Homebuilders are having their best quarter in years — how to play the move using ETFs

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Homebuilding stocks are on the rise.

The SPDR S&P Homebuilders ETF is on pace for its best quarter since 2012, up over 17 percent since Jan. 1. The rally is largely pegged to lower interest rates, with the U.S. 10-year Treasury yield sitting at its lowest level in more than a year.

And if you ask specialists such as Mary Ann Bartels, Bank of America-Merrill Lynch’s head of ETF strategy, this environment isn’t all that different from the homebuilders’ last hurrah in 2012.

“Homebuilders did well in 2012. Well, we had a bear market in 2011. We just had a bear market in December. Homebuilders were down over 30 percent,” Bartels told CNBC’s “ETF Edge” on Monday, adding that lower interest rates are historically “very positive for the industry.”

But investors should review their options before blindly buying into the space, Dave Nadig, managing director of ETF.com, said in the same interview.

He explained that while the iShares U.S. Home Construction ETF is market-cap-weighted, a risk-averse characteristic that means larger-cap companies account for a bigger chunk of the portfolio than their smaller counterparts, its holdings are closely related to homebuilding. Its top holdings include names such as Lennar, D.R. Horton and PulteGroup.

The SPDR S&P Homebuilders ETF, on the other hand, is equal-weighted, meaning large-cap and small-cap companies are given the same degree of importance, but it’s more of an indirect play on home construction, Nadig said. Stocks such as Lowe’s and Owens Corning top its list of holdings.

“When you’re looking at what’s really a theme, not a sector, I tend to think that the cap weighting here may actually help you,” Nadig said. “The equal-weighted here spreads you out really thin across Home Depot and Lowe’s and firms that you may not think of as being core homebuilding holdings. So, here, I like the market-cap-weighted version.”

The SPDR S&P Homebuilders ETF and iShares U.S. Home Construction ETF both continued to trade higher in Monday’s session.

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