Homebuilders or Construction-- Think about it

Why not take a longer term look at a market known for its cyclical nature? Real estate and the subsidiary businesses it creates- Buy at the bottom when all the money chasers are scrambling over each other to exit positions and sit on an industry (REITS) whose dividend payments could come in at less than your marginal tax rate. Saving on taxes is very MoJo.

Back in December and over breakfast, my good buddy over at http://gluxe.blogspot.com/ was taking the contrarion view that home builders and construction stocks presented good longer term value for the investor looking to sit pretty in the years ahead. With the recent roller coaster of a ride we call our equity markets recently I've found that maybe he was on to something. Check out the following piece from www.seekingalpha.com


Homebuilders ETFs iShares Dow Jones U.S. Home Construction Index Fund ETF (ITB) SPDR S&P Homebuilders ETF (XHB)
Construction Industry ETFs PowerShares Dynamic Building & Construction Portfolio ETF (PKB)
What Are They?
Homebuilders and Construction ETFs are exchange-traded funds that focus on homebuilder stocks or stocks broadly related to construction. Neither are an "industry" according to most classifications, so these ETFs are generally not part of the families of primary sector ETFs.
Why & How To Use Them

Since homebuilding and construction are sub-sectors rather than sectors, these ETFs are most suitable for investors who desire concentrated exposure to those groups of stocks. They're not suitable for investors looking to build diversfied portfolios using sector ETFs.

What to Look Out For
Homebuilders and construction are different, and should not be confused with each other. Construction stocks, such as Caterpiller (CAT) which provides construction machinery, have exposure to international markets, whereas homebuilders tend to be entirely US-based. And construction stocks benefit from commercial and government building, not just the housing market.

Most of these ETFs are market cap weighted index funds. However, PowerShares offers a "dynamic" ETF that selects stocks based on rules which are not revealed to investors in the fund. Use it instead of a regular index ETF if you believe that quantitative, rules-based stock selection will outperform a market cap weighted index.
Narrower ETFs, such as these, tend to have higher expense ratios than the ETFs which track broad indexes such as the S&P 500.

Further Reading
Homebuilding and construction are sub-sectors; here's a list of primary US sector ETFs.
On the difference between PowerShares Dynamic Building & Construction Portfolio ETF and the others, see Homebuilders vs. Construction ETFs.
For a cautious view of real estate related ETFs, see Richard Kang's Beware New Real Estate Investment Products.

For discussion of ETFs and their relationship to house prices, see: Looking To Short Real Estate Via ETFs, John Bethel's James Grant's Investment Strategies for the Housing Predicament, and Geoff Considine's Investing in Real Estate: REITs and Your Home.
As a hedge against house prices, consider also Real Estate [REIT] ETFs.

This page is part of The Seeking Alpha ETF Selector which sorts ETFs by type, highlights how to use them and what to look out for, and provides links to articles that discuss key issues for investors.