ETF Talk: Homebuilder Fund Offers Growth Opportunity

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

The last several weeks of ETF Talks have taken turns focusing on different segments of the housing market as it heads into what is expected to be a very good year for the sector. Today, we round out our coverage of exchange-traded funds (ETFs) which capitalize on the rebound by offering a pick which combines multiple sectors in the domain of housing. PowerShares Dynamic Building & Construction (PKB) may seem a lot like previous ETF Talk pick SPDR S&P Homebuilders (XHB), but, while XHB was simply tied to a general housing sector index, PKB is more directly involved in the nitty-gritty of the sector by investing in engineering, building and constructing companies.

This non-diversified fund seeks results that, before fees and expenses, correspond generally to the price and yield of the Dynamic Building & Construction IntellidexSM Index. That index is made up of stock from 30 U.S. building and construction companies, providing construction and engineering services for building and remodeling residential properties, commercial or industrial buildings.

PKB is demonstrating remarkable growth: the fund is up 7.45% this year, following a whopping 42.70% gain in 2012. In addition to gains to be made from capital appreciation, PKB also offers a yield of 0.49%. And as the housing rebound looks to continue, especially as the Fed remains committed to its easy-money policies, strong gains look to be not just in the rear-view mirror, but on the road ahead as well.

PKB has its holdings invested in three different sectors. The industrials sector leads the way, with 48.37% of the fund’s assets, though the consumer cyclical sector is not far behind at 35.18%. The basic materials sector brings up the rear at 16.44%. As for individual companies, PKB’s top ten holdings total 45.25% of its assets. The top five of these holdings each possess around 5% of the fund’s assets: PulteGroup, Inc., 5.13%; KBR, Inc., 5.11%; Quanta Services, Inc., 5.01%; Mohawk Industries, Inc., 4.99%; and NVR, Inc., 4.85%.

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Even if the housing rebound does not wind up as robust as expectations, due to slowing housing starts or any other reason, keep in mind that PKB also invests in remodeling, which is gaining popularity as a cheaper alternative to building entirely new homes. However, in light of the aforementioned Fed policies, as well as high expectations and optimism regarding the housing rebound, it is unlikely PKB will rely solely on this “Plan B.” Instead, this ETF, and those who invest in it, can profit from both avenues.

Indeed, the Federal Open Market Committee this afternoon released minutes from its Jan. 30 meeting and the central bank indicated that it will maintain its easy-money policies, which are helping the housing market’s recovery. The minutes stated, “Household spending and business fixed investment advanced, and the housing sector has shown further improvement.” That report shows no reason to think the housing recovery is slowing, despite the uncertainty about the federal government’s budget situation.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to email me by clicking here. You just may see your question answered in a future ETF Talk.

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Today's release of minutes from the Federal Reserve's last meeting showed debate regarding the direction of further stimulus action, and investors responded with hesitation, as the S&P 500 fell 1.2%, its biggest drop in more than three months.

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