Myth Of The Homebuilders ETF

May.10.12 | About: SPDR Homebuilders (XHB)

The S&P 500 is being beat this year by an ETF that many have grown to love over the last few years, XHB, the SPDR S&P Homebuilders ETF. For almost all of 2012, XHB has been outperforming the S&P 500 handily. So it's not unexpected that just this week, Forbes reported notable inflows into XHB. Here's the year to date performance chart from Yahoo Finance of XHB versus SPY, the S&P 500 ETF.

Not only would investors have been better off owning XHB, they would have done better to sell their house on New Year's day and invest in XHB as well. So what gives?

XHB cratered during the market lows of 2009, losing around 80% of its value as the real estate bubble popped. Since then however, XHB has been the comeback kid. Take a look at the graph comparing XHB to SPY since the early March lows of 2009.

Looks like a great investment, right? Wrong. Don't be fooled by the percentages and latest headlines extolling homebuilders. XHB has a long term track record as a bad investment. Yes, it has outperformed the S&P 500 recently but viewing the homebuilders ETF as an attractive investment is a myth.

After viewing the previous charts, would you have guessed that XHB is one of the worst performing industry ETFs going back six years? You would if you own had owned it. Take a look at the chart that begins a few days after the inception of XHB. Ouch!

XHB has suffered close to a 50% decline since early February of 2006. (inception of XHB was Jan 31, 2006) Its recent outperformance of the S&P has been based off a recovery from a catastrophic decline in the first three years of its existence. So while the percentages may look good shorter term, the long term numbers are austere.

To be clear XHB can be a useful ETF in the right circumstances. Has XHB created short term trading opportunities? Yes. Has XHB been a good investment since inception? No, that is a myth.

So why the fuss? According to Index Universe's Fund Flow Tool, XHB has received $364 million of net inflows year to date. With around $1.4 billion in assets under management, this represents about 25% of XHB's assets. While these notable flows may be geared toward trading opportunities, one hopes longer term investment dollars aren't blindly following short term performance into an investment myth.

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