The mortgage market and homebuilding industries have been two of the top-performing sectors in 2012, and their recovery from the bottom of the 2008 real estate crisis appears to be gaining momentum. An exchange traded fund that lets you invest in both of these sectors is the SPDR S&P Mortgage Finance ETF (NYSEARCA:KME).
The fund seeks investment results that closely correspond to the price and yield performance, before fees and expenses, of the S&P Mortgage Finance Select Industry Index (INDEXSP:SPSIMF). That index features the mortgage banking, processing, and marketing segments of the US financial services industry.
To that end, the performance of the index is reflecting a strong recovery in the sector. While mortgage rates are at record lows, lending has tightened due to uncertainty about the economy.
Despite this heightened aversion to risk among mortgage lenders, KME is up 32.43% year-to-date. One reason for this surge is the inclusion of homebuilders in the ETF. Homebuilding has improved this year, with existing home sales, new residential construction, and building permit authorizations beating market expectations. These positive signs point to growth and new business for mortgage finance companies.
Click to enlarge
The sector allocation is worth noting. The index's name gives the impression that the primary businesses it tracks consist of mortgage industry-related companies. But a closer look at the composition of the holdings reveals that 58.77% of the ETF includes property and casualty insurance companies. Other major holdings of the fund are homebuilders, 22.52%, and thrifts and mortgage finance companies, 18.71%.
KME is a well-diversified fund that consists of 45 holdings, each consisting of less than 4% of the portfolio. The five biggest holdings are: Ocwen Financial
(NYSE:OCN), 3.73%; Fidelity National Financial
(NYSE:FNF), 3.48%; Old Republic Intl.
(NYSE:ORI), 3.16%; Arch Capital Group
(NASDAQ:ACGL), 3.12%; and Ryland Group
Recent indications are that the mortgage and homebuilding markets will keep moving toward full recovery in the next five years. While policy implications in Washington have tightened lending standards, a resolution in the near future should clear up some uncertainty and give another boost to KME.
Editor's Note: This article was written by Doug Fabian of Making Money Alert.
Below, find some more great investing and trading content from MoneyShow:
Mexico: The China of the Americas
5 ETFs to Profit from the Volatility
The Goldilocks View Still Prevails
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.