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New Residential Construction Rebounds in July: 5 Fund Picks

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In spite of August's weak homebuilder sentiment reading, the overall outlook for the sector remains positive. New residential construction data was upbeat, with housing starts rebounding in July after touching nine-month lows in June. Additionally, building permits increased last month after declining for three months consecutively.

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.

New Residential Construction Remains Upbeat

Per the Census Bureau and Housing and Urban Development Department, new residential construction improved in July after a forgettable June performance. Housing starts rose to 1.168 million in July from the downwardly revised level of 1.158 million June.

Housing starts increased last month after the metric touched its lowest level since last September in June. Privately owned housing starts for single family nudged up by 0.9% to 862,000 in July. Starts rose across major geographical regions like the Midwest and South.

Moreover, building permits, which are an indicator of future housing activity prospects, increased from 1.292 million June to 1.311 million in July after three straight months of declines. The metric was also higher than the estimated level of 1,306 million and represents a 4.2% year-over-year increase. Further, permits for single-family residences advanced from June's revised figure of 853,000 to 869,000 in July.

NAHB Index Remains Above 50

Though the NAHB sentiment index has declined this month, it still above the 50 mark, indicating improvement in the sector. For sure, the NAHB/Wells Fargo builder sentiment index has declined from 68 in July to 67 in August, its lowest level in the last 11 months. But it is important to remember that any level above 50 indicates that builders' views on sale conditions are optimistic.

Although some concerns remain, all is definitely not lost as pointed by NAHB Chairman Randy Noel, when he said that homebuilders will continue to witness “strong demand for new housing,” supported by stable income and job growth, in addition to “rising household formations.”

Buy These 5 Real Estate Mutual Funds

As discussed above, encouraging new residential construction data suggest that housing activity is gaining momentum. This is borne out by the fact that Real Estate SPDR (XLRE) has gained 11.1% in the last three months, turning out to be the second-best performer among the major S&P 500 sectors. Additionally, the real estate mutual fund has registered three-month and returns of 10.9%, according to Morningstar.

Banking on this encouraging backdrop, we have selected five real estate mutual funds that flaunt a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (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.

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 should one be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

These funds have encouraging one-year annualized returns. Their minimum initial investment is within $5000 and has a low expense ratio.

TIAA-CREF Real Estate Securities Retirement (TRRSX - Free Report) invests a large chunk of its assets in companies primarily involved in operations related to the real estate domain. The fund may invest a maximum of 15% of its assets in securities issued by foreign entities.

TRRSX carries an expense ratio of 0.76% compared with the category average of 1.24%. Moreover, TRRSXrequires a minimal initial investment of $0. The fund has one-year annualized returns of 4.5%.

TRRSX has a Zacks Mutual Fund Rank #1. Further, David Copp is one of the fund managers of TRRSX since 2005.

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 huge part 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 1.24%. Moreover, FRESX requires a minimal initial investment of $2,500. The fund has one-year annualized returns of 3.1%.

FRESX has a Zacks Mutual Fund Rank #1. Further, Steve J. Buller is the fund manager of FRESX since 1997.

Principal Real Estate Securities R5 (PREPX - Free Report)  seeks growth of total returns. PREPX invests the majority of its assets in equity securities of companies involved in the real estate industry. The fund focuses on value equity securities.

PREPX carries an expense ratio of 1.07% compared with the category average of 1.24%. Moreover, PREPX requires a minimal initial investment of $0. The fund has one-year annualized returns of 5.4%.

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

JPMorgan Realty Income A (URTAX - Free Report) seeks maximization of returns through appreciation of capital and income. URTAX invests the majority of its assets in equity securities of REITs. The fund invests both in equity and mortgage REITs, with around 15% of its assets invested in illiquid holdings.

URTAX carries an expense ratio of 1.18% compared with the category average of 1.24%. Moreover, URTAX requires a minimal initial investment of $1,000. The fund has one-year annualized returns of 2.1%.

URTAX has a Zacks Mutual Fund Rank #2. Further, Jason Ko is one of the fund managers of URTAX since 2009.

T. Rowe Price Real Estate (TRREX - Free Report) invests heavily in equity securities of companies from the real estate industry. TRREX maintains a large part of its assets in equity REITs. The fund seeks appreciation of capital for the long run.

TRREX carries an expense ratio of 0.73% compared with the category average of 1.24%. Moreover, TRREX requires a minimal initial investment of $2,500. The fund has one-year annualized returns of 2.6%.

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

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