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Home Remodeling Boom Points To This ETF

By Brian O'Connell on January 28, 2014

Data out last week from the US Department of Housing and Urban Development showed that sales of newly built single family homes declined by 7 percent in December, signaling a slowdown in the once resurgent US housing market.

But the news wasn’t all bad: US homes sales were 16 percent higher in 2013 than in 2012.

“December’s decline in new-home sales follows elevated levels in the previous two months and means the fourth quarter was still much stronger than the third,” says Rick Judson, chairman of the National Association of Home Builders (NAHB). “While we expect sales to gain strength in 2014, builders still face considerable constraints, including tight credit conditions for home buyers, and a limited supply of labor and buildable lots.”

On the surface, that would seem to show that homebuilding stocks could be a burden on investors’ portfolios, and to an extent, that may be true right now.

But there’s another area of the residential home market that growing fast, and deserves a closer look by investors.

I’m talking about the home remodeling market, which “should see strong growth in 2014”, according to a new study from the Joint Center for Housing Studies at Harvard University.

The study calls for “double-digit gains” in the remodeling sector in the first half of 2014, then moderating to 10 percent over the second half of the year.

“The ongoing growth that we’ve seen in home prices, housing starts, and existing home sales is also being reflected in home improvement activity,” says Eric S. Belsky, managing director of the JCHS.  “As owners gain more confidence in the housing market, they are likely to undertake home improvements that they have deferred.”

The US remodeling market has actually been on a steady upward path for three years. Data from the US Census Bureau shows that total US consumer remodeling expenditures grew from $111 billion in early 2011, to $153 billion at the end of 2013.

All of that activity should lead opportunistic investors toward home retailer-oriented stocks like Home Depot (NYSE: HD), Lowes (MYSE: LOW), and Bed, Bath and Beyond (NASDAQ: BBBY).

There’s a good case to be made for all three of the above stocks, but I’m not here to make one. I’m here to make a case for home retail-oriented exchange traded funds (ETFs), specifically SPDR S&P Homebuilders ETF, which holds a number of home retail stocks including Lumber Liquidators (NYSE: LL), Pier One Imports (NYSE: PIR), Whirlpool (MYSE: WHR), and mattress maker Select Comfort (NASDAQ: SCSS).

The ETF’s main competitor is iShares U.S. Home Construction (NYSE: ITB), which has 82 percent of its holdings in consumer cyclicals, including the two major home retailers, Lowes and Home Depot. The primary difference is in this fund’s “top ten” component, which holds eight pure homebuilding stocks in its top ten holdings, which isn’t exactly where you want to be, not with the real money to be made in home remodeling.

So let’s check out XHB. This ETF is loaded up with home consumer stocks. Consumer cyclicals comprise 66.8 percent of the fund’s holdings (and 14.77 percent in basic building materials stocks). Here’s how the fund’s holdings break down:

Home building companies – 29 percent
Household appliances  – 15 percent
Special retail stocks – 29 percent
Building materials – 28 percent

The fund is trading at $30.65, and has ample net assets of $2.01 billion, and is trading at the upper end of its $26-$33 52-week trading range. It leans heavily toward home furnishings in its holdings. They comprise 37 percent of the entire fund, which sets the table nicely to take full advantage of the big uptick in home remodeling market cited by the Harvard study.

Fee-wise, the fund offers a good deal for investors. It only charges 35 basis points annually, giving investors a low barrier to cross to gain access to the home remodeling boom.

Going all in on home remodeling could lead you to the Home Depots and Lumber Liquidators of the world, and that’s fine. But if you really want to take some risk out of the equation, try home construction ETFs, and XHB, in particular.

Brian O’Connell is an investment analyst at Investing Daily. He has appeared as an expert financial commentator on CNN, NPR, Fox News, Bloomberg, CNBC, C-Span, CBS Radio, and many other media broadcast outlets.

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