The outlook for the real estate sector is positive on the back of upbeat new construction data and encouraging homebuilder sentiment. New residential construction rose in January after housing starts reached the highest level in more than a year. Additionally, building permits reached its best levels in more than 10 years.

Following these gains, the addition of real estate mutual funds to one’s portfolio will be a suitable investment option. 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 Rebounded Strongly

Per the Census Bureau and Housing and Urban Development Department, new residential construction came in favorable in January. Housing starts rose by a staggering 9.7% to 1.326 million last month, after declining in the preceding month. Housing starts increased last month settling at the biggest level since October 2016 and the second highest since the end of the Great Recession.

This metric was also higher than the consensus estimate of 1.232 million. Both privately owned housing starts for single-family and multifamily moved higher. Starts rose across several major geographical regions. Particularly, notable was a jump of 45.5% in the Northeast and 10.7% in the West.

Moreover, building permits increased from 1.300 million in December to 1.396 million in January, its best settlement since June 2007. This was also higher than the estimated level of 1,292 million and represents a 7.4% year-over-year increase.

Permits for multi-family residences shot up 26.5% to 530,000 in January, managing to boost overall building permits despite a fall in single-family permits. A tight labor market contributed to this stunning new residential construction data. Although, apprehensions remained over the impact of an increase in mortgage rates on this momentum, solid homebuilder sentiment mitigated some of the fear.

NAHB Index Remains Well Above 50

The NAHB/Wells Fargo Housing Market Index, a key homebuilder sentiment metric, remained unchanged at 72 in February. The figure is also near the highest level since 1999, hinting at improvement in the sector. It is important to remember that any level above 50 indicates that builders’ views on sale conditions are optimistic. The overall sentiment remained steady as homebuilders are taking a breather from recent tax cuts despite rising mortgage rates. 

NAHB chairman Randy Noel said, "builders are excited about the pro-business political climate” including tax cuts and expects this to support the housing market and ensure economic expansion in general. Additionally, NAHB chief economist Robert Dietz said recent job additions along with “increasing owner-occupied household formation and tight supply of existing home inventory” will continue to boost single-family housing market.

Buy These 5 Real Estate Mutual Funds

As discussed, most of the recent data related to homebuilding suggest that housing activity is improving. Mutual funds related to the real estate sector registered strong returns. According to Morningstar, the real estate mutual fund posted three-year returns of 0.6%.

Banking on this encouraging backdrop, we have selected five real estate mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy). Moreover, these funds have encouraging three and five-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.

VALIC Company I Global Real Estate (VGREX - Free Report) maintains a diversified portfolio by investing its assets in equity securities of real estate and real estate-related companies. The fund invests around 75% of its assets in securities of foreign companies, including those based in emerging markets.

This fund has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 0.9% and 4.1%, respectively. VGREX has an annual expense ratio of 0.85%, which is below the category average of 1.34%.

John Hancock II Real Estate Securities Fund Class 1 (JIREX - Free Report)  invests a bulk of its net assets in equity securities of real estate companies and REITs. The fund may invest nearly 10% of its total assets in securities of non-U.S. real estate companies.

This fund has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 2% and 7.6%, respectively. JIREX has an annual expense ratio of 0.79%, which is below the category average of 1.20%.

American Century Global Real Estate Investor (ARYVX - Free Report) invests a huge portion of its assets in securities that are issued by REITs and real estate companies. Although the fund invests mainly in developed markets, it may also invest in emerging markets.

This fund has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 3.6% and 5.9%, respectively. ARYVX has an annual expense ratio of 1.13%, which is below the category average of 1.34%.

Fidelity Series Real Estate Equity (FREDX - Free Report) invests the majority of its assets in real estate companies and in other real estate related investments. FREDX seeks appreciation of capital and above-average income growth. It aims to offer a yield, which will be higher than the combined yield of the S&P 500 Index.

This fund 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% and 7.1%, respectively. FREDX has an annual expense ratio of 0.62%, which is below the category average of 1.20%.

VY Clarion Real Estate S (IVRSX - Free Report) invests a large part 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.

This fund has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 0.8% and 7%, respectively. IVRSX has an annual expense ratio of 0.96%, which is below the category average of 1.20%.