Monday, June 9, 2008

XHB: Not A Real-Estate Play

We've seen here that certain home builders are showing large discounts to their book values right now. But some of these companies might actually be in trouble. For those who don't have the time to dig through each individual builder's finances, or for those who prefer a diversification strategy, a home builder ETF exists called XHB that tracks a whole slew of builders.

However, a closer examination of the underlying securities of XHB reveals this ETF not to be exactly what it purports to be.

First of all, it has quite a bit of exposure to retail. Home Depot and Lowe's make up almost 10% of its portfolio! Another problem is that three of the companies in XHB (Standard Pac, MDC, and Ryland) are heavily involved in mortgage financing. So you thought you were making a play on real-estate, but you end up owning mortgages you know nothing about, for another 10% of your portfolio!

Third, this ETF has another 25% of its holdings not in homebuilders, but in home accessories! With companies like Tempur-pedic (mattresses!), Sherwin-Williams (paint!), and other companies involved in furniture, carpets, and interior decorating, beware! I'm not saying that these companies don't have some correlations to the housing market, but by no means are these real-estate plays!

Finally, the builders we looked at which have the largest discounts to their book values (rankings here), do not even appear in XHB. It's possible they're too small for the ETF to hold without affecting their values.

In any case, if you're looking to benefit from the discounts to book values that home builders are trading at, XHB is not for you. Its exposure to retail, mortgage financing and various other sectors (adding up to almost half the portfolio) combined with the fact that even its home builders are not the cheapest ones out there, mean that if you want to take advantage of the discount to book values that are out there, the best strategy is to buy the individual securities yourself!

1 comment:

George said...

Thanks for the warning on XHB.

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