Five ETFs to Play a Housing Double Dip

 |  Includes: ITB, KBE, SRS, TBT, XHB
by: David Oldenburg
Are we in a real estate double dip? There seems to be a euphoria in the stock market, as we march ever closer to 12,000. However, the real estate market has shown up late to the party or maybe never received the invitation. Yesterday's S&P 500 Case-Shiller report, rising interest rates and dropping demand for homes paint a grim picture for 2011 when it comes to a recovery that so many are waiting to see. Here is a quote directly from the Case-Shiller report: "Since May 2010, the housing market has experienced an unambiguous deceleration in home price returns."
I also confirmed with Kevin Goehring, a Certified Distress Property Expert, who I am interviewing for my live radio show this weekend, that in some areas short sales and REOs are making up 70% of the overall market activity. If you would like to hear a broadcast of that show, please check out the website, which will offer a free rebroadcast of the show available on Monday, January 31st.
I have included here 5 ETFs that may experience a change in a declining housing market:
XHB (SPDR S&P Homebuilders)
The XHB's name is a little confusing, like many ETFs because it leads one to believe that it is a pure play on Homebuilders like KBH or TOL. In reality, only a few homebuilders (RYL and KBH) are in it's top 10 holdings and they account for just 8.68% of the total assets of XHB. This is a broad-based ETF that is weighted with names like Pier-1 Imports, Sherwin Williams and Armstrong World Industries, just to name a few. XHB holds 78% of it's assets in the Industrial Materials and Consumer Services sector. These are names that do well when the housing market is on the rise but may come under pressure if the housing market continues to remain weak or double dip lower.
ITB (iShares Dow Jones US Home Construction)
ITB is more of a home builder and home construction play, with names like PulteGroup, D.R. Horton, TollBrothers, Home Depot, Lowe's and KB Home accounting for nearly 45% of all assets. Nearly 73% of ITB is in the Industrial Materials sector. ITB has been in a trading range for the last 6 months between about $11 and $15 and has recently run a little higher as the overall market has been rising. ITB is going to have a hard time rallying much higher if home sales and prices continue their decline.
KBE is a pure financial play with names like Citigroup, Chase, JPMorgan, Wells Fargo, Bank of America and even US Bancorp. The Financial sector makes up 100% of KBE and it holds over 99% stocks. The financial stocks have had a good run over the last few months and KBE has risen about 20% since the end of November, 2010. However, bank stocks are going to have to fire on all cylinders to do well at these levels. With the market near 12,000 they may come under pressure. In addition, defaults and foreclosures are not showing any sign of going away anytime soon and this will continue to be a drag on many bank stocks in a declining real estate market.
SRS (Proshares Ultrashort Real Estate)
SRS is a 2x leveraged ETF designed to return 2x the inverse of the Dow Jones U.S. Real Estate Index. If you look at the last 3 years, the leverage has all been to the downside! The chart over the last 2 years of SRS looks like an intermediate run at a ski resort. The SRS was trading near $300 per share at this time in 2009 and is now around $17. However, this is one of those leveraged ETFs that could see a sudden jump based on some really bad news in the area of real estate. I have heard from several industry professionals that pending homes sales for January (that we have not yet seen) will be very disappointing. On February 23rd, we have existing home sales for January and that will be an important number to watch.
TBT (Proshares Ultrashort 20+ Year Treasury)
TBT is a 2x leveraged ETF designed to return 2x the inverse of the Barclays Capital 20+ Year U.S. Treasury Bond Index. I recently wrote a great article on using the TBT to hedge interest rate locks (previous article). The TBT is a great short-term play either up or down on interest rates. In the previous article, I explain how the TBT tracks the 10-Year Treasury over short periods of time and how it will rise when interest rates rise and drop when rates drop. Like many ETFs, it tends to under-perform over a long period of time, so it should ONLY be used for your short-term strategies. A declining stock market and declining economic news tend to push the TBT lower. If the real estate market continues to soften, this is an ETF that could see it's price fall. TBT has risen by almost 30% over the last 4 months as QE2 fueled perceived strength and yields on treasuries jumped by nearly 100 basis points. I believe it will pull back at some point in the near future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.