The SPDR S&P Homebuilders exchange-traded fund (ETF) is commonly used as a proxy for the housing industry. Just one problem: It’s a terrible predictor of new-home sales. Since August 2006, the annualized rate of new-home sales has dropped about 60 percent—and stayed there. The Homebuilders ETF has recovered completely.
So what’s up? The Homebuilders ETF tracks the S&P Homebuilders Select Industry Index, which is made up mostly of non-homebuilders. When S&P makes an industry index, it often includes related companies to bolster liquidity. In this case “all of those things should be correlated with homebuilding,” says Phil Murphy, S&P’s U.S. equities product manager.