NAIL: Top 10 Holdings Remain Attractively Valued Relative To The S&P 500

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The Direxion Daily Homebuilders & Supplies Bull 3X Shares ETF seeks to deliver 300% (3x) of the return of an index tracking US stocks exposed to the homebuilding sector.NAIL has outperformed the SPY ...

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Since then, the first 0.5% Fed rate cut has materialized, with market expectations of a Fed policy rate of around 3.25% in July 2025, indicating further tailwinds for homebuilders. Furthermore, valuations for the homebuilding sector remain attractive. The top ten NAIL holdings trade at a weighted average forward P/E multiple of 17.45, offering a discount of 26% relative to the SPY. As a result, while valuations for homebuilding stocks have increased since July 2024, I still think NAIL is worth a Buy rating as it should deliver a low double-digit return over the medium term. ETF Overview You can access all NAIL information on the Direxion website here. The ETF seeks to deliver 300% (3x) of the performance of the Dow Jones U.S. Select Home Construction Index. The index is heavily exposed to Homebuilding (65.24% of the total index), followed by Building Products at 15.97% and Home Improvement Retail at 10.83%: Index exposure by sector (Direxion website (accessed October 2024)) The expense ratio stands at 0.97% which is in line with other 3x levered ETFs but above what you would ideally want from a passive ETF holding. Holdings and diversification The index NAIL tracks is heavily concentrated in its top ten holdings which account for ~67% of all index assets. The largest single positions are D.R. Horton, Inc. (DHI) at 14.10%, Lennar Corporation (LEN) at 12.39%, and NVR, Inc. (NVR) at 8.02%: Exposure to the top ten holdings (Direxion website (accessed October 2024)) This high concentration exposes NAIL to the idiosyncratic risks facing the largest constituents of the index. At the same time, it allows us to easily get a better idea of the earnings potential of its top ten holdings (as opposed to an ETF holding hundreds or thousands of stocks). I estimate the weighted average forward P/E multiple for NAIL's top ten holdings currently stands at about 17.45:   Company Weight Forward P/E   D.R. Horton, Inc. (DHI) 14.10% 13.08   Lennar Corporation (LEN) 12.39% 13.33   NVR, Inc. (NVR) 8.02% 19.4   PulteGroup, Inc. (PHM) 7.82% 10.85   The Home Depot, Inc. (HD) 4.67% 27.49   The Sherwin-Williams Company (SHW) 4.65% 32.46   Lowe's Companies, Inc. (LOW) 4.57% 22.88   TopBuild Corp. (BLD) 4.11% 18.87   Toll Brothers, Inc. (TOL) 4.05% 10.54   Lennox 2.56% 28.96   Total: 66.94% 17.45   Click to enlarge Source: Author calculations We observe that relative to my previous article, the forward P/E for the top ten index holdings has increased from 14.36 to 17.45, indicating a slower pace of gains going forward:   Period\\Metric Forward P/E   July 2024 14.36   October 2024 17.45   Click to enlarge Source: Author calculations The current forward P/E indicates a high single-digit unlevered return going forward, driven by a 5.73% earnings yield and 2% inflation. When factoring in the 300% leverage employed by NAIL and its expense ratio, we should expect a low double-digit return going forward. NAIL relative to SPY The forward P/E ratio for the SPY currently stands at about 23.67, indicating that the top ten positions in NAIL trade at a ~26% discount to the S&P 500. I think the discount is still attractive considering that:  Many of the top ten NAIL holdings employ little to no leverage. The homebuilding sector should see further benefits as the Fed normalizes policy in 2025 and 2026.  As such, while potential returns have certainly decreased since July 2024, I still think NAIL is worth holding as the Fed normalizes policy. Of course, if you are more conservative you may want to physically replicate NAIL's portfolio (or at least its top ten positions). In this way, you will reduce your risk from the 300% leverage as well as save on the expense ratio. Risks In my opinion, the key risk facing the investment case for NAIL outlined above is that it is based on a medium-term outlook, while NAIL strives for daily replication of index returns. As such, there is no guarantee that the drip feed of small daily NAIL gains will offset a few big daily declines. I would also like to highlight while that triple-leveraged ETFs may still outperform over long periods of time, they experience significant near-term draw-downs. If we examine the performance of NAIL relative to the SPY over the past 5 years, we see NAIL has delivered a cumulative gain of ~ 168%, well above the SPY's ~111% return. However, during the 2020 correction, NAIL saw a peak-to-trough decline of some 92% all in one month! Still, it is encouraging to note that even if you bought at the top of the market prior to the 2020 crash you would have recovered your losses: NAIL vs SPY over the past 5 years (Seeking Alpha) If we do see some near-term downward volatility around the November 2024 US elections, it may be an opportunistic time to initiate a long position in NAIL. Conclusion NAIL has outperformed the SPY so far in 2024 and over the past 5 years. While the forward P/E of NAIL's top ten holdings has increased since July, the top ten positions still trade at a 26% discount relative to the S&P 500. Given market expectations for a Fed funds rate of about 3.25% in July 2025 and the Fed's own projections of a Fed funds rate of 2.9% at the end of 2026, the homebuilding sector remains an attractive value proposition relative to an arguably expensive US market. As such, I think a Buy rating is still warranted for NAIL, notwithstanding risks stemming from 300% leverage and excessive downward volatility.  Thank you for reading.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2473628359"}