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With mortgage rates at all-time lows and housing inventories also at low levels, the housing market looks like an intriguing investment opportunity. The National Association of Realtors reported that existing home sales increased 2.1% in October over September and increased 11% year-over-year. The National Association of Homebuilders shows that builder confidence has gained for seven consecutive months. This improving data creates an investment opportunity. The SPDR S&P Homebuilders ETF (NYSEARCA:XHB) looks like a diverse way to capitalize on the improving housing market.

The XHB ETF seeks to replicate the performance of the S&P Homebuilders Select Industry Index. It invests at least 80% of assets in equities comprising the index. The fund has a modest yield of 0.90% and an expense ratio of 0.35%.

The fund contains a total of 37 holdings. Interestingly, the companies in the fund are not all home builders. Companies related to home building are also included. I'd like to highlight the top five companies in the fund.

 

Whirlpool Corp. (NYSE:WHR)

Lowes Companies (NYSE:LOW)

Leggett & Platt

(NYSE:LEG)

Lennox Int.

(NYSE:LII)

AO Smith Corp.

(NYSE:AOS)

Weight of Fund

4.08%

3.87%

3.79%

3.77%

3.74%

Forward PE

10.94

16.73

16.62

15.16

17.72

PEG

1.65

1.26

1.17

0.97

1.00

Profit Margin

2.65%

3.58%

4.93%

2.51%

8.01%

Operating Cash

Flow

$711 Million

$3.85 Billion

$367.9 Million

$142.8 Million

$201.8 Million

5-Yr. Annual Expected Earnings Growth

8.1%

15.03%

15%

18.17%

20%

The top five holdings aren't homebuilders at all, but they are key players in supporting the home building industry. Whirlpool supplies home appliances. Lowes supplies just about everything outside and inside a home. Leggett & Platt provides various furniture and bedding products, shelving, counters, mechanical springs, carpet underlay materials, etc. Lennox supplies heating, ventilation, air conditioning, and refrigeration products. AO Smith manufactures various water heaters and boilers for residential and commercial settings.

The fund has a trailing PE ratio of 22, but trades at only 2.53 times its book value per share. We can see that the forward PE ratios of the top holdings look more attractive than the trailing PE. With the exception of Whirlpool, the top 5 holding have better than average 5-year expected annual earnings growth. The expected 3 - 5 year annual earnings growth for the entire fund is 17.18%. This means that XHB is likely to outperform the performance of the S&P 500 over the same period. Currently, the S&P 500 is expected to achieve about 9.5% annually.

Currently, the various conditions in the housing market are working together synergistically for XHB to perform well. The combination of low mortgage rates, low inventories, increasing sales, and confidence should bode well for an investment in XHB.

Source: Improving Conditions In The Housing Market Creates Opportunity