Homebuilders and other housing industry stocks have been strong performers in 2012 as low interest rates offset higher underwriting standards for home loans. The SPDR S&P Homebuilders ETF (XHB) rose more than 54% since the beginning of this year, while the iShares Dow Jones U.S. Home Construction ETF (ITB) is up more than 74% over the same period

While equities may offer exposure to homebuilding companies, commodities represent another great way to play the boom in the homebuilding industry. Timber,copper, cement and other commodities are widely used in the construction and therefore could benefit from the higher demand due to new home construction in the United States.

Timber: Money Does Grow on Trees

A typical 2,400 square foot, single-family home requires approximately 16,000 board feet of framing lumber and over 14,000 square feet of other wood products including plywood, particleboard and fiberboard, according to the Idaho Forest Products Commission. As a result, timber is one of the most essential commodities used in the homebuilding industry.Here are some ways for investors to build exposure:

• iShares S&P Global Timber & Forestry Index Fund (WOOD): With a net asset value of $196 million and a 0.48% expense ratio, this ETF is one of the most popular options for investors looking for exposure to timber. The index’s 27 holdings consist of 53% paper and forestry companies and 28% real estate companies.
• Claymore Beacon Global Timber Index ETF (CUT): With a net asset value of $170 million and a 0.65% ER, this ETF is another popular option for timber investors. The index holds 28 different companies that are 37.5% weighted in the United States and 72.6% weighted in materials [see also Timber Set to Soar Says Jeremy Grantham].
• Plum Creek Timber Co. Inc. (PCL): With a market capitalization of $6.8 billion, PCL is the largest publicly traded timber company in the U.S., holding approximately 6.6 million acres of timberlands across 19 different states. In 2011, the company generated revenues of approximately $1.167 billion.

Copper: Electrifying the Housing Market

The average single-family home uses an average of 439 pounds of copper, including 295 pounds of building wire and 151 pounds of plumbing tube, fittings and valves, according to the Copper Development Association. While the copper industry extends well beyond residential homes, the commodity could still see significant upside from a boom in homebuilding. Here are some ways for investors to build exposure:

• iPath Dow Jones AIG Copper Total Return ETF (JJC): With a market capitalization of $115 million and a 0.75% yearly fee, this ETN is the most popular way to play the copper market. The index consists of one futures contract on copper – the Copper High Grade futures contract traded on the COMEX.
• iPath Pure Beta Copper ETN (CUPM): With a market capitalization of $2.7 million and a 0.75% yearly fee, this ETN is a distant second to JJC in popularity, but uses a number of different expiration dates instead of a single futures contract with a single expiration date, like many commodity ETFs [see also Physical Copper ETFs? Not So Fast].
• Freeport McMoRan Copper & Gold Inc. (FCX): With a market capitalization of $37 billion, FCX is one of the largest publicly traded copper miners in the world, offering significant exposure to the commodity. As of 2011, the company had proven and probable reserves totaling about 119.7 billion pounds of copper.

Notably, J.P. Morgan has been attempting to launch the first physically backed copper ETF, but it is facing opposition from regulators concerned about the impact on the physical markets.

Concrete: The Unconventional Commodity

Concrete may not be a traded commodity on its own yet, but investors can build exposure to the universal building material in many ways. According to the National Association of Homebuilders, the average house built in 1998 used some 14 tons of concrete, or approximately 7.5 yards, to create foundations and slab floors for basements. Here are some ways for investors to build exposure:

• Cemex SAB de CV (CX): With a $10 billion market capitalization, CX is the largest cement producer in the world, selling products into more than 50 countries. The company only realized about 17% of its revenues from the U.S., but remains one of the largest suppliers to the market given its $15.14 billion in annual sales.
• US Concrete Inc. (USCR): With a $108 million market capitalization, USCR provides ready-mixed concrete, precast concrete products and concrete-related products in select U.S.-only markets. As of March 2012, the firm had the capacity to produce 4 million cubic yards of ready-mix concrete and 3 million tons of aggregates [see also How To Lose Money Investing In Commodities].
• Eagle Materials Inc. (EXP): With a market capitalization of $2.5 billion, EXP is another U.S. provider of cement, concrete and aggregates. The company also manufactures and distributes gypsum wallboard which is used in construction, providing added exposure to the homebuilding industry.

Building Commodities into Your Portfolio

The homebuilding industry may have seen a sharp increase over the past year, but many analysts believe that there could be significantly more upside potential. Investors should keep an eye on leading indicators for the industry, like railcar volumes and new building permits, to determine whether or not these trends will continue through next year.

Many of the commodities mentioned in this article have also seen significant appreciation alongside the boom in U.S. housing. Investors may also want to consider the fact that some commodities, like timber, have seen some of the most consistent long-term returns when compared to anything from the S&P 500 to T-Bills to the Consumer Price Index.

Finally, investors should consider several factors when building these commodities into any diversified portfolio. For instance, commodity exposure should be balanced with other asset classes to diversify risk, while the beta co-efficient and risks associated with each of the commodities should also be considered relative to the overall portfolio’s acceptable level of risk.