From the September 2007 issue of Research Magazine • Subscribe!

Housing Slumps, ETFs Suffer

After several years of outsized gains, homebuilding stocks are slumping. Slow job growth and falling home prices throughout the U.S. are putting a damper on the appetite for residential real estate.

Then too, there's the problem of consumers that are financially tapped out. According to the American Bankers Association, the level of late payments on all home loans (including home equity loans) has reached a peak not seen since 2001. Declining home values means homeowners don't have as much equity to cash out by selling their homes or refinancing.

Reflecting this pessimism are the SPDR S&P Homebuilders (XHB) and the associated ETF. Through mid-July, the fund was down 19.40 percent year to date. The underlying index has 21 stocks composed of companies that construct new homes and as such are closely tied to the U.S. housing sector. Top holdings include D. R. Horton, Home Depot, Lennar, Pulte Homes and Sherwin Williams. The fund charges an annual expense ratio of 0.35 percent.

REITs seem to be following the homebuilders downward in sympathy. After starting the year on a high note, stock indexes associated with commercial real estate have lost their luster, even though these properties have little (if any) direct connection to the housing market. If REITs keep it up, this could be the first year in seven they post negative performance returns.

The Vanguard REIT ETF (VNQ) was down 4.85 percent through mid-July. The fund is composed of companies involved in office, industrial, retail and property management. Among top holdings are Boston Properties, General Growth Properties and Public Storage. The expense ratio is currently 0.12 percent, which is the lowest among similar REIT ETFs.

Other broad index REIT funds include the iShares Dow Jones U.S. Real Estate Fund ( IYR) down 4.42 percent YTD, and the iShares Cohen & Steers Realty Majors ( ICF), down 6.59 percent.

Less concentrated on residential properties is the PowerShares Dynamic Building & Construction Portfolio (PKB). The fund has been balking the trend by increasing an impressive 29.48 percent YTD. The index contains 30 stocks and is weighted heaviest towards industrials and material suppliers. Top holdings in the fund include American Standard, Caterpillar, Fluor, Terex and Vulcan Materials.

Another of the few bright spots in real estate has been in the international property sector. Launched late last year, the SPDR DJ Wilshire International Real Estate ETF (RWX) has notched a year-to-date gain of 4.13 percent. Australia, Japan and the United Kingdom account for over 56 percent of the fund's country representation.

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Ron DeLegge is the San Diego-based editor of www.etfguide.com.

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