Focus: Real Estate

Housing market was a drag on the economic recovery for quite some time but it is finally showing clear signs of bottoming out.

If we take a look at some of the housing data released in the past few days, the positive tone is quite evident. (Read: Obama or Romney? Win With These ETFs )

Home prices (per S&P/Case-Shiller 20-city index) have increased 5.9% through July this year, reflecting their strongest performance since 2005.

Home builders’ confidence index this month rose to its highest level since June 2006. It was the index’s fifth consecutive gain, though the index still remains much below its historical highs.

Further, new home sales are now near their two-year high. Rising home sales are resulting from an improvement in demand-supply situation now. (See: Three Biggest Mistakes of ETF Investing )

Mortgage rates are now at their record lows and are expected to remain at low levels in the near future. Under the QE3 program, the Fed has pledged to buy $40 billion of mortgage-backed securities per month on an open-ended basis till the job market situation improves.  This aggressive move further supports the nascent housing market recovery. (Read: Are QE3 and Mortgage REIT ETFs a Winning Combo?)

That said, strong and sustained recovery in the housing market still appears to be far away, particularly in view of the labor market conditions.  Unemployment remains above 8% and the businesses are still hesitant to hire due to macroeconomic and fiscal cliff related uncertainties.

Further, millions of homeowners are still underwater on their mortgages and there is still a glut of foreclosed properties on the market, which will keep the lid on the prices. Also even though the interest rates are at ultra-low levels, the credit situation is still tight and thus many prospective buyers are forced to remain away from the market.

Based on the optimism that the worst may be over for the housing market, many homebuilder stocks have jumped more than 100% in the last 12 months. The housing related ETFs have also enjoyed a smooth run in the past few months.  (See: Protect Against QE with these Precious Metal ETFs )

Despite recent price rise, these ETFs may continue to outperform the broader market, if the housing market continues its uptrend. Per Zacks earnings analysis, Construction sector will be the best performer with a very strong 46.3% growth in the third quarter, whereas total market earnings will decline 3.4% from the third quarter of last year.

Below we take a look at the three construction ETFs and analyze which one is the most suitable for the investors seeking to benefit from housing upswing.

iShares Dow Jones US Home Construction (ITB )

ITB tracks the Dow Jones U.S. Select Home Construction Index, which measures the performance of the home construction sector of the U.S. equity market.

Top three holdings are DR Horton (9.56%), Lennar (9.56%) and Pulte Group (8.99%). The fund is heavily exposed to the Home Construction sector (64.3%), followed by Building Materials & Fixtures (17.6%) and Home Improvement Retailers (13.3%).

SPDR S&P Homebuilders (XHB )

The fund employs a replication strategy in seeking to track the performance of the S&P Homebuilders Select Industry Index, which is an equal weighted index of the homebuilding segment of a U.S. total market composite index.

Top three sectors are Building Products (28.4%), Homebuilding (27.0%) and Home-furnishing (15.41%). Top three holdings are Lennox Intl (3.67%), Lowes (3.61%) and Smith AO (3.59%).

PowerShares Dynamic Building & Construct (PKB )

PKB seeks to match the performance of Dynamic Building & Construction IntellidexSM Index, which is composed of U.S. building and construction companies. Top sector allocations are Industrials (51.0%), Consumer Discretionary (35.8%) and Materials (13.3%).