The real estate sector is on investors’ radar as most of the economic data related to the space have been encouraging in recent times. Meanwhile, the federal funds rate remained unchanged and the hike got delayed following concerns over weak job growth and a likely “Brexit”. This low-rate environment is expected to boost the sector further.
Against this backdrop, we have tried to compare two popular real estate mutual funds – T. Rowe Price Real Estate TRREX and Fidelity Real Estate Investment Portfolio FRESX – that also have favorable a Zacks Mutual Fund Rank. Both funds have reasonable expense ratios and do not carry any sales load. TRREX and FRESX have an expense ratio of 0.76% and 0.78%, respectively, significantly less than their category average of 1.28%. Also, both funds have a minimum initial investment of $2,500.
Before going into the detailed comparison, let’s have a brief look at the major reasons that boosted the real estate sector in recent times.
What is Driving the Real Estate Sector?
Encouraging housing data and a low-rate environment played the key roles in boosting the real estate sector in recent months. Per the recent data provided by the Commerce Department, in April, new home sales reached the highest levels since 2008. Further, home prices are now back to their near-record highs, showing a distinct sign of recovery of the housing market. In fact, the S&P/Case-Shiller national home-price index rose continuously over the past 12 months.
Moreover, the National Association of Realtors (NAR) reported that the Pending Home Sales Index increased 5.1% from March to 116.3 in April, reaching its highest level since Feb. 2006. Meanwhile, recently released existing homes sales, housing starts, and building permits were also encouraging.
Separately, the Fed’s decision to keep the interest rate unchanged amid weak jobs data and concerns over “Brexit” may also have a positive impact on the sector. In addition to the unchanged rate, the Fed’s decision to stick to its 2016 rate path also appears to be on shaky ground with just six of the 17 policymakers forecasting one rate hike this year. Yellen added that “we are quite uncertain about where rates are heading in the longer term.”
A low interest rate environment brings golden opportunities for REITs, which are required to distribute at least 90% of their annual taxable income to shareholders annually in the form of dividends. Thus, a low interest rate environment increases the lure of high yields delivered by REITs and vice versa.
Fidelity Real Estate Investment Portfolio – (Net Assets of $4.8 billion as of May 31)
The fund seeks high income and long-term capital appreciation by investing most of its assets in common stocks of companies principally engaged in the real estate industry and other real estate related investments. As of April 30, this Zacks Mutual Fund Rank #1 (Strong Buy) fund had more than 44% of its assets invested in securities of mid-cap companies and invests the rest of its assets in securities of large (39%) and small (13.5%) size companies.
As of April 30, 2016, FRESX had nearly 51 securities in its portfolio and allocated nearly 45% in the top 10 holdings. Looking at the fund’s risk profile, it has 3-year beta and Sharpe ratio of 0.59 and 0.80, respectively (as of May 31). It also has an annual dividend yield of 1.43%.
In terms of performance, the mutual fund has provided impressive returns in both the short-term and long-term periods. While FRESX returned 3.9% over the past three months, it has gained 6% in the year-to-date frame. Meanwhile, it has one-year, three-year and five-year annualized returns of 15.9%, 11.5% and 12.1%, respectively.
T. Rowe Price Real Estate – (Net Assets of $5.2 billion as of May 31)
This Zacks Mutual Fund Rank #2 (Buy) invests a major portion of its assets in equity securities of companies that derive a minimum 50% of revenues or profits from real estate activities. It may also invest in REITs. As of March 31, this Zacks Mutual Fund Rank #2 fund had more than 43.3% of its assets invested in securities of mid-cap companies and invests the rest of its assets in securities of large (39.7%) and small (16.1%) size companies.
As of March 31, 2016, TRREX had nearly 39 securities in its portfolio and allocated 47.4% in the top 10 holdings. Looking at the fund’s risk profile, it has 3-year beta and Sharpe ratio of 0.64 and 0.81, respectively (as of May 31). It also has an annual dividend yield of 2.18%.
In terms of performance, the mutual fund has provided better returns in long-term periods than in the short term. While TRREX rose 2.5% over the past three-month period, it has returned nearly 3.1% in the year-to-date frame. Meanwhile, it has one-year, three-year and five-year annualized returns of 10.7%, 10.8% and 10.9%, respectively.
Both the above-mentioned funds are quite similar if you consider some of the main characteristics like expense ratio, asset allocation across different market caps and risk profile. Although minimal, there are some differences between them. In terms of return, FRESX has outperformed TRREX across all the time frames that we have considered. However, TRREX has a better annual dividend yield compared to FRESX.