How To Play Housing and Retail ETFs After Recent Data (ITB, XHB, RTH, XLP, VDC)
Eric Dutram: Just when the housing market was making a comeback, the sector disappointed the market by posting a fall in housing starts for the month January. Housing starts fell by of 8.5% to 890,000 units in January 2013, after a 15.7% surge in December to 973,000 units.
It should be noted that the volatile multi-family unit category was mostly responsible for the drop in housing start numbers. The unit plummeted 24.1% in January. Interestingly, starts for single-family unit rose to its highest level since July 2008, climbing 0.8%.
Investors should however note that the poor performance in January primarily emanated from the multi-family units, which tends to be volatile. The focus should rather be on the single-family units which continue to gain strength. In fact, the positive aspect of the story is the rise in permits for future construction to a 925,000-unit rate (Best Construction ETF to Ride the Housing Upswing?).
Most probably, February and March start numbers would once again pull up and add to the evidence that the housing sector is finally on the path of recovery. Ups and downs are part of the game and the general trend in the housing market suggests that this slump is just temporary and the sector will continue with its growth momentum.
The housing sector should turn out to be the primary driver of economic growth in 2013. For seven straight quarters spending on home construction and home improvement activity had a positive contribution to the economic growth.
However, the fact cannot be denied that much is left to be done for housing starts to reach their historical levels. Last year, builders commenced construction on about 780,000 homes, the highest since 906,000 in 2008 (4 Best ETF Strategies for 2013).
ETFs on the News
Both the ETFs tracking the homebuilder segment of the market iShares DJ US Home Construction (NYSEARCA:ITB) and SPDR S&P Homebuilders ETF (NYSEARCA:XHB) recorded a sharp fall in prices after the housing start numbers.
Notwithstanding the recent weakness, investors looking to capitalize on 2012’s best performing sector should invest in ETFs that have heavy exposure to the residential real estate market. And for a direct exposure to U.S. homebuilding companies, ITB represents an excellent option to play (Two Sector ETFs to Buy in 2013).
ITB offers a pure play into the sector as evidenced by its allocation of 64.08% of its asset base of $2 billion to home construction companies. Other sectors that it invests in are building materials, home improvement and furnishing..
The fund offers exposure to 29 companies, with established homebuilders like Pulte Group, DR Horton Inc and Lennar Corp making up the top line of the fund.
Although the SPDR ETF is somewhat larger and a more liquid option to play in the sector, it is probably not the right choice for investors looking for a direct exposure to residential real estate companies.
XHB has just 28.79% of its asset base of $2.6 billion in homebuilding, while the rest is spread across building products, home furnishing retail, home improvement retail and household appliances (Is XHB a Better Housing ETF Play?).
However, related sectors have also reaped the benefits from the resurgence in housing as exemplified by XHB’s performance in 2012.
While weak housing start numbers dragged down the prices of homebuilder ETFs this week, consumer ETFs appear to be under pressure as well following the leaked Wal-Mart emails that divulged disastrous sales for the month of February.
An email from Wal-Mart corporate executive revealed disastrous sales for the month of February, supposedly the worst start to the month in its seven years of history. It seems that Wal-Mart’s plan to invest in pricing, such as using ads that compare their prices to a competitor, has failed to improve store traffic.
The bad sales number for the month can also be attributed to a 2% hike in payroll taxes effective from the start of 2013. Another reason could be the delay in tax return to consumers which ultimately affected the sales of the company in February.
Wal-Mart share price slipped 2% on the news during the Friday trading session. Investors should nonetheless note that the impressive size of Wal-Mart, from a market perspective, sets it apart from other retailers. The firm is currently in the top ten list in terms of market cap and is five times bigger than its rival Target. On Thursday, Walmart provided weaker sales forecast for the coming months.
In fact, there are many consumer ETFs in which WMT plays a dominating role in their performance attributable to its heavy weighting in the fund including an 11.16% allocation to the firm in the Market Vectors Retail ETF (NYSEARCA:RTH).
Beyond this, the Consumer Staples Select Sector SPDR (NYSEARCA:XLP) assigns a weighting of 8.12% to the company and the Vanguard Consumer Staples Fund (NYSEARCA:VDC) allocates 8.17% to WMT while a few others also give the company at least a 5% weight.
Given the uncertainty surrounding Wal-Mart and the company’s uncertain path to growth in the domestic market going forward, these ETFs with exposure towards the company could prove to be an unwise choice for investment currently.
Fortunately, there are still a number of ETFs beyond those listed above that can offer great exposure to the retail or consumer spaces but can do so without putting so much into WMT.