3 Real Estate Funds To Gain From The Fed Rate Cut

In order to counter the coronavirus outbreak, the Federal Reserve cut its benchmark rates to near zero earlier this week. This came just days ahead of the FOMC meeting. The earlier-than-expected rate cut along with Fed’s other measures is expected to avert financial market disruptions as well as boost gains for real estate stocks and funds.

Fed’s Moves to Prevent a Severe Slowdown

On the night of Mar 15, the Fed slashed the short-term interest rates by a full percentage point, bringing the current rates to 0%-0.25% from the previous range of 1%-1.25%. In addition, the central bank launched a quantitative easing program as it plans to buy $700 billion worth of Treasury bonds and mortgage-backed securities.

The Fed also slashed the rate of emergency lending for banks by 125 basis points to 0.25% and increased the term of loans to 90 days.

In addition, the central bank encouraged the largest American banks to utilize their $4 trillion plus post-crisis capital to lend to businesses and households. The Fed is also lowering the level of reserves it requires banks to hold to zero. These steps are aimed to push money into large and small businesses and households, thus boosting spending ahead.

Fed’s steps are especially a boon for the real estate industry. After all, the central bank is buying $200 billion worth of mortgage-backed bonds, which could stabilize and probably lower mortgage rates. Mortgage rates fell to a record low two weeks ago but hit their January high by the end of last week. The current Fed rates are likely to pull them down again.

In such a scenario, mutual funds that invest in real estate and related securities are expected to do well. As mortgage rates fall, it will become easier for prospective homebuyers to take a home loan, thus helping real estate and construction companies.

3 Funds to Buy

We have, therefore, selected three mutual funds that invest in real estate. All of these funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). In addition, the minimum initial investment for these funds is within $5,000.

We expect these funds to outperform 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).

DWS RREEF Real Estate Securities Fund - Class A RRRAX aims for long-term capital growth and current income. The fund invests majority of its assets in equity securities of real estate investment trusts and real estate companies. RRRAX is a non-diversified fund.

This Zacks sector – Real Estate has a history of positive total returns for more than 10 years. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

RRRAX carries a Zacks Mutual Fund Rank #1 and has an annual expense ratio of 0.97%, which is below the category average of 1.22%. It has returned 17.5% over a year. The fund has a minimum initial investment of $1000.

MFS Global Real Estate Fund Class A MGLAX seeks total return. The fund invests majority of its assets in U.S. and non-U.S. real estate-related investments. Under normal circumstances, the fund invests across different countries and regions.

This Zacks sector – Real Estate has a history of positive total returns for more than 10 years. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

MGLAX carries a Zacks Mutual Fund Rank #1 and has an annual expense ratio of 1.23%, which is below the category average of 1.28%. It has returned 15.6% over a year. The fund has a minimum initial investment of $1000.

American Century Real Estate Fund Investor Class REACX aims for high total investment return by combining capital appreciation and current income. The fund invests majority of its assets in real estate investment trusts and other real estate companies. REACX is a non-diversified fund.

This Zacks sector – Real Estate has a history of positive total returns for more than 10 years. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

REACX carries a Zacks Mutual Fund Rank #2 and has an annual expense ratio of 1.16%, which is below the category average of 1.22%. It has returned 20.4% over a year. The fund has a minimum initial investment of $2500.

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 >>