While U.S. based stock funds continued to witness significant outflows, real estate funds emerged as one of the few bright spots in terms of inflows, according to Lipper. The stock funds registered an outflow of $3.9 billion for the week ending May 18, raising the total withdrawals in the year-to-date frame to $45 billion. Moreover, stock funds have not seen inflows for two-consecutive weeks since November.
However, real estate funds are the ones that emerged as one of the few sectors that attracted significant investor sentiment during the week. These funds registered an inflow of $750 million, the biggest inflow witnessed since Nov 2015. Encouraging data related to the sector and a bright outlook may have boosted investor sentiment. Against this backdrop, investing in mutual funds and ETFs from this sector may prove profitable for investors in the coming months.
Concerns Affecting Stocks
Weak first-quarter earnings and intensified rate hike fears affected financial markets. As of May 18, total earnings for 466 S&P 500 members were down 7.0% from the same period last year on 1.2% lower revenues. Like the last few quarters, disappointing results from energy companies marred the first-quarter earnings season. Without energy earnings results, total earnings of the S&P 500 members would have been down 1.3% from the year-ago quarter.
Also, minutes of the Federal Reserve's two-day policy meeting in April indicated that most of its officials remain optimist for a rate hike in the June meeting. Moreover, New York Fed President William Dudley said that he is "quite pleased" to see strong possibilities of a rate hike in June-July. Dudley also said that the Fed is "on track to satisfy a lot of the conditions" for a rate rise.
Also, Richmond Fed President Jeffrey Lacker pointed to a June rate hike, after "risks from global and financial developments having virtually entirely dissipated." Lacker previously wanted a rate hike in April, and now agrees that "the case would be very strong for raising rates in June." These have intensified rate hike fears among investors, which in turn affected the major benchmarks recently.
What is Boosting Real Estate Funds?
Despite these concerns, real estate mutual funds registered return of 8.5% over the past three months banking on optimism in the sector, according to Morningstar. While most of the broader sector found it difficult to post encouraging first-quarter earnings results, total earnings for S&P 500 construction companies jumped 27.5% from the same period last year on 3.9% higher revenues.
Encouraging first-quarter results from the sector indicated that it is on a track for impressive growth at least in the near future. Along with the upbeat earnings results, the sector also got a boost from recently released housing data and positive outlook.
Encouraging Housing Data
Among the recent encouraging data, a 1.5% uptick in residential construction spending led expenditure on construction to rise 0.3% from February to a seasonally adjusted annual rate of $1,137.5 billion in March. Over the last 12 months, construction spending has gained 8%. During this period, non-residential construction has increased by 8.3%.
Also, the National Association of Home Builders (NAHB) reported that home builder sentiment index (HMI) remained flat at 58 in May for the fourth consecutive month. This also indicates that the sector continues to experience steady growth, fueled by an improving job market and low mortgage rates. Moreover, the National Association of Realtors reported that existing homes sales gained 1.7% last month to a seasonally adjusted annual rate of 5.45 million, higher than the consensus estimate of 5.38 million. Existing homes sales rose for the second consecutive month.
Meanwhile, housing starts increased 6.6% from March to an annual rate of 1,172,000 in April. Housing starts increased by 10.2% during the first four months of 2016, compared with the year-ago period. Significantly, single family housing starts increased 16.8% year over year during this period. Also, building permits increased 3.6% from March to 1,116,000 last month.
Recently, economists in the National Association of Home Builders (NAHB) Spring Construction Forecast Webinar predicted that single-family construction may jump 14% from 2015 to 812,000 units this year. Moreover, single-family construction is expected to surge another 19% next year. They also projected 3.3% and 1.3% gains in residential remodeling activity in 2016 and 2017, respectively.
Separately, as per the Freddie Mac forecast, total home sales may hit the highest level of 5.9 million units in 2016 in nearly a decade. Sales were estimated to increase further to 6.2 million units next year.
Mutual Funds & ETFs to Buy
Banking on this encouraging scenario, we have highlighted three mutual funds and three ETFs from the real estate sector that carry favorable Zacks Ranks.
Each of these real estate mutual funds carries a Zacks Mutual Fund Rank #1 (Strong Buy). 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.
Moreover, these funds have encouraging year-to-date and one-year returns. The minimum initial investment is within $5000. Also, these funds have a low expense ratio and carry no sales load.
Fidelity Real Estate Investment Portfolio ( FRESX ) primarily focuses on acquiring common stocks of companies involved in operations related to the real estate domain. FRESX has year-to-date and one-year returns of 3.6% and 9.5%, respectively. Annual expense ratio of 0.78% is lower than the category average of 1.29%.
John Hancock II Real Estate Securities 1 ( JIREX ) invests a large chunk of its assets in equity securities of companies from the real estate sector and REITs. JIREX has year-to-date and one-year returns of 2.8% and 6.5%, respectively. Annual expense ratio of 0.79% is lower than the category average of 1.29%.
VY Clarion Real Estate S ( IVRSX ) invests the lion's share of its assets in equity securities including common and preferred stocks of domestic real estate companies, including REITs. IVRSX has year-to-date and one-year returns of 1.4% and 4.7%, respectively. Annual expense ratio of 0.96% is lower than the category average of 1.29%.
The three popular real estate ETFs carry a Zacks Mutual Fund Rank #2 (Buy) each and have Medium risk outlook. These ETFs have also attracted significant inflows in the month-to-date period and gained significantly in recent times.
Vanguard REIT ETF ( VNQ ) provides exposure across 150 stocks of REITs by tracking the MSCI US REIT Index. With $30.6 billion assets under management (AUM) and strong daily average volume of around 4 million shares, VNQ is the most popular ETF in its category.
The ETF has 0.12% in expense ratio compared with the category average of 0.45%. The fund has returned 7.7% and 2.9% over the three-month and year-to-date frame, respectively. VNQ has seen an inflow of $535.17 million in the month-to-date period.
iShares US Real EstateETF ( IYR ) provides exposure across 117 domestic real estate securities by tracking the Dow Jones U.S. Real Estate Index. With $4.6 billion AUM and strong daily average volume of around 9 million shares, IYR is the second most popular ETF in its category.
The ETF has 0.43% in expense ratio compared with the category average of 0.45%. The fund has returned 8.6% and 2.2% over the three-month and year-to-date frame, respectively. IYR has seen an inflow of $557.95 million in the month-to-date period.
iShares Cohen & Steers REIT ETF ( ICF ) provides exposure across 30 securities large-cap real estate companies by tracking the Cohen & Steers Realty Majors Index. IYR has $3.7 billion AUM and moderate daily average volume of around 220,000 shares, and is currently the third largest ETF in its category in terms of AUM.
The ETF has 0.35% in expense ratio compared with the category average of 0.45%. The fund has returned 6.9% and 1.2% over the three-month and year-to-date frame, respectively. IYR has seen an inflow of $26.35 million in the month-to-date period.
About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the help of Zacks Rank.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report