ITB iShares US Home Construction ETF

One of the most famous conferences of hedge fund managers and market gurus is the Sohn investment Conference. This year’s edition, which is the 19^th annual conference, highlighted a number of top picks from these market mavens in a variety of sectors and segments. While stocks are generally the focus, investors got a rare ETF pick this year from bond king Jeffrey Gundlach.

Gundlach, the CEO of DoubleLine Capital, a firm that has attracted more than $47 billion in assets, said that he was recommending a short play on an ETF this year, thanks to some unfavorable trends developing in the space. The segment he highlighted was housing, and in particular the SPDR Homebuilders ETF (XHB) as a potential short candidate.

Why the Bearishness on Housing?

At the conference, Gundlach cited a lack of housing affordability as one of the top reasons for his bearish call on the space. He believes that this lack of affordability will in turn reduce housing demand and thus hit companies in the homebuilding space hard (see Homebuilder ETFs in Focus on Mixed Bag Earnings).

“Single-family housing is overrated,” said Gundlach at the conference. “Renting is more appealing across all age groups, all parts of the U.S., city, suburb, small town and rural. This is a generational preference; all young people are scarred by the housing crash.”

Beyond preferences by younger buyers, Gundlach also cited investment demand, as well as baby boomers as reasons to bet against this space. He believes that both camps will be adding to the supply of housing in the near term and that this will keep a lid on fresh demand in the near term, adding further credence to his bearish call on the space.

Homebuilders ETF in Focus

For investors who agree with Gundlach’s assessment, it might be worth it to dive deeper into XHB’s holdings profile. The fund is the most popular fund in the space by a narrow margin, while it does see about four million shares change hands on a daily basis as well.

It is also worth noting that XHB uses an equal weight scheme in order to determine the weights for each of its 36 securities. This means that no one single security dominates the space, and that exposure is pretty well spread out across all the components (read Don’t Let These ETFs Fool You).

Investors should also know that XHB has a definite focus on mid cap stocks, though it isn’t entirely concentrated in the pure homebuilder space. In fact, roughly one-quarter of its holdings are in homebuilders, while another quarter are (roughly) in each of the following three segments; building materials, retail, household appliances.  Given this, XHB might not be the most pure play on homebuilders, but instead can arguably offer up a more holistic and comprehensive approach to investing in the homebuilder sector.

The fund is down a little over 5% on the year, and pretty much flat over the last 52 weeks as well. This comes on the heels of a huge appreciation in the preceding time frame, so it is entirely possible that this is the beginning of a broader slump in the housing industry, much like what Gundlach called for at the conference.

Other Homebuilder ETFs & Bottom Line

Interestingly, Gundlach didn’t speak to the other housing ETF that has attracted a considerable amount of assets in the space, the iShares U.S. Home Construction ETF (ITB). This fund is neck-and-neck with XHB for the most assets in the space at just under $1.6 billion (read Are Housing ETFs in Trouble?).

Unlike XHB though, ITB focuses solely on the homebuilders and companies that provide building materials to the space. So while XHB has companies like Home Depot and Lowe’s, ITB zeroes in on firms like Lennar, DR Horton and PulteGroup, all of which have more than 9.3% of assets.

This difference can lead to a big divergence in terms of overall performance, though ITB has also been down about 4% so far in 2014 and roughly flat in the past 52 weeks. It has easily outperformed in the trailing two year period though, so it may be more primed for a fall than its retail-focused counterpart XHB (see all the Top Ranked ETFs here).

Either way, investors should note that both of these ETFs have crushed the market over the past two years and are now trading at lofty valuations despite the shaky longer-term outlook. But should Gundlach’s prediction come true, we may see a continued reversal of this outperformance trend—both homebuilder ETFs have underperformed YTD-- and watch both Gundlach’s pick of XHB, as well as ITB, go even lower in the months ahead.

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ISHARS-US HO CO (ITB): ETF Research Reports
 
SPDR-SP HOMEBLD (XHB): ETF Research Reports
 
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