As the Federal Reserve continues to hint a raising rates soon, inevitably the focus comes back to home builders. Will the be able to thrive in a higher rate environment? The analysis is pretty simple. Home prices have been rising steadily now for a while and the home builders can justify the higher prices because the buyers can obtain loans at the lowest rates in history. But, what happens when rates begin to rise? Will the home buyer demand lower prices to offset the increase in interest?
At the moment the home builders have been doing well. A steady increase in new home sales, along with a steady push of new customers at the door leads to a nice market for those that build homes for a living. Looking at data that analyses the stream of new home applicants also shows a steady in crease. So let's say you want to participate in the strength of the home builders, what are you choices?
There are currently two good choices, but both have some significant differences. The iShares U.S. Home Construction ETF (NYSE: ITB ) and the SPDR S&P Home builders ETF (NYSE: XHB ). Both have plenty of liquidity and reasonable expense ratios. Where they differ is in their definition of "home building." Are we building a home that people will live in? Or are we building a home and then furnishing it with couches, a fridge, and bath towels?
The ITB:
The iShares (NYSE: ITB) product tracks companies that actually produce wood and put up walls, for the most part. Its portfolio has around 65 percent in home builders and 15 percent in building materials companies. Companies like Lennar Corp. (NYSE: LEN ) and Toll Brothers Inc. (NYSE: TOL ) are among some of the top holdings, and ITB has more than 9 percent of assets in each. As you can imagine, the ETF's fairly narrow focus makes it sensitive to changes in the housing market.
The XHB:
Now, the SPDR Home builders ETF (NYSE: XHB) goes about it a bit differently. It has only 30 percent in home builders and 20 percent in building materials companies. Twenty percent is in retail companies like Bed Bath & Beyond Inc. (NASDAQ: BBBY ), and Lowe's Cos. Inc. (NYSE: LOW ). Another 15 percent is in popular home furnishing companies like La-Z-Boy Inc. (NYSE: LZB ) and Whirlpool Corp. (NYSE: WHR ).
In either case, you have products that are balanced to a point where you don't have direct exposure to only the home building companies.