XHB: The Good And The Bad Of The Oldest Homebuilders ETF

The SPDR S&P Homebuilders ETF (XHB) has long been a go-to vehicle for investors seeking exposure to the U.S. housing market. With a gross expense ratio of 0.35% and a diversified portfolio of 35 holdings spanning homebuilding, building products, and home improvement retail, XHB offers a low-cost, broad-based approach to a sector that has historically been a bellwether for economic health. But in 2025, as the housing market grapples with high mortgage rates, inventory imbalances, and shifting consumer demand, the question arises: does XHB's structure still justify its place in a portfolio?

The Good: Low Costs and Strategic Diversification

XHB's appeal lies in its simplicity and cost efficiency. At 0.35%, its expense ratio is competitive with other sector ETFs, making it an attractive option for passive investors. The fund's modified equal-weight structure ensures no single holding dominates the portfolio. For instance, top holdings like Installed Building Products (4.53%) and D.R. Horton (3.80%) are balanced by smaller allocations to home improvement retailers like Williams-Sonoma (3.71%), reducing overexposure to any one sub-industry. This diversification is critical in a sector where volatility is the norm.

The fund's allocation—51% to homebuilding, 31% to building products, and 9% to home improvement retail—also reflects a nuanced understanding of the housing ecosystem. While homebuilders like PulteGroup and Toll Brothers are sensitive to interest rates, building product manufacturers and retailers often benefit from consistent demand for materials and services, even in a slowdown. This mix could provide a buffer against sector-specific downturns.

The Bad: A Housing Market in Stasis

Despite XHB's structural advantages, the broader housing market remains a drag. Mortgage rates have lingered near 6.7% in 2025, locking in existing homeowners and deterring new buyers. Inventory of unsold new homes hit a 17-year high in June 2025, while housing starts and permits have fallen to multi-year lows. These conditions have led to a 13% drop in XHB's value over the past year, outpacing even its benchmark index.

The fund's performance is further complicated by regional disparities. While markets like Austin and Tampa see increased inventory and slower price growth, sellers' markets in the Midwest and Northeast persist. This fragmentation makes it harder for XHB's broad portfolio to capitalize on localized trends. Additionally, builder incentives—such as price cuts and mortgage rate buydowns—have become widespread, eroding profit margins and signaling weak demand.

Valuation and Outlook: A Tug-of-War Between Risks and Opportunities

XHB's current valuation appears compelling. At a forward P/E of 14x and a PEG ratio of 1.56x, the ETF trades at a discount to the S&P 500's 22x multiple. This suggests the market is pricing in continued weakness, but also leaves room for a rebound if conditions improve. The fund's 12.2x P/E ratio and 8% long-term EPS growth forecast further support its appeal as a value play.

However, the path to recovery is far from certain. The Federal Reserve's anticipated rate cuts in late 2025 could drive mortgage rates toward 6%, improving affordability and stimulating demand. Yet, even a modest decline in rates may not offset years of inventory buildup or address structural issues like labor shortages and zoning restrictions. For XHB to thrive, the housing market must see a meaningful increase in supply and a sustained drop in borrowing costs—a scenario that hinges on policy shifts and economic stability.

Investment Advice: A Case for Caution and Selectivity

For investors, XHB's role depends on their risk tolerance and market outlook. The ETF's low cost and diversification make it a reasonable core holding for those seeking long-term exposure to the housing sector, particularly if they believe in a gradual recovery driven by rate cuts. However, its recent underperformance and the sector's vulnerability to macroeconomic shocks suggest it should not be a core holding in a volatile market.

A tactical approach might involve using XHB as a satellite position, complemented by individual stocks in resilient sub-industries like building products (e.g., Lennox International, up 50% in 2025) or home improvement retail (e.g., Williams-Sonoma, up 110% in 2024). This strategy allows investors to capitalize on XHB's diversification while hedging against the sector's broader risks.

In conclusion, XHB remains a viable option for investors who prioritize cost efficiency and diversification in the homebuilding sector. But in a market defined by uncertainty, its value proposition is tempered by the sector's challenges. Those willing to navigate the volatility and bet on a Fed-driven recovery may find XHB's structure appealing—but they should do so with a clear-eyed understanding of the risks.