Real Estate Mutual Funds Emerge as Attractive Investment Opportunity Amid Housing Market Shifts

The U.S. housing sector showed surprising resilience in December 2024. According to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, new home sales surged to an annual rate of 698,000 units, marking a 3.6% monthly increase and outpacing December 2023 by 6.7%. Meanwhile, the Commerce Department revised November’s figures upward to 674,000 units. Despite elevated mortgage rates hovering around 7%, builders adapted by constructing more modestly-priced homes to address affordability concerns. This resilient demand backdrop is creating renewed interest in real estate mutual funds, which stand to benefit from both ongoing housing appetite and evolving market conditions.

Record Inventory Levels Signal Shifting Dynamics

December 2024 brought an unexpected development: new home inventory reached 494,000 units, the highest level since 2007. While some analysts feared this oversupply might discourage future construction, the data tells a more nuanced story. The abundance of available inventory actually reflects sustained underlying demand—builders wouldn’t maintain such supply levels without confidence in purchaser interest. This surplus, combined with modest mortgage rates and affordability-focused construction, creates a favorable environment for investors seeking exposure to the residential real estate sector through diversified vehicles.

Why Real Estate Mutual Funds Merit Attention

Real estate mutual funds offer a compelling way to participate in this market dynamic. These investment vehicles primarily channel capital into REITs and related real estate assets, providing both diversification and growth potential as the housing landscape evolves. Rather than betting on individual property or builder stocks, investors can gain balanced exposure to multiple segments of the real estate sector—from residential to commercial to mortgage-backed securities.

Three funds stand out based on their track records and structural advantages: Fidelity Series Real Estate Income (FSREX), Westwood Real Estate Income (KIFAX), and Fidelity Real Estate Income (FRIFX). Each carries a Zacks Mutual Fund Rank of 1 (Strong Buy) or 2 (Buy), maintains expense ratios well below category averages, requires minimum investments under $5,000, and demonstrates solid multi-year performance. This combination of affordability, low costs, and consistent returns positions them favorably for long-term real estate mutual funds portfolios.

Fund Comparison: Performance and Structure

Fidelity Series Real Estate Income (FSREX) has been managed by Bill Maclay since March 2019. The fund invests across preferred and common stocks of REITs, real estate debt securities, and mortgage-backed instruments. As of July 31, 2024, top holdings included AGNC Investment Corp. (2.0%), Annaly Capital Management Inc. (1.7%), and DigitalBridge Group Inc. (1.7%). The fund delivered 3-year and 5-year annualized returns of 1.6% and 4.1% respectively, with an exceptionally low net expense ratio of just 0.01%. Its Zacks Rank #1 designation reflects consistent quality execution.

Westwood Real Estate Income (KIFAX) takes a different approach under manager John D. Palmer, who has led the fund since May 2021. KIFAX emphasizes income-producing real estate securities, including REITs, master limited partnerships, and specialized real estate firms. July 2024 holdings were led by Pebblebrook Hotel Trust (7.8%), EPR Properties (4.0%), and Saul Centers Inc. (3.9%). The fund achieved 3-year and 5-year returns of 1.5% and 3.1%, with a 1.27% annual expense ratio and Zacks Rank #2.

Fidelity Real Estate Income (FRIFX) complements the Fidelity Series offering with similar holdings composition but a distinct portfolio tilt. Bill Maclay has managed FRIFX since May 2019. Major positions included American Tower Corp (2.5%), AGNC Investment Corp (2.0%), and Equity LifeStyle Properties Inc. (1.9%) as of mid-2024. Performance metrics showed 3-year and 5-year annualized returns of 0.3% and 3.5%, with a more moderate 0.68% annual expense ratio and Zacks Rank #2.

Making the Choice

Each fund offers distinct characteristics suited to different investor priorities. FSREX’s ultra-low fees and strong historic returns appeal to cost-conscious investors. KIFAX provides higher dividend potential through hospitality and specialized real estate exposure. FRIFX balances accessibility with diversification across tower and lifestyle REITs. The convergence of healthy housing demand, record inventory optionality, and affordability-focused construction creates a compelling backdrop for real estate mutual funds exposure—with these three funds providing accessible entry points.