Three Construction ETFs For An Economic Recovery

As more jobs are created and some Americans are beginning to feel more confident about the economy, stock prices have surged across the board. While most sectors have benefited from this surge in optimism, a few of the more cyclical—and heavily beaten down—corners of the market have seen even more impressive performances to start the year. No more has this been true than in the construction segment, as investors have piled into this corner of the market thanks to solid data, reasonable valuations, and hopes for greater demand going forward.

These expectations have been further boosted by strong economic indicators relative to the construction space specifically. Recent readings on the construction spending front came in well above expectations in terms of month/month reports, while other metrics such as housing starts also posted favorable figures. Beyond these data points, investors have also seen favorable releases regarding both personal income and the ISM Non-Manufacturing Index, all the while rates have stayed low, keeping borrowing costs at a minimum for those looking to expand their operations (read Three Cyclical ETFs That Are Surging Higher).

As a result of this broadly improving economic environment, low borrowing costs, and the vast wealth of untapped capital stored up by many businesses, some are forecasting that a resurgence in the building sector could have some staying power. This could especially be true if the trends highlighted above remain strong and investors continue to pile into highly cyclical industries like construction for their equity exposure (read Three Industrial ETFs For A Manufacturing Revival).

In light of this, it may be a good idea to tilt portfolios towards the building sector, at least in the short-term. While an investment in an individual stock could be an intriguing idea, some investors may be better off seeking broad exposure to the sector via an ETF. For these investors, we have highlighted three construction ETFs that could be in prime position to benefit from this positive trend in the construction world, or at least surge if the economic climate continues to improve as we go further into 2012:

ISE Global Engineering and Construction Index Fund (FLM)

If investors are looking for a global way to play this trend, both from an engineering and construction perspective, FLM is tough to beat. The product tracks the ISE Global Engineering and construction index which focuses in on firms that are principally engaged in the production or completion of large civil and capital projects or any aspect of the engineering process. In order to weight securities, the fund uses a linear-based cap-weighted method which stops a few firms from dominating the performance of the total index. With this strategy, the fund holds just under 70 securities although it does charge investors 70 basis points a year in fees (read Three Outperforming Active ETFs).

Top holdings for FLM are Vinci SA, McDermott international (MDR), and Fluor Corp (FLR), giving the fund a heavy tilt towards industrial firms. However, the product does have a median market cap of just $2.3 billion, suggesting a smattering of mid and small caps are in the fund. In fact, mid caps make up a majority of the fund’s assets at close to two-thirds of the total. In terms of country exposure, U.S. securities make up about one-quarter of assets while Japan (19.1%), and developed Europe (44%) make up much of the rest of the fund.

Dynamic Building & Construction Portfolio (PKB)

If investors are searching for a U.S centric play on the broad sector, PKB could be the way to go. The PowerShares fund tracks the Dynamic Building & construction Intellidex which consists of 30 companies in the U.S. from those sectors. The product also utilizes a more quantitative methodology which looks to evaluate companies based on a number of investment criteria including growth, valuation, timeliness, and risk factors. This approach produces a fund that charges a net expense ratio of 63 basis points a year, after current fee waivers of 28 basis points (also read Are Telecom ETFs In Trouble?).

Current top holdings include Vulcan Materials (VMC), KBR Inc (KBR), and Home Depot (HD) suggesting that while the fund has a heavy tilt towards industrials, consumer firms make up a decent chunk as well. In fact, industrials make up about 52% of the fund while consumer discretionary (23.5%) and materials (19.2%) help to round out the fund from an industry perspective. For market capitalization exposure, the product has a definite focus on smaller firms as mid caps make up a plurality at about 40% of the fund while small and micro make up another 50% of the product, leaving just 10% for large and giant cap firms. This suggests that the fund could be more volatile than some in the sector, pushing standard deviation levels up compared to more large cap focused funds in the industrial and materials sectors.

Dow Jones U.S. Home Construction Index Fund (ITB)

For investors searching for more of a housing recovery play, ITB could be an interesting choice. The product tracks the Dow Jones U.S. Select Home Construction Index which is a broad benchmark of firms that includes companies that construct residential homes including mobile and prefab domiciles. Homebuilders make up roughly two-thirds of the total exposure, although firms in the building materials segment occupy another 19.5% while home improvement firms take up another 9% of total assets (see Five Cheaper ETFs You Probably Overlooked).

This is in stark contrast to the SPDR S&P Homebuilders ETF (XHB) as this product puts less than 30% of its assets in homebuilders, giving double digit weights to home furnishing retail and home furnishing manufacturers. As a result, ITB could be more of a pure play on construction and thus make for an intriguing play for those focused in on this corner of the market. Total holdings include 27 firms while DR Horton takes the top spot, followed closely by Lennar Corp and Pulte Group. The product charges 47 basis points a year in fees but pays out a respectable 65 basis points in dividends in 30-Day SEC Yield terms.

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