A Buying Opportunity With Homebuilders ETFs

The SPDR S&P Homebuilders ETF XHB is down 10.6 percent year-to-date, dragged lower by negative treatment of the broader consumer discretionary sector. However, investors might want consider XHB's woes as an opportunity to embrace, not ignore, the fund.

Correction Territory

XHB's year-to-date decline puts it in correction territory, but the ETF is up 3.4 percent over the past month. XHB differs from rival homebuilders ETFs due to its robust exposure to the discretionary/retail side of the residential real estate industry. That includes an almost 8 percent weight to home improvement retailers, a group that is expected to deliver some of the most impressive earnings growth in the broader consumer discretionary sector.

"Though the Federal Reserve raised interest rates in December, mortgage rates still remain low and housing data is indicating that first-time buyers are returning to the market. The homeownership rate in the fourth quarter rose slightly (63.7% to 63.8%), coming off a 48-year low touched in the second quarter; among 35- to 44-year-olds, it rose to 59.3% from 58.1%," said State Street Vice President David Mazza in a new note.

Good Release From Home Depot

Adding to the case for a recovery by XHB is Home Depot Inc HD's rise Tuesday after saying it expects 2016 revenue to miss analysts' estimates. Looking forward to fiscal 2016, Home Depot expects to earn $6.12 to $6.18 per share on revenue of $88.084 billion to $88.838 billion. Wall Street analysts were already estimating the company to earn $6.16 per share on revenue of $93.12 billion.

Dow component Home Depot is a member of XHB's lineup. Home Depot is just one example, but it highlights XHB's ability to capture consumer discretionary trends beyond pure play homebuilders.

"XHB allows investors to harness the potential growth not only of new home construction, but also of housing retail and building products. Because existing home sales make up approximately 90% of all home sales, more than 65% of XHB’s portfolio is allocated to household consumer discretionary stocks, such as housing retail and building products. This portion of the portfolio also includes home improvement retailers and home décor retailers that could benefit from an improving housing market," adds Mazza.

Lowe's Companies, Inc. LOW reported a slight Q4 beat on Wednesday morning, with better-than-expected guidance.