ETF of the Day: Burning Up The House

Published on Thursday, 19 January 2012 16:48 Written by Todd Shriber

New York, January 19^th (TradersHuddle.com) - It probably isn’t a mystery to many investors that shares of homebuilders have been on fire recently. Looking at the charts of stocks such as Lennar (NYSE: LEN), PulteGroup (NYSE: PHM) and KB Home (NYSE: KBH), just to name a few, it’s easy to spot a series a near straight-line moves higher off the October lows.

The same can be said for the iShares Dow Jones US Home Construction ETF (NYSE: ITB), today’s ETF of the Day. How intense has the rally been for the iShares Dow Jones US Home Construction ETF? Well, in October the ETF flirted with $8. At the close of trading Thursday, the ETF flirts with $14 and is just 35 cents off its 52-week high.

Investors should note that ITB has a rival in the form of the SPDR S&P Homebuilders ETF (NYSE: XHB), but there are key differences between these two ETFs. Yes, both ETFs devote significant portions of their respective weights to pure play homebuilders such as Lennar, Pulte, etc. And both ETFs are exposed to stocks that, while not homebuilders, are plays on the residential real estate market. Think Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW).

However, the XHB is much more exposed to those names, giving the ETF more of a retail/consumer discretionary feel than is found with ITB. In fact, DR Horton (NYSE: DHI), Lennar, NVR (NYSE: NVR), Toll Brothers (NYSE: TOL) and Pulte represent about 42% of ITB’s weight. Said differently, the indecisive investor that believes the rally in homebuilders isn’t in its late innings could easily warm to ITB because of its pure-play homebuilders exposure.

The good news is recent data has been supportive of more gains for ITB and its constituents. On Wednesday, the National Association of Home Builders/Wells Fargo housing market index rose four points to 25 in January, beating the reading of 22 economists expected while marking the fourth straight month of gains. Today, weekly jobless claims came in at the lowest level in over three-and-a-half years while the four-week moving average dropped to 379,000, the second-lowest reading in three years.

The Vitals: With an expense ratio of 0.47%, ITB is home to 27 stocks and $439.1 million in assets under management. The ETF is up over 35% in the past 90 days, 24% in the past month and almost 13% year-to-date. Over all of those time frames, ITB has sharply outperformed XHB, underscoring the notion that the ETF is more intimately levered to the performance of homebuilders and a rebound in residential real estate.