While there is still a question on whether housing in general has put in a bottom, the SPDR S&P Homebuilders ETF (XHB) clearly put in a bottom a few years ago and has been on a fairly steady trajectory upwards since 2009.
The XHB, managed by State Street Global Advisors, seeks to closely match the returns and characteristics of the S&P Homebuilders Select IndustryTM before expenses. As of 7/19/2012, the stocks in the ETF tracked very closely to the holdings in the index, with the weighting varying by only a few basis points per stock.
The top ten holdings as of this date in the fund were:
- U S G Corp (USG)
- Select Comfort Corp (SCSS)
- Standard Pacific Corp (SPF)
- Ryland Group, Inc. (RYL)
- Pulte Group, Inc. (PHM)
- D R. Horton Inc. (DHI)
- Lennar Corp. (LEN)
- Toll Brothers Inc. (TOL)
- M D C Hldgs. Inc. (MDC)
- Whirlpool Corp (WHR)
These stocks make up only 36.3% of the fund, with another 26 making up the balance. The fund is well diversified within the sector.
Focusing on Homebuilders?
The second stock in the list above jumps out, since it is clearly not a homebuilder, but a manufacturer of adjustable mattresses. Whirlpool at number 10 does not fit in as a builder, and the rest of the list includes companies like Williams Sonoma and Home Depot. State Street clearly maintains some latitude as they attempt to closely track the appropriate index, as this fund does, at least over the short term.
As most of the builders included cut or eliminated their dividends during the housing crisis, the fund pays an anemic dividend around 1%. Capital appreciation has been solid of late. Year to date, the ETF has returned 25.72%, with a 3 year average of 23.66%. When you include the disastrous year of 2008, the 5 year average is a negative 5.33%.
Where Do the Homebuilders Go From Here?
It is clear that it was not necessary for there to be a bottom in home prices or sales for the stock prices of the builders to recover. The prices of some of the major components had fallen so far that they reached a speculative level. For instance, SPF, currently the top holding of the XHB, went from single digits to a high of a split adjusted price of $47, and then fell back to around 2. At its current price of $6.27, it is still a long way from the highs during the bubble. Many of the other holdings are in a similar position.
It seems that most of the homebuilders have now recovered to the prices they were at before the bubble. Without a complete recovery there is no reason to be euphoric about these stocks. Homebuilder sentiment recently rose to 35, its highest level in a long time, but it is still below the average of 50. Until things really recover, the XHB may not have any more room to run for a while.