Back to top

New Home Sales Hit 6-Month High: 4 Fund Picks

Read MoreHide Full Article

A cluster of reports released this month suggests that the outlook for the homebuilding sector remains positive and is expected to improve over the year. Homebuilders’ confidence level in June continued to expand. Additionally, home sales and residential construction data were positive, while building materials experienced the largest increase among all the categories mentioned in the retail sales report.

Following these gains, 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.

New Home Sales Hit Six-Month High

According to the U.S. Department of Commerce, new single-family houses sales jumped 6.7% last month to hit 689,000. This is the highest seasonally adjusted annual rate in the last six months. Also, new home sales have advanced 8.8% in the first five months of this year on the back of strong jobs market and decline in existing homes. New home sales in the South posted monthly increase in sales of 17.9% which in turn boosted the broader index.

In May, housing starts increased by 5% to a seasonally adjusted annual rate of 1.35 million units. This is the highest level recorded since July 2007 and represents a rebound from April’s decline of 3.7%. April’s figure was also revised marginally upward from the previously reported 1.286 million units to 1.287 million units.

However, building permits declined by 4.6% to 1.3 million units. This is the lowest level recorded since September 2017. But this still represents an 8% year-over-year increase. Additionally, permits increased in the Midwest and Northeast.

NAHB Index Expands, Building Materials Post Growth

Earlier in the month, the NAHB/Wells Fargo builder sentiment index declined marginally from 70 in May to 68 in May. Although the index fell from 67 to 64 in the Midwest and from 71 to 69 in South, it increased from 56 to 61 in the Northeast and from 75 to 76 in West. Moreover, the index continued to expand in the first six months of 2018.

Additionally, NAHB Chairman Randy Noel said that “tariffs placed on Canadian lumber and other imported products,” is a concern for homebuilders. However, despite a dip in June, he also said builders remained “optimistic about housing market conditions” following growth in “consumer demand.”

Substantial gains in building materials and furniture stores in May’s retail sales report gave further evidence of steady growth in housing. Retail sales advanced 0.8% in May from the prior month to a seasonally adjusted $502.0 billion,its highest level since November 2017. In May, both building materials and furniture stores rose 18.2% and 6.6%, respectively, on a non-adjusted basis.

Buy These 5 Real Estate Mutual Funds

Record increase in new home sales, expansion in homebuilders’ confidence index and upbeat housing starts data pushed up housing stocks recently. This is borne out by the fact that Real Estate SPDR (XLRE) has gained 7.2% in the past three months, 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 returns of 11% in the past three months.

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 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.

T. Rowe Price Real Estate Advisor (PAREX - Free Report) invests a huge portion of its assets in equity securities of real estate companies. PAREX aims to maintain a large portion of its assets in real estate investment trusts. The fund seeks growth for the long run through maximization of income and appreciation of capital.

PAREX carries an expense ratio of 1.02% compared with the category average of 1.14%. Moreover, PAREX requires minimal initial investment of $2,500. The fund has one-year annualized returns of 3%.

PAREX has a Zacks Mutual Fund Rank #1. Further, David M. Lee is the fund manager of PAREX since 1997.

VY Clarion Real Estate S (IVRSX - Free Report) invests a huge chunk of its assets in preferred and common stocks of domestic real estate companies and REITs. The fund seeks returns through growth of capital and income.

IVRSX carries an expense ratio of 0.96% compared with the category average of 1.14%. Moreover, IVRSX requires a minimal initial investment of $0. The fund has one-year annualized returns of 0.8%.

IVRSX has a Zacks Mutual Fund Rank #1. Further, T. Ritson Ferguson is one of the fund managers of IVRSX since 2009.

Principal Real Estate Securities Fund R-6 (PFRSX - Free Report) seeks to boost returns. PFRSX invests a major part of its assets in equity securities of companies that are involved mainly in the real estate industry. The fund has adopted an investment strategy that focuses on undervalued securities.

PFRSX carries an expense ratio of 0.82% compared with the category average of 1.14%. Moreover, PFRSX requires a minimal initial investment of $0. The fund has one-year annualized returns of 4.2%.

PFRSX has a Zacks Mutual Fund Rank #1. Further, Kelly D. Rush is one of the fund managers of PFRSX since 2000.

Fidelity Real Estate Investment Portfolio (FRESX - Free Report) seeks a high level of income and growth of capital for the long run. FRESX normally invests a bulk of its assets in securities of companies involved mainly in the real estate industry. The fund invests in both U.S. and non-U.S. companies.

FRESX carries an expense ratio of 0.76% compared with the category average of 1.14%. Moreover, FRESX requires a minimal initial investment of $2,500. The fund has one-year annualized returns of 1.7%.

FRESX has a Zacks Mutual Fund Rank #2. Further, Steve J. Buller is the fund manager of FRESX since 1997.

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 >>



More from Zacks Mutual Fund Commentary

You May Like