well ahead of analyst expectations for a 30 cents and greatly improved from the year-ago loss of 98 cents. Lennar's CEO cited cost-cutting and reduced marketing as part of the reason for the solid quarter. The firm also expects to be profitable for the year.

On Tuesday KB Home ( KBH) lost 1.7% after reporting a larger-than-expected loss in the first quarter of 71 cents per share. Expectations were for 42 cents. There also wasn't much improvement from the year-ago loss of 75 cents, but the company did say it expects to be profitable later this year. Shares fell, but the ETFs advanced thanks to housing data.

The National Association of Realtors reported that sales of existing homes were up in February from the same period in 2009, although inventories of existing homes stood at 8.6 months, up from 7.8 months in January. For comparison, inventories were at five months in 2005 and reached a peak of 10.1 months in April 2009.

New-home sales data for February were released Wednesday morning. The Census Bureau reported that sales were 2.2% below January levels and 13.0% below February 2009 levels, while supply is up to 9.2 months. With a margin of error slightly north of double digits, this report should be taken with a grain of salt, but the supply trends do align with the existing home sales report from the National Association of Realtors.

Putting the two reports together, it appears that existing-home sales are cutting into new-home sales in a very difficult market for home sellers. Additionally, mortgage rates are up, and applications are down in the past week, and they are also down from last year.

Investors are stuck trying to gauge which trends are most powerful in this space. Right now, the fundamental data are neutral to negative. On the other side, the homebuilders appear to be improving financially, and the stocks continue to beat the broader market. If the market continues to power higher, the homebuilder-related funds could continue to outperform, but eroding housing market fundamentals mean investors need to be on the alert for a potential market reversal.

Year to date, ITB has advanced 14%. SPDR S&P Homebuilder ( XHB) has gained 12%, while the Fidelity Select Housing & Construction (FSHOX) mutual fund has added 11%. Meanwhile, the S&P 500 has climbed 5.3%.

Investors have the above three funds to choose from in the homebuilding space, each with a slightly different approach. While they all hold basically the same companies, their weightings in each segment of the industry vary.

ITB is the purest play on the homebuilders, with 66% of assets in homebuilding and only 8.5% split between home-improvement retailers Home Depot ( HD) and Lowe's ( LOW). The rest of the fund is mainly suppliers such as Owens Corning ( OC), Sherwin Williams ( SHW) and Masco ( MAS).

XHB has only 8% in Home Depot and Lowe's, but also holds retailers such as Williams-Sonoma ( WSM), Bed, Bath & Beyond ( BBBY), Pier 1 Imports ( PIR) and Aarons ( AAN), lifting exposure in the retail sector to almost 25% of assets. The fund uses an equal weight index with 25 holdings.

As of January 29, FSHOX held 20.1% in HD and 17.3% in LOW, plus smaller retail holdings, making it the most retail-focused fund.

For investors looking to play homebuilders specifically, ITB is the better choice.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion had no positions in equities mentioned.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.