The strong start for the U.S. equity markets in 2013 finally seems to be losing some steam as the benchmarks have been showing signs of consolidation. In fact of late, the major economic indicators have also posted mixed results coupled with a decent earnings picture.
While unemployment levels have been declining marginally and the U.S. trade deficit has reduced, the negative GDP growth and the decline in industrial production has surely dented investor confidence somewhat. Apart from this, there was the Building Permits and Housing Starts data that was reported yesterday which posted a disappointing picture (read ETF of the Week: Industrial SPDR (XLI)).
The Housing starts data came in below the expectations of the market. This was enough to trigger a massive sell-off in the homebuilder ETF space. The iShares U.S. Home Construction ETF (ITB) slumped 5.74%, whereas the SPDR S&P Homebuilders ETF (XHB) lost 4.45% in yesterdays trading session.
The housing data is keenly watched by major market players as this data is widely regarded as one of the most important economic indicators. This is because the housing sector is strongly correlated with the economic sentiments in the broader market.
ITB and XHB track the equity market performance of companies from the housing sector. ITB tracks the Dow Jones U.S. Select Home Construction Index. Its portfolio comprises of 29 stocks with around 63% of its assets in the top 10 holdings (read Can Solar ETFs Continue Their Bull Run?). XHB tracks the S&P Homebuilders Select Industry Index and its portfolio comprises of 36 stocks.
Furthermore, it is prudent to note that ITB is considered to be a pure play in the housing sector, especially compared to XHB. This is because around 64% of ITB’s assets are allocated to the Home Construction industry; this is followed by Building Materials and Fixtures industry to which it allocates 18%.
Therefore around 82% of its total assets are allocated towards a pure play in the housing sector. On the other hand XHB is relatively less concentrated in the homebuilding space
Just to highlight the importance of the housing data on the homebuilder ETFs it should be noted that both ITB and XHB rallied massively following the extremely positive looking Building Permits and Housing Starts data last month. The ETFs registered single day gain of around 2.71% and 1.85% respectively (see Housing ETFs Rally on Solid Data).
Furthermore, this positive momentum was also carried forward in the subsequent trading sessions as well. And the positive looking housing starts data last month surely ignited the upward trajectory of the homebuilder ETFs.