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Buy 5 Real Estate Mutual Funds Going Into Second-Half 2017

Although the recent homebuilder confidence index was disappointing, the overall sentiment for the real estate sector remains positive and is likely to improve over the rest of the year. Moreover, existing and new home sales as well as housing completions data were encouraging. Also, sales of building materials experienced strong year-over-year increase last month.

Following these gains, the addition of real estate mutual funds to one’s portfolio might be a suitable investment option. These are convenient ways of playing the real estate market because of their low initial investment requirements. Investors willing to hold long-term positions would do well to consider these funds as they add stability and bring steady returns to a portfolio.

NAHB Index Above 50

The NAHB/Wells Fargo builder sentiment index declined marginally from 69 in May to 67 in June. Though the NAHB sentiment index declined, it remained above the 50 mark, indicating improvement in the sector. Any level above 50 indicates that builders’ views about sale conditions are optimistic.

Further, despite falling to a fourth-month low, homebuilder sentiment index managed to remain near its highest levels since June 2005. According to the NAHB chairman Granger MacDonald, homebuilder confidence levels remained “consistently sound this year,” which reflected steady recovery in the housing market.

Home Sales Remain Upbeat

According to National Association of Realtors (NAR) sales of existing homes increased 1.1% to a seasonally adjusted annual rate of 5.62 million in May, higher than consensus estimate of 5.54 million. It was also above April’s downwardly revised rate of 5.56 million and reached the third-highest settlement in the last one year.

As per the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, new-home sales in May were recorded at a seasonally adjusted annual rate of 610,000 against the consensus estimate of 596,000. The figure increased 2.9% from the revised April rate of 593,000. Further, the median sales price of new home sales increased from $310,200 in April to $345,800 in May, reaching its best level ever.

Housing Completions and Building Materials Move Up

Per Housing and Urban Development Department, new residential construction was not at all favorable last month. Both housing starts and building permits fell in May. However, the privately owned housing completions rose by 5.6% to a seasonally adjusted annual rate of 1,164,000. The metric was also up 14.6% from the year-ago figure of 1,016,000.

Considerable gains for building materials and furniture stores categories in May’s retail sales report bear further evidence of steady year-on-year growth in housing. According to the U.S. Census Bureau, sales at building materials and supplies dealers increased 7.7%, while furniture and home finishing stores sales advanced 3.4%.

Buy These 5 Real Estate Mutual Funds

As discussed above, most of the recent data related to homebuilding suggest that housing activity is gaining momentum. This is borne out by the fact that Real Estate SPDR (XLRE) has gained 4.8% so far this year, turning out to be one of the best-performing sectors among the major S&P 500 sectors.

Additionally, mutual funds related to this sector registered strong returns recently. According to Morningstar, the real estate mutual fund has registered one-month, three-month and year-to-date (YTD) returns of 1%, 4% and 6.9%, respectively.

Banking on this encouraging backdrop, we have selected five real estate mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy). Moreover, these funds have encouraging YTD and one-year annualized returns. They also have minimum initial investment within $5000 and low expense ratios.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

Fidelity Real Estate Income FRIFX seeks above average income. FRIFX invests a large chunk of its assets in securities of real estate companies throughout the globe. The fund invests in a wide range of securities including common stocks, debt securities and mortgage-backed securities.

The fund has YTD and one year annualized returns of 5.6% and 8.7%, respectively, and an expense ratio of 0.81% as compared to the category average of 1.26%.

CGM Realty CGMRX invests the lion’s share of its assets in securities of companies within the real estate domain, irrespective of their market capitalization. CGMRX may invest not more than one-fifth of its assets in securities of companies from sectors other than real estate.

The fund has YTD and one year annualized returns of 9.8% and 19.8%, respectively, and an expense ratio of 0.99% as compared to the category average of 1.26%.

John Hancock II Real Estate Securities 1 JIREX invests primarily in equity securities of companies engaged in operations related to real estate sector, which also include REITs. JIREX invests in securities including common stock, preferred stock and convertible securities. The fund may invest a maximum of 10% of its assets in securities of companies domiciled outside the U.S. territory.

The fund has YTD and one year annualized returns of 4.2% and 0.8%, respectively, and an expense ratio of 0.78% as compared to the category average of 1.26%.

Davis Real Estate A RPFRX utilizes the Davis Investment Discipline to allocate the majority of its assets in securities of companies primarily involved in operations related to the real estate sector. Though RPFRX primarily invests in common stocks of U.S. companies, it may also invest in non-U.S. companies, including depositary receipts.

The fund has YTD and one year annualized returns of 3.3% and 2.1%, respectively, and an expense ratio of 0.92% as compared to the category average of 1.26%.

Northern Global Real Estate Index NGREX invests a bulk portion of its assets in equity securities of companies included in the FTSE EPRA/NAREIT Global Index. Companies which are involved in real estate sector are normally included in this index.

The fund has YTD and one year annualized returns of 7.9% and 6.1%, respectively, and an expense ratio of 0.50% as compared to the category average of 1.38%.

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