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5 Best-Performing Real Estate Mutual Funds of Q1 2016

As the first quarter is drawing to a close, the housing industry remains firmer than what most believed. New residential construction was impressive in February, while rise in new single home sales indicated that there is momentum in the housing market.

In March, the NAHB/Wells Fargo housing market index that reflects home builders' sentiment continued to remain above the 50 mark, indicating improvement. Add to this low mortgage rates and strong employment report and you know why they sound so confident. Banking on these positive trends in the real estate industry, it will be wise to bet on fundamentally solid funds from this space.

Upbeat New Residential Construction

After a crippling east coast storm affecting housing starts in January, new residential construction bounced back in February as the spring selling season kicked off. Housing starts rose to 1.18 million in February from 1.12 million January, way above analysts' estimates. Both privately owned housing starts for single family and multifamily moved north.

Starts also rose across all the geographies except for the Northeast. Builders are allocating more resources to multifamily construction to benefit from the current upbeat rental market. Moreover, construction outlay had already touched the highest level in January since Oct 2007. In January, spending also rose a whopping 10.4% year over year.

Building permits are a precursor to construction activity. It indicates the future growth of housing activities. While permits remained unchanged in January, it fell slightly in February. However, permits for single-family residences actually increased from 728,000 in January to 731,000 in February.

New Residential Sales Gain, Sentiment Steady

Sales of single family home in the U.S. rose 2% to a seasonally adjusted annual rate of 512,000 units in February. January's sales figure was also revised up to 502,000 units. This is good news for the housing sector as new home sales account for about 9.2% of the housing market.

Pending home sales also increased 3.5% from January to a seven-month high of 109.1 in February. This gain follows a 3.1% loss in January. Pending sales indicate upcoming sales activity. A sale is considered pending when the contract has been signed but the transaction hasn't closed.

Existing home sales, on the other hand, turned out be a bit disappointing in February. Sales of existing homes came in at 5.08 million, down 7.1% from January's figure. Even though it's a drop in numbers, it has followed January's strongest rise in sales in six months at 5.47 million.

Meanwhile, The National Association of Home Builders (NAHB)/Wells Fargo housing market index (HMI) remained flat at 58 in March. While it's the lowest level in eight months, it's still a good number. The index has remained well above the 50 mark for several months indicating a steady recovery.

Top 5 Real Estate Funds of Q1 2016

As discussed above, most of the data related to homebuilding released this quarter suggest that housing activity is improving. This is borne out by the fact that the Real Estate SPDR (XLRE) has gained 2.8% on a year-to-date-basis.

Moreover, historically low mortgage rates are expected to give the real estate industry a boost. Bankrate, Inc. ( RATE ) reported that in March the 30-year fixed rate mortgage dipped to a range of 3.56 to 3.6%. In February, the rate was at 3.65%.

Further, jobs data in February painted a solid picture of the labor market, which will eventually increase demand for more residential complexes. The U.S. economy added 242,000 jobs in February, handily beating January's upwardly revised job number of 172,000. Additionally, the unemployment rate in February remained unchanged at 4.9%.

Residential investment also jumped 10.1% in the fourth quarter, compared with a rise of 8.2% in the third. It also surged 8.9% in 2015, exceeding 2014's gain of only 1.8%. Moreover, democratic presidential candidates Hillary Clinton and Bernie Sanders have already promised to increase infrastructure investment in the future.

Given these positive trends in the real estate industry, it will be prudent to invest in funds related to the housing space. Funds have been selected over stocks, since funds reduce transaction costs for investors and also diversify their portfolio without the numerous commission charges that stocks need to bear.

Here we have selected five such real estate funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have given highest year-to-date return, offer minimum initial investment within $5000, carry a low expense ratio and possess no-sales load.

Fidelity Real Estate Investment Portfolio ( FRESX ) invests the majority of its assets in securities of companies engaged in the real estate industry and other real estate related investment. FRESX's year-to-date return is 5.6%. FRESX carries a Zacks Mutual Fund Rank #2 and the annual expense ratio of 0.78% is lower than the category average of 1.29%.

AMG Managers Real Estate Securities ( MRESX ) invests a major portion of its assets in stocks of companies principally engaged in the real estate industry, including Real Estate Investment Trusts. MRESX's year-to-date return is 4.7%. MRESX carries a Zacks Mutual Fund Rank #2 and the annual expense ratio of 1.16% is lower than the category average of 1.29%.

PIMCO Real Estate Real Return Strategy D ( PETDX ) seeks to achieve its investment objective by investing in real estate-linked derivative instruments backed by a portfolio of inflation-indexed securities and other Fixed Income Instruments. PETDX's year-to-date return is 3%. PETDX carries a Zacks Mutual Fund Rank #2 and the annual expense ratio of 1.14% is lower than the category average of 1.29%.

T. Rowe Price Real Estate ( TRREX ) invests a large portion of its assets in the equity securities of real estate companies. TRREX's year-to-date return is 1.9%. TRREX carries a Zacks Mutual Fund Rank #1 and the annual expense ratio of 0.76% is lower than the category average of 1.29%.

TIAA-CREF Real Estate Securities Retirement ( TRRSX ) invests a large portion of its assets in the securities of companies that are principally engaged in or related to the real estate industry, including those that own significant real estate assets. TRRSX's year-to-date return is almost 1%. TRRSX carries a Zacks Mutual Fund Rank #2 and the annual expense ratio of 0.77% is lower than the category average of 1.29%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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