Make Money in the Recovering Homebuilding Industry the Easy Way

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you think the housing market is finally picking up, and that homebuilders and related companies have rosy futures, the SPDR S&P Homebuilders ETF (NYSE: XHB  ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The homebuilder ETF's expense ratio -- its annual fee -- is a rather low 0.35%.

This ETF has lagged the world market over the past five years, but trounced it over the past three. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

What's in it?
Lots of homebuilding-related companies had strong performances over the past year. Homebuilding giant PulteGroup (NYSE: PHM  ) , for example, surged 91%, gaining an upgrade from analysts at FBR along the way, but some leading Fool analysts warn that we shouldn't expect rapid growth. Pulte recently reported second-quarter earnings in the black and revenue up 15%, with new-home orders rising 32% over year-ago levels.

Wallboard maker USG (NYSE: USG  ) gained 53% over the past year, albeit with some hiccups, when it reported revenue up and losses shrinking in results that missed analyst projections. CEO James Metcalf has noted, "We are seeing the signs of a recovery in our core markets, and will continue to focus on reducing costs and improving margins as we work toward positive net earnings." The company is also targeting emerging markets to boost growth.

Furniture and furnishings maker Leggett & Platt (NYSE: LEG  ) gained 19%, serving both residential and industrial markets. The sluggish economy has been holding it back, along with rising materials costs. Interested and patient investors can grab a dividend yield near 4.8% these days. The company is poised to benefit as the economy improves, as it serves carmakers and other industries. Its revenue has been growing at a faster clip in recent years.

Other companies didn't do as well last year but could see their fortunes change in the coming years. Tempur-Pedic International (NYSE: TPX  ) , for instance, shed 60%. Some see that as overreaction, given the company's three-year 39% growth rate and net profit margins that are substantial at more than 15% and also expected to grow. The company has lowered near-term expectations, but its long-term prospects seem solid. One recent success is its new, lower-cost "Simplicity" line, which targets a new, less-affluent market, and lets it compete against old-guard mattress-makers.

The big picture
Long-term demand for homes isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, holds no position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Tempur-Pedic International. The Motley Fool has a disclosure policy.

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