Use an Industrial ETF for Exposure to Resurgent Real Estate Market
ETFs tracking shares of home builders and related fare have been among the best performers at the sub-sector level this year. The SPDR S&P Homebuilders ETF (NYSE: XHB) looks good with a year-to-date gain of almost 46 percent. Under normal circumstances, a 46 percent year-to-date gain would look great, but XHB must be measured against its nearest rival, the iShares Dow Jones U.S. Home Construction Index Fund (NYSE: ITB). That fund is up more than 66 percent this year.
"With a large number of factors making us believe that a recovery has started in the overall housing market, particularly in the area of existing home sales, the Building Products sub-industry has outperformed the broad market by a wide margin to date in 2012," S&P Capital IQ said in a research note. "Through October 5, the S&P Building Products sub-industry index recorded a 40.0% gain, which far exceeded the 15.8% rise seen in the S&P 1500 Index during that period."
Improving housing data has lifted ITB, XHB and shares of select building products firms. These stocks along with the likes of Home Depot, should continue to benefit from increased spending on home improvement. S&P Capital IQ offers up an interesting way of getting exposure to these themes: The Industrial Select Sector SPDR (NYSE: XLI), which the research firm rates Overweight.
"XLI is composed almost entirely of Industrials companies, a part of which are in the Building Products category, although no Building Products companies are part of XLI's top 10 holdings. The ETF gains its overall Overweight ETF ranking from positive scores for inputs such as S&P STARS, S&P Quality Rank, and expense ratio," S&P said in the note.
XLI, which has $3.41 billion in assets under management, devotes almost 13.6 percent of its weight to General Electric (NYSE: GE). Four other Dow components – United Technologies (NYSE: UTX), 3M (NYSE: MMM), Caterpillar (NYSE: CAT) and Boeing (NYSE: BA) combine for nearly 19 percent of the fund's weight. A home builder's ETF this is not.
However, as S&P noted, XLI has a exposure to the home improvement cycle and it does offer some exposure to a rebound in commercial real estate, as well.
"In addition to demand for building products in residential markets, we see somewhat better trends in commercial building aiding the sub-industry. Expenditures in commercial building had slowed notably from 2008's second half until recent periods, limited by weak economies and tight credit markets. Yet, we think stabilization is now being seen in this area, on an improvement in global economies (outside of what we view as a current soft patch) and aggressive efforts to industrialize emerging markets, with building-related sales rising solidly in emerging markets," S&P said in the note.
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