NYSEARCA:XHB – Is This Homebuilder ETF the Best Play for the 2025 Housing Market?
Can NYSEARCA:XHB Outperform as the Housing Market Stabilizes?
The SPDR S&P Homebuilders ETF (NYSEARCA:XHB) has been a key player in the homebuilding sector, benefiting from the ongoing recovery in the housing market. After a turbulent 2024 marked by rising mortgage rates and tight supply, the 2025 outlook appears more promising, with mortgage rates expected to ease, home inventory gradually improving, and economic stability providing a more favorable backdrop. At its current price of $103.50, XHB has outperformed broader indices and remains a compelling option for investors looking for exposure to the home construction industry. But is it still a buy, or has the recent rally priced in too much optimism?
The housing market’s rebound is supported by several key factors. New home sales increased 6.7% year over year, showing that demand remains resilient despite historically high borrowing costs. The supply of new homes has also risen, with 494,000 units available, representing an 8.5-month supply, the highest level in recent years. While affordability remains a concern due to a 30-year mortgage rate hovering around 7%, the potential for Federal Reserve rate cuts in the second half of 2025 could further fuel the sector’s recovery.
NYSEARCA:XHB’s Portfolio Structure – What Makes It a Strong Bet?
XHB differentiates itself from other homebuilder-focused ETFs by maintaining a modified equal-weight structure, ensuring no single stock dominates the fund. The ETF holds 37 stocks, with its top 10 holdings making up about 35% of the portfolio. The allocation is spread across multiple housing-related industries, including homebuilders, home improvement, building products, and home furnishing companies. This balanced diversification makes XHB a lower-risk alternative compared to highly concentrated funds like iShares U.S. Home Construction ETF (ITB), which heavily leans on a few top holdings such as D.R. Horton (DHI) and Lennar (LEN).
Top Holdings Driving Growth – Williams-Sonoma, Lennox International, and Trane Technologies
The top-performing stocks in XHB’s portfolio have significantly contributed to its recent gains. Williams-Sonoma (NYSE:WSM), the fund’s largest holding, has surged 110% in the past year, driven by strong earnings and aggressive share buybacks. The company’s recent $1 billion repurchase program has reduced outstanding shares by 4% in the first three quarters of 2024, signaling confidence in future growth.
Lennox International (NYSE:LII), another key component, has seen 50% stock appreciation in the past year, thanks to double-digit revenue and profit growth. The HVAC manufacturer is expected to increase revenue by 10% in 2025, with earnings projected to rise 18% year over year. Similarly, Trane Technologies (NYSE:TT) reported 11% revenue growth and a 21% earnings jump in its latest quarter, fueling a 43% increase in its stock price over the past 12 months.
These companies have positioned themselves as leaders in home-related consumer spending, energy-efficient building solutions, and high-end home furnishings, making them strong contributors to XHB’s performance.
Why Has NYSEARCA:XHB Pulled Back 20% from Its Highs?
Despite strong fundamentals, XHB has corrected nearly 20% from its 2024 peak of $125, largely due to rising mortgage rates, concerns over consumer affordability, and technical selling pressure. The 7% 30-year mortgage rate remains a major obstacle for homebuyers, restricting demand for both new and existing homes. While homebuilders have adapted by offering more incentives and focusing on smaller, affordable homes, the uncertainty surrounding interest rates remains a headwind.
However, the selloff has created a buying opportunity for long-term investors. XHB now trades at 14x forward earnings, a significant discount to the broader S&P 500’s 22x multiple. With the Federal Reserve expected to cut rates later in 2025, mortgage costs could ease, boosting affordability and demand for new homes.
Valuation – Is NYSEARCA:XHB Undervalued or Fairly Priced?
At its current price of $103.50, XHB presents a strong risk-reward profile, particularly given its low expense ratio (0.35%) and healthy earnings growth projections. The fund’s price-to-earnings ratio of 12.2x, combined with an 8% long-term EPS growth forecast, results in an attractive PEG ratio of 1.56x, indicating undervaluation compared to its historical averages.
Compared to its closest peer, iShares U.S. Home Construction ETF (ITB), XHB stands out due to its diversified portfolio and lower exposure to individual homebuilders, which tend to be more volatile. ITB’s top five holdings make up 44% of the portfolio, making it more susceptible to swings in the performance of a few stocks. XHB’s approach spreads risk more effectively, providing a balanced exposure to the homebuilding industry.
Will Mortgage Rates and Economic Trends Support Further Upside?
The biggest factor influencing XHB’s future performance is the direction of mortgage rates and economic growth. The Federal Reserve’s stance on interest rates will be a critical determinant of housing affordability. If inflation continues to cool and rate cuts materialize in late 2025, mortgage rates could decline to the 6% range, stimulating home sales and supporting homebuilder stocks.
Additionally, rising wages, low unemployment, and continued demand for housing should provide a supportive backdrop for the industry. The U.S. still faces a shortage of approximately 5 million homes, meaning demand for new construction remains high. Homebuilders have responded by expanding production, adjusting pricing strategies, and enhancing efficiency, which should drive revenue growth even in a high-rate environment.
Technical Analysis – Has NYSEARCA:XHB Found a Bottom?
From a technical standpoint, XHB recently tested key support levels around $100-$101, which aligns with its 38.2% Fibonacci retracement level from the October 2022 lows. This area has historically acted as a strong demand zone, suggesting that the recent pullback may be near its end. Additionally, the RSI momentum oscillator showed a bullish divergence, indicating that selling pressure could be fading.
However, XHB remains below its 200-day moving average, signaling that the ETF is still in a short-term downtrend. A sustained break above $110 would confirm a reversal and open the door for a move back toward the $120 range. While volatility may persist, long-term investors with a multi-year outlook should view the recent decline as a buying opportunity.
Buy, Sell, or Hold – What’s the Best Move for NYSEARCA:XHB?
XHB presents a compelling investment case, balancing strong sector fundamentals with an attractive valuation. The housing market’s recovery, combined with improving economic conditions and potential rate cuts, supports further upside in 2025 and beyond. The ETF’s diversified portfolio, strong earnings growth from its top holdings, and reasonable valuation multiples make it an appealing long-term play.
The key risks include persistent high mortgage rates, slowing economic growth, and weaker-than-expected housing demand. However, given the strong backlog of new home construction and continued supply shortages, these risks appear manageable.
For investors seeking exposure to the homebuilding sector with reduced single-stock risk, XHB remains a buy at current levels. With the potential for 20-25% upside in the next 12 months as rate cuts provide relief and homebuilders capitalize on increasing demand, XHB stands out as a top-tier ETF choice in the housing market recovery.
