The U.S. housing market has been hard hit coming off the financial crisis, but cautiously optimistic investors are beginning to venture back into homebuilder exchange traded funds.
The iShares Dow Jones U.S. Home Construction ETF (ITB) is up 19.2% year-to-date. The fund allocates 64% of its weighting to the home construction sector, followed by 20% in building materials, 10.9% in home improvement retailers and 4.9% in furnishings. ITB has an expense ratio of 0.47%.
The SPDR S&P Homebuilders ETF (XHB) is up 20.2% year-to-date. The fund has a more diversified weighting, with sub-sector allocations including building products 26.3%, homebuilding 26.1%, home furnishing retail 17.7%, home furnishings 13.6%, home improvement retail 9.1 and household appliances 7.2%. XHB has an expense ratio of 0.35%.
The ITB ETF may be better suited for those who believe homebuilder stocks will benefit the most from the improving investor sentiment, but XHB may be better for those who remain less optimistic and believe the housing market may stumble, writes David Sterman for Financial Advisor.
Exiting home sales hit 4.6 million in February, a five-year high. Looking ahead, the March numbers, which are due out on April 19, may have been boosted by the unseasonably warmer weather.
In the article, though, Michael Souers, who tracks housing sector ETFs for S&P/Capital IQ, cautions that the better foot traffic in the warmer winter months makes him "a bit nervous that the spring season will be underwhelming."
Nevertheless, Merrill Lynch's Chris Flanagan believes that falling home prices are near their bottom, but prices may still hover around their current levels before rising in 2013. Economists optimistically note that the period of high housing inventories and low buyers may have passed, with the supply of existing homes falling to 2.43 million, or down 50% year-over-year, and employment numbers begin improving.
"It could take several years to work off this shadow inventory," Souers said in the article, but he added that "homebuilders are now in far healthier shape and leveraged to even a moderate upturn."
Max Chen contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.