Will Homebuilder ETFs Maintain Momentum In 2013?

Includes: ITB, XHB
by: Tom Lydon

Homebuilder exchange traded funds have been the top performers so far this year, and with the Fed intent on keeping borrowing costs low, the sector could continue to reap profits going into 2013.

The iShares Dow Jones U.S. Home Construction Index Fund (BATS:ITB) has been the best performing ETF so far this year, increasing 68.6% year-to-date. While it has shown an impressive run, the fund is still over 50% off its 2007 high. The SPDR S&P Homebuilders ETF (NYSEARCA:XHB) was also another top ETF, adding 54.6% year-to-date.

The Fed's strategy to keep borrowing costs lower through purchases of home-loan bonds has widened margins in the lending industry, reports Kathleen M. Howley for Bloomberg.

"Homebuilders are getting extra help right now from mortgages," Jack Micenko, a homebuilding analyst at Susquehanna International Group, said in the article. "They're over- earning in those areas because lending margins are so wide."

"The homebuilders are little players in the lending world, but they're benefiting from the wide margins of the big players," Michael Widner, an analyst at Stifel Nicolaus & Co., said in the article. "Why charge much less than the banks that are your customers' alternatives?"

Micenko pointed out that the average gain-on-sale, or difference between the rate homeowners pay to that paid by investors, has doubled this year due to demand for the securities.

The S&P Supercomposite Homebuilding index has jumped 83% this year through October. The top 11 U.S. homebuilders show a price-to-earnings ratio of 38.8, compared to the S&P 500′s 14.5. Nevertheless, most homebuilding analysts project that the top homebuilders, Lennar Corp. (NYSE:LEN) and PulteGroup (NYSE:PHM), can still see profits double this quarter while the third largest DR Horton (NYSE:DHI) will take profits of 75% and fifth largest NVR Inc (NYSE:NVR) will see a gain of 70%.

Among ITB's holdings, LEN is 9.8%, PHM is 9.3%, DHI is 8.3% and NVR is 7.4%. The XHB ETF follows a more equally weighted methodology and among its top holdings NVR is 3.6%. Moreover, XHB has a greater allocation toward other home-related sub-sectors, such as building products 29.5% and homefurnishing retailers 14.5%.

iShares Dow Jones U.S. Home Construction Index Fund

(Click to enlarge)

For more information on homebuilders, visit our homebuilders category.

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. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.