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Housing Sector Headed for Recovery in Q2: 4 Fund Picks
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The housing sector had fallen out of favor in the first quarter of 2018 with high prices, rising rents and interest rates doing the damage. However, a recovery seems to be occurring at this point, with millennials contributing to most of the sector’s gains. There has been an increasing shift in the population group toward house ownership due to an improving employment scenario and a burgeoning economy.
Moreover, as millennials are likely to comprise around 75% of the workforce by 2025, the housing sector appears a lucrative long-term bet. The sector’s growth trajectory is also intact for 2018, implying that investing in real estate mutual funds now would be prudent.
Millennials Shifting Toward House Ownership
Gone are the days when millennials, typically bachelors, were stereotyped based on their choice to stay with parents. Now, people from this age group are contributing in a big way to the housing market recovery with a keenness to buy property rather than rent. For the first time in 13 years, 20- and 30- somethings have given a solid impetus to the U.S. housing market.
A tight labor market, 17-year low unemployment and the new tax code have actually renewed confidence among millennials. Moreover, per the latest report by ADP, the private sector added an impressive 241,000 new jobs last month.
Trump’s Tax Reforms
President Trump’s new tax code lowered the value of mortgage interest deduction to $750,000 from $1 million. The bill also capped deductions for state and local taxes, which include property taxes, at $10,000. Moreover, the bill doubled these standardized deductions as a result of which very few homeowners would now be willing to itemize the tax filings.
While such a scenario apparently diminishes the benefits of homeownership, Mark Zandi, chief economist at Moody’s Analytics believes that this would rather weigh on “house-price growth.” He reasoned that certain housing markets rely on taxpayers, “who use those tax benefits, which have been capitalized into house prices.” In the absence of these benefits, prices would drastically fall. This automatically gives a boost to home sales.
Compelling Earnings Prospects in Q2
During the first quarter of 2018, the Real Estate Select Sector SPDR (XLRE), which represents real estate shares included on the S&P 500, declined 3.3%. However, a rebound in housing sector is now palpable. In March, the Real Estate Select Sector SPDR (XLRE) gained 3% even as the S&P 500 lost 2.7%.
In fourth-quarter 2017, real estate sector earnings were up 20.6% from the same period last year on 13.3% higher revenues. For the first quarter of 2018, earnings growth is expected to be up 36.3% on 15.9% higher revenues. (Read: Handicapping the Q1 Earnings Season)
4 Great Choices
Given such circumstances, we have highlighted four real estate mutual funds that are poised to gain significantly from a rebound in housing stocks. These funds also carry a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.
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.
The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
CGM Realty invests a major portion 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.
This Sector – Real Estate product has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 8.1% and 11%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.
CGMRX has a Zacks Rank #1 and an annual expense ratio of 0.97%, which is below the category average of 1.08%.
Fidelity Advisor International Real Estate Fund Class I (FIRIX - Free Report) seeks to invest primarily in foreign securities. The fund invests a bulk of its assets in securities of companies involved in the real estate industry as well as real estate-related investments. It allocates investments across the globe in different countries and regions.
This Sector – Real Estate product has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 5.5% and 7.5%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.
FIRIX has a Zacks Rank #1 and an annual expense ratio of 0.95%, which is below the category average of 1.33%.
Principal Real Estate Securities R5 (PREPX - Free Report) seeks growth of total returns. PREPX invests the lion’s share of its assets in equity securities of real estate companies. The fund focuses on value equity securities.
This Sector – Real Estate product has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 1.8% and 7.7%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.
PREPX has a Zacks Rank #2 and an annual expense ratio of 1.07%, which is below the category average of 1.23%.
John Hancock II Real Estate Securities 1 (JIREX - Free Report) seeks appreciation of capital and income over the long term. JIREX invests primarily in equity securities of companies engaged in operations related to the real estate sector, which also include REITs. The fund invests in securities including common stock, preferred stock and convertible securities. It may invest a maximum of 10% of its assets in securities of companies domiciled outside the U.S. territory.
This Sector – Real Estate product has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 0.7% and 6%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.
JIREX has a Zacks Rank #1 and an annual expense ratio of 0.79%, which is below the category average of 1.23%.
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Housing Sector Headed for Recovery in Q2: 4 Fund Picks
The housing sector had fallen out of favor in the first quarter of 2018 with high prices, rising rents and interest rates doing the damage. However, a recovery seems to be occurring at this point, with millennials contributing to most of the sector’s gains. There has been an increasing shift in the population group toward house ownership due to an improving employment scenario and a burgeoning economy.
Moreover, as millennials are likely to comprise around 75% of the workforce by 2025, the housing sector appears a lucrative long-term bet. The sector’s growth trajectory is also intact for 2018, implying that investing in real estate mutual funds now would be prudent.
Millennials Shifting Toward House Ownership
Gone are the days when millennials, typically bachelors, were stereotyped based on their choice to stay with parents. Now, people from this age group are contributing in a big way to the housing market recovery with a keenness to buy property rather than rent. For the first time in 13 years, 20- and 30- somethings have given a solid impetus to the U.S. housing market.
A tight labor market, 17-year low unemployment and the new tax code have actually renewed confidence among millennials. Moreover, per the latest report by ADP, the private sector added an impressive 241,000 new jobs last month.
Trump’s Tax Reforms
President Trump’s new tax code lowered the value of mortgage interest deduction to $750,000 from $1 million. The bill also capped deductions for state and local taxes, which include property taxes, at $10,000. Moreover, the bill doubled these standardized deductions as a result of which very few homeowners would now be willing to itemize the tax filings.
While such a scenario apparently diminishes the benefits of homeownership, Mark Zandi, chief economist at Moody’s Analytics believes that this would rather weigh on “house-price growth.” He reasoned that certain housing markets rely on taxpayers, “who use those tax benefits, which have been capitalized into house prices.” In the absence of these benefits, prices would drastically fall. This automatically gives a boost to home sales.
Compelling Earnings Prospects in Q2
During the first quarter of 2018, the Real Estate Select Sector SPDR (XLRE), which represents real estate shares included on the S&P 500, declined 3.3%. However, a rebound in housing sector is now palpable. In March, the Real Estate Select Sector SPDR (XLRE) gained 3% even as the S&P 500 lost 2.7%.
In fourth-quarter 2017, real estate sector earnings were up 20.6% from the same period last year on 13.3% higher revenues. For the first quarter of 2018, earnings growth is expected to be up 36.3% on 15.9% higher revenues. (Read: Handicapping the Q1 Earnings Season)
4 Great Choices
Given such circumstances, we have highlighted four real estate mutual funds that are poised to gain significantly from a rebound in housing stocks. These funds also carry a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.
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.
The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
CGM Realty invests a major portion 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.
This Sector – Real Estate product has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 8.1% and 11%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.
CGMRX has a Zacks Rank #1 and an annual expense ratio of 0.97%, which is below the category average of 1.08%.
Fidelity Advisor International Real Estate Fund Class I (FIRIX - Free Report) seeks to invest primarily in foreign securities. The fund invests a bulk of its assets in securities of companies involved in the real estate industry as well as real estate-related investments. It allocates investments across the globe in different countries and regions.
This Sector – Real Estate product has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 5.5% and 7.5%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.
FIRIX has a Zacks Rank #1 and an annual expense ratio of 0.95%, which is below the category average of 1.33%.
Principal Real Estate Securities R5 (PREPX - Free Report) seeks growth of total returns. PREPX invests the lion’s share of its assets in equity securities of real estate companies. The fund focuses on value equity securities.
This Sector – Real Estate product has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 1.8% and 7.7%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.
PREPX has a Zacks Rank #2 and an annual expense ratio of 1.07%, which is below the category average of 1.23%.
John Hancock II Real Estate Securities 1 (JIREX - Free Report) seeks appreciation of capital and income over the long term. JIREX invests primarily in equity securities of companies engaged in operations related to the real estate sector, which also include REITs. The fund invests in securities including common stock, preferred stock and convertible securities. It may invest a maximum of 10% of its assets in securities of companies domiciled outside the U.S. territory.
This Sector – Real Estate product has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 0.7% and 6%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.
JIREX has a Zacks Rank #1 and an annual expense ratio of 0.79%, which is below the category average of 1.23%.
Want key mutual fund info delivered straight to your inbox?
Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>