Building and construction is the backbone of the industrial economy. When the overall economy is strong, interest in new building projects rises, and construction activity climbs in response. Smart investors are able to see shifting trends and anticipate recoveries in the space, and that can produce impressive returns in this cyclical business. Specialized ETFs offer diversified exposure to the building and construction industry, and the top funds in the space are worth looking at if you're optimistic about the sector's prospects.

Building and Construction ETF

Assets Under Management

Expense Ratio

5-Year Average Annual Return

iShares U.S. Home Construction (NYSEMKT:ITB)

$1.69 billion



SPDR Homebuilders (NYSEMKT:XHB)

$1.05 billion



PowerShares Dynamic Building & Construction Portfolio (NYSEMKT:PKB)

$316 million



First Trust ISE Global Engineering and Construction Index (NYSEMKT:FLM)

$16 million



Global X U.S. Infrastructure Development (NYSEMKT: PAVE)

$12 million



Data source: Fund providers. NM = not meaningful; fund began March 6, 2017.

Focusing on homebuilders

The best-known portion of the building and construction industry is homebuilding, and the two main ETFs in the space focus on that particular area. Given how well the housing market has done since the 2008 financial crisis, it's not surprising to see strong returns from the homebuilders that are capitalizing on that higher demand.

The two ETFs have substantial differences in the way they approach the sector. The iShares fund is much more focused on actual homebuilding, with a two-thirds allocation to the companies that actually build homes and another 15% of assets invested in companies that make building products. Home-improvement retailers make up about 8% of the portfolio, and the remaining 10% is divided across home furnishings, specialty chemicals, forest products, construction materials, and various distributors of such products.

A newly built home, as seen from the lawn under a blue sky.

Image source: Getty Images.

The SPDR takes a much more liberal approach toward the sector. Only a third of the fund is in homebuilder stocks, with another third in building products. Home furnishings manufacturers get more than a 10% allocation, and retailers of home improvement supplies and home furnishings add up to more than 15% of the fund. Appliance manufacturers make up the remaining 7%. With so much more exposure to consumer durables, the SPDR fund hasn't done as well as the purer-play homebuilding ETF from iShares.

Turning toward broader exposure

If you prefer even less emphasis on homebuilders, then the PowerShares ETF fits the bill better. More than 55% of the fund is focused on makers of building products and providers of engineering and construction services. Companies in the insulation, aggregates, and forest products industries are big players in the fund, and you'll even find a 5% exposure to utility stocks in the mix. Major home improvement retailers and consumer-products suppliers for swimming pools, garage doors, and other ancillary home-related items round out the last 15% of the portfolio.

First Trust goes even further by taking a global approach toward the space. The ETF focuses on companies involved in large projects in the infrastructure, utility, transportation, telecom, and building space. Only about 20% of the fund is invested in U.S. companies, with Japan leading the way with almost 30% exposure and various European countries adding up to another 25%. A special weighting system leads to much less concentration among top holdings, with the biggest position among the 66 stocks amounting to less than 3% of the total portfolio.

Looking to American infrastructure

Finally, the new Global X ETF is a play on the call for greater U.S. infrastructure development. The fund's holdings are a lot different from what you see with most building and construction funds, as it includes allocations to railroads, equipment rental specialists, steelmakers, and even technology stocks. With the forward-looking goal of taking advantage of all available infrastructure advances in the U.S. market, Global X hopes that it can produce returns similar to the best performances of its ETF peers in the building and construction space.

Which ETF is best for building and construction investors?

The range of building and construction ETFs is so wide that the right pick for you truly depends on your preference for investing within the space. The iShares fund is an obvious pick if you believe that homebuilders can continue to thrive, while the First Trust fund is ideal for international investors in the space. The other ETFs take their own individual positions with respect to the industry, offering a good variety from which to decide what fits best with your particular beliefs about the future of the sector.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.