Over the last couple of week’s, two of the best performing ETFs were the iShares Dow Jones US Home Construction ETF (NYSE: ITB), up more than 7%, and the SPDR Series Trust S&P Homebuilders (NYSE: XHB), which has gained more than 6%. The PowerShares Dynamic Building & Construction ETF (NYSE: PKB) gained more than 4% in the same period. That’s pretty impressive, when the homebuilding industry is stuck in the doldrums. What’s causing this boomlet?

The iShares Dow Jones US Home Construction ETF (NYSE: ITB) holds a stake in 28 companies and claims net assets totaling about $479 million. Just over 60% of the fund’s assets comprise the top 10 holdings. Among the other 40% are several industrials, a furniture company, and a roofing supply company. Every one of the non-homebuilders has shown a share price gain over the past twelve months, with furniture maker Ethan Allen up by around 50%. Of the top 10 holdings, Home Depot is one of the top 3 performers and Lowe’s is one of the top six.

The SPDR Series Trust S&P Homebuilders (NYSE: XHB) claims total assets of about $794 million in a portfolio of 39 stocks. Unlike ITB, only about 30% of the fund’s holdings are in homebuilders; the rest of the holdings include industrials like USG Group and Whirlpool; retailers like Bed, Bath, and Beyond, Home Depot, and Lowe’s; and the top holding, bed-maker Tempur Pedic. More than 50% of holdings are in home furnishings, retailers, and building products.

The PowerShares Dynamic Building & Construction ETF (NYSE: PKB) has a market value of $32.4 million spread among a portfolio of 30 stocks. Industrials comprise nearly 48% of the portfolio and only homebuilder NVR Inc. is included among the top ten holdings. Unlike the ITB and the XHB, building and construction here refers to commercial and industrial projects. KBR Corp. and Fluor Corp. are among the fund’s top holdings.

Housing prices continue to fall, and could drop as much as another 10% this year.  Foreclosed properties are dragging prices for new homes down, and new orders are weak too.

The only reasonable explanation for the run-up in homebuilding ETFs is that some investors are trying to get ahead of a hoped-for recovery in the housing market. They could have a long wait.

OptionMonster reports this morning that in one trade yesterday, 30,000 September 18 put options were bought.  As OptionMonster noted, this could be a hedge against an outstanding long position or it could be revealing a bearish outlook for the homebuilding ETFs and the homebuilders in general.

It should be the latter.

Paul Ausick

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