The SPDR Homebuilders ETF (XHB)

Homebuilders is not a sector I would normally invest in, but my interest was piqued by the discovery that the SPDR Homebuilders ETF (XHB) is negatively correlated to major portfolio holdings in energy and utilities, and might be a good hedge.
There has been a lot of chatter about homebuilders lately, how cheap the stocks are, whether or not the low has been seen, and what may be the future prospects of this group.

Most of the news has not been very good. Moody’s forecasts a 3.6% median house price decline in 2007. Realtors expect new house prices to fall for the first time in 15 years. And although mortgage applications may be rebounding, due to the recent decline in mortgage rates, much of the recent increase in mortgage applications may be due to refinancing activity, as some home owners take advantage of slightly lower rates to switch out of variable rate mortgages. However, Greenspan says the worst may already be over in the housing slump.

XHB has been trading for less than a year. According to etfconnect, the current distribution rate is .88% and the expense ratio is .35. This portfolio is 100% domestic consumer discretionary stocks. The top 10 holdings, all at about 5%, are Sherwin Williams, Leggett & Platt, Toll Brothers, Pulte Homes, Centex, D R Horton, Mohawk Inds., Home Depot, Lennar Corp., and Lowes.

We have less than 200 days of data for this security so technical analysis is tentative, but I see that after a sharp decline from spring into summer, there has been a basing process and a rally attempt this fall. XHB has benefited from recent sector rotation and speculation about the “Goldilocks economy”. But XHB is very sensitive to interest rates; in fact it has an awesome negative correlation to the 30 year mortgage rate, and any hint that the Fed may engage in further policy firming should send this security back to the new lows list. That is exactly the scenario I am expecting, so I will be looking for an opportunity to buy XHB cheaper in late fall or early winter.

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