It’s never been easier to gain access to real estate market exposure. Owning property is still the primary method, but investors looking to diversify their holdings while maintaining liquidity have a number of options now. Real estate crowdfunding platforms allow individual investors to purchase shares in a specific home or building and earn money on rental fees and property appreciation. Exchange-traded funds (ETFs) and real estate investment trusts (REITs) enable investors to buy and sell funds linked to real estate projects on open exchanges. Real estate mutual funds let investors and retirement savers diversify their retirement portfolios.
Finding the ideal fund takes research and risk assessment. Are you looking for income or capital appreciation? Commercial or residential real estate? Benzinga looks at five of the best real estate mutual funds on the market and the potential yield to investors.
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The Best Real Estate Mutual Funds
Real estate mutual funds come from many different issuers; not all have the same investment goals. Some funds prioritize capital appreciation while others focus on dividends and income. With mutual funds, consider your goals as an investor and the costs and philosophy of each specific fund. Here are five mutual funds to consider if you want exposure to the real estate market without the hassle of owning property.
Fidelity® Real Estate Index Fund (FSRNX)
Fidelity is known for having some of the cheapest ETFs and mutual funds available on the market, and their offerings in the real estate sector are no different. The Fidelity Real Estate Index Mutual Fund is a passively managed mutual fund that tracks the MSCI IMI Real Estate 25/25 Index, with 80% of its holdings matching those of the underlying index.
The fund aims for a combination of capital appreciation and income production. The holdings are mostly equity REITs and other real estate-related stocks such as Simon Property Group Inc. (NYSE: SPG), American Tower Corp. (NYSE: AMT) and Equinix Inc. (NASDAQ: EQIX). The fund has over 160 total stocks in its basket and charges a 0.07% expense ratio. The fund is over a decade old (inception date of Sept. 8, 2011) and has amassed over $3 billion in assets under management. The fund lends out securities in the portfolio to generate income for investors. It does not have a minimum investment amount to open a position.
Vanguard Real Estate II Index Fund (VRTPX)
Vanguard originated the mutual fund concept and has plenty of real estate offerings in mutual funds and ETFs. The Vanguard Real Estate II Index Fund attempts to provide both capital appreciation and income production but with more emphasis on income production through dividends. The fund tracks the MSCI US Investable Real Estate Market 25/50 Index and holds nearly all its assets in stocks associated with the underlying index.
The fund carries a 0.08% expense ratio and holds more than $8 billion in assets. The dividend yield is high, making it an ideal fund for those looking to preserve purchasing power while taking in periodic cash flow as the fund returns profits to investors. Its largest holdings include Prologis Inc. (NYSE: PLD), Crown Castle International Corp. (NYSE: CCI) and Public Storage (NYSE: PSA). The fund has a $3,000 investment minimum to open a position.
Fidelity® Series Real Estate Income Fund (FSREX)
Fidelity has tried hard to usurp Vanguard as the top low-cost index fund provider, and it recently began offering index funds with expense rates of 0.00%. That’s right, zero expenses going to the fund family or management. The Fidelity Series Real Estate Income Fund happens to be one of those zero-expense vehicles.
Income generation is the main goal of this fund, and it accomplishes its task not by tracking an index but by investing in both common and preferred stocks of real estate-related US companies. Since preferred shares function like a hybrid of a stock and bond, the fund is able to provide a higher-than-average yield despite the zero expense ratio. However, this fund is not available for individual purchase and can only be invested through Fidelity’s Freedom Funds or certain asset management programs. The fund’s asset allocation is about 50/50 stocks to bonds, with some holdings in cash as well.
Manning & Napier Real Estate Series Class W (MNRWX)
Manning & Napier may not be a household name when it comes to mutual funds and ETFs, but its Real Estate Series Class W fund is worth taking a look at if you’re interested in real estate exposure. The fund is smaller (less than $300 million in assets under management) but offers a fair expense ratio of 0.10% and seeks income generation and capital appreciation.
Over 80% of the fund assets are invested in real estate-related companies. The Manning & Napier Real Estate Series funds have been traded since 2009, but the W-class shares began trading in 2019. Over 96% of the fund’s holdings are U.S.-based companies with a small allocation to Latin America and the Eurozone. Many of the holdings are common among these real estate funds: Equinix, Prologis and Public Storage. About 1% of the fund’s assets are in fixed income securities, allowing it to produce dividends for income-seeking investors.
Neuberger Berman Real Estate Fund Class E Shares (NREEX)
One of the newest entrants in the real estate mutual fund space is the Real Estate Fund Class E Shares from Neuberger Berman. Incepted in January 2022, the fund has quickly amassed over $1 billion in assets and charges a 0.08% expense ratio. According to the fund’s objectives, 80% of its assets are in REITs or other real estate-related companies with a goal of capital appreciation and income generation. The fund prospectus allows 20% of assets under management to be in debt securities related to real estate companies. At least 50% of a company’s profits must come from real estate ventures for inclusion.
The largest holdings of this fund are American REITs and other similar companies, such as American Tower, Equity Residential (NYSE: EQR) and Crown Castle . The fund has 36 total holdings with the top five weighted stocks making up 34% of the total portfolio. Unlike many of the funds on our list, NREEX dispenses its dividends quarterly, not annually or bi-annually. The remaining fixed income and cash holdings represent less than 2% of the fund’s assets. It requires no minimum investment amount to open a position.
Why Invest in Real Estate Mutual Funds?
Real estate mutual funds aren’t the most exciting investment product on the market, but you can gain a number of advantages to buying them. If you’re considering the pros and cons of adding real estate mutual funds to your portfolio, here are a few benefits to keep in mind.
Diversification: Spreading wealth across multiple asset classes is usually a smart idea. With real estate mutual funds, you can supplement a portfolio of stocks and bonds with REITs, income-producing funds or other investment vehicles that provide residential or commercial property exposure.
More liquid than actual property: Selling a house or building is a tedious and time-consuming process, with lots of different hands out looking for a cut. You need to pay realtor fees, taxes and maintenance costs to get the property ready for sale. A mutual fund can be sold with much less hassle and often without commission or transaction fees.
Different methods of earning yield: Real estate mutual funds offer two ways to accrue gains: dividends and capital appreciation. Investors are often well compensated with dividends since these funds usually have higher than average yields. Dividends can be used for income while capital gains can grow wealth.
Useful in a 401(k) account: Mutual funds aren’t the most tax-efficient investment product, but tax efficiency isn’t as big a sticking point in a tax-deferred account as a 401(k). Many 401(k) accounts don’t allow individual stocks or ETFs, so an allocation to real estate mutual funds makes sense for many retirement savers looking for a combination of income and capital appreciation.
How Do Real Estate Mutual Funds Work?
A real estate mutual fund functions like other types of mutual funds. A real estate mutual fund holds a variety of assets such as REITs, mortgage bonds, property management companies or other entities directly involved with buying or selling properties. Shares of real estate mutual funds are priced daily based on the net asset value (NAV) of the closing price of all assets in the fund portfolio.
Investors buy shares in real estate mutual funds to diversify their exposure to the market through a single investment vehicle. Real estate mutual funds work by investors pooling their money in a single asset, which can be redeemed when an individual wants to pull out of the fund. The group of investors owning the mutual fund shares profit when the price goes up.
Unlike ETFs, real estate mutual funds aren’t bought and sold on exchanges. Investments in real estate mutual funds can only be made after the market closes and NAV can be calculated. As such, investment minimums often apply to real estate funds since redemptions can trigger taxable events as the fund manager sells assets within the fund to meet the redemption obligations.
Can You Make Money With Real Estate Mutual Funds?
Real estate mutual funds can be an excellent tool for capital appreciation and income since REITs by law must return 90% of their taxable profits to investors, usually in the form of dividends. Real estate mutual funds often invest in a variety of stocks, bonds and assets connected to the real estate market, so not every fund has the same goal. Some funds focus more on the capital appreciation part of the equation; others focus on returning profits to shareholders through dividends.
Real estate mutual funds can be volatile (especially when rates are rising and the debt required to purchase property becomes burdensome), but they tend to move less drastically than individual stocks. Real estate mutual funds can be used to make money. If you’re looking to take on risk in the name of outsized returns, a real estate mutual fund focused on providing income through dividends probably wouldn’t match your criteria. Or, if you want to generate income in retirement, a fund that invests in homebuilders, construction and other types of individual stocks may be too risky for your preferences. However, a real estate mutual fund could be a way to diversify your holdings.
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Frequently Asked Questions
Are real estate mutual funds a good investment?
Real estate mutual funds can be a worthwhile investment should your goals line up with those of a particular fund. Real estate price movement often diverges from the gyrations of stocks and bonds, making real estate mutual funds a good possible choice to diversify a portfolio.
Are there any REIT mutual funds?