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4 Real Estate Mutual Funds to Buy on Optimistic Housing Data

Zacks Equity Research

Although recent homebuilder sentiment index was disappointing, the overall viewpoint for the real estate sector remains positive and might improve over the rest of the year. Moreover, existing home sales and new residential construction data were encouraging and also building materials experienced largest increase among all the categories.

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 marginally declined from 60 in June to 59 in July. Though the NAHB sentiment index declined, it still remained above the 50 mark, indicating improvement in the sector. Any level above 50 indicates that builders’ views about sale conditions remain optimistic.

According to the NAHB, home sales might register growth at a slower pace but will continue to expand over the year. According to the association’s chief economist, Robert Dietz, multiple factors continue to support growth.

Existing Home Sales and New Residential Construction Remain Upbeat

According to National Association of Realtors (NAR) sales of existing homes increased 1.1% to a seasonally adjusted annual rate of 5.57 million in June, higher than consensus estimate of 5.46 million. It was also above May’s downwardly revised rate of 5.51 million and reached its highest settlement since Feb 2007.

Per Housing and Urban Development Department, new residential construction also came in favorable in June. Housing starts rose to 1.189 million in June from 1.135 million May, way above analysts’ estimates. Both privately owned housing starts for single family and multifamily moved north. Starts also rose across all geographical regions except for the Midwest and South.

Building permits, which indicates the future growth of housing activities, increased from 1.136 million May to 1.153 million in June. Further, permits for single-family residences rose from May’s revised figure of 731,000 to 738,000 in June.

Building Materials Post Growth

Substantial gains for building materials and furniture stores in June’s retail sales report bear further evidence of steady growth in housing. Retail sales advanced 0.6% in June from the prior month to a seasonally adjusted $456.98 billion. Household spending was broad-based, with sales excluding autos and gasoline advancing 0.7%.

Sales were mostly led by a jump of 3.9% in building and supply stores, its largest one-month increase since Apr 2010. Furniture and home furnishing stores also experienced an increase (of 0.5%) in sales.

Buy These 4 Real Estate Mutual Funds

As discussed above, most of the recent data related to homebuilding suggest that housing activity is improving. This is borne out by the fact that Real Estate SPDR (XLRE) has gained 10.6% in the last three months, turning out to be the second best performing sector among the major S&P 500 sectors.

Additionally, mutual funds related to this sector also registered strong returns. According to Morningstar, the real estate mutual fund posted 1-month, 3-month and year-to-date returns of 5.9%, 11.4% and 13.1%, respectively.

Banking on this encouraging backdrop, we have selected four real estate mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have encouraging year-to-date, three-year and five-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.

Nuveen Real Estate Securities A FREAX seeks growth of income and capital for the long run. FREAX invests a large chunk of its assets in income-producing securities of companies from the real estate sector. Nuveen Real Estate Securities A has year-to-date, three-year and five-year annualized returns of 13.6%, 12.1% and 11.5%, respectively. FREAX has an expense ratio of 1.30% as compared to the category average of 1.31% and carries a Zacks Mutual Fund Rank #1.

John Hancock II Real Estate Securities 1 JIREX invests a major portion of its assets in securities of real estate companies and REITs. JIREX seeks long-term appreciation of capital and income. John Hancock II Real Estate Securities 1 has year-to-date, three-year and five-year annualized returns of 15.3%, 12.4% and 11.4%, respectively. JIREX has an expense ratio of 0.78% as compared to the category average of 1.31% and carries a Zacks Mutual Fund Rank #1.

Goldman Sachs Real Estate Securities A GREAX seeks return, which consists of long-term appreciation of capital and dividend income. GREAX invests its assets largely in the securities of real estate industry companies. Goldman Sachs Real Estate Securities A has year-to-date, three-year and five-year annualized returns of 12.6%, 11.6% and 11.4%, respectively. GREAX has an expense ratio of 1.26% as compared to the category average of 1.31% and carries a Zacks Mutual Fund Rank #1.

Neuberger Berman Real Estate Trust NBRFX invests the lion’s shares of its assets in securities of not only the REITs but also other real estate companies. NBRFX seeks return by focusing on both capital and income growth. Neuberger Berman Real Estate Trust has year-to-date, three-year and five-year annualized returns of 12.5%, 10.5% and 9.9%, respectively. NBRFX has an expense ratio of 1.04% as compared to the category average of 1.31% and carries a Zacks Mutual Fund Rank #2.

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.

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