Building Something With This Construction ETF

Although they have not been immune to the recent pullback in U.S. equities, homebuilders stocks and the relevant exchange traded funds have been leadership groups this year.

The SPDR S&P Homebuilders ETF XHB and the iShares U.S. Home Construction ETF ITB, the two largest homebuilders ETFs, have each returned more than 3 percent, a far cry from the dismal performance offered by the S&P 500. Going forward, it could take more than the Federal Reserve incrementally boosting interest rates to derail momentum in the construction and homebuilders industry.

“Real estate is one area of the US economy showing undisputed strength, and recent data argues for continued expansion, in my view. With so much momentum built up, I expect that it’s going take more than a few small rate hikes by the Federal Reserve to dampen this story,” according to a note from PowerShares, the fourth-largest U.S. ETF issuer.

Speaking of momentum with construction and homebuilders stocks, behold the PowerShares Dynamic Building & Construction Portfolio PKB, an ETF that has returned 6.8 percent year-to-date. The momentum factor, in part, serves as the backstop for PKB, which weights its 30 holdings by price momentum, earnings momentum, quality, management action, and value.

What is important to note about PKB, beyond its stellar performance and weighting methodology, is that this is far from a dedicated homebuilders ETF on par with the aforementioned ITB. Rather, PKB includes exposure to “engaged in providing construction and related engineering services for building and remodeling residential properties, commercial or industrial buildings, or working on large-scale infrastructure projects, such as highways, tunnels, bridges, dams, power lines, and airports,” according to PowerShares.

In terms of its homebuilders exposure, PKB gets that via derivatives plays such as Home Depot Inc. HD and Lowes Companies Inc. LOW and by way of an almost 53 percent industrial sector weight that includes direct and indirect residential real estate exposure.

While it is residential real estate that investors and the financial media are infatuated with when it comes to various monthly data points, rising construction spending is a clear catalyst for PKB going forward.

“Construction trends are also on the rise. The Architecture Firms Billing Index was 54.7 in July; any score above 50 indicates an increase in billings. As shown in the chart below, the Architecture Firms Billing Index typically comes out roughly a year ahead of the US Census Bureau’s construction spending reports. The strength of the index augurs for positive growth in construction spending into mid-2016. There may be a short-term pause, but conditions are generally favorable, in my view,” according to PowerShares.