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Too Soon to Bank on Real Estate Funds

Exchange traded funds that invest in real estate jumped 4% last week amid early signals of a potential housing recovery and optimism generated by the government's plan to buy $1 trillion of troubled bank assets.

While these positive developments suggest that happy times are here again, investors might be wise to wait for stronger signs that real estate is on the upswing. Homebuilders, which rely on sales of newly constructed homes, might face a prolonged recovery as the glut of cheap properties for sale shrinks. In addition, cut-rate prices will reduce revenue and put downward pressure on margins.

The iShares Dow Jones U.S. Home Construction Index Fund (ITB) and the SPDR S&P Homebuilders ETF (XHB) were the top-performing ETFs in the category, rising 14% and 13%, respectively. The S&P 500 Index advanced 6.2% during the same period. The funds have lost more than 45% in the past year.

ETFs that invest in homebuilders benefited from industrywide stock gains. KB Home (KBH - Get Report) energized investors last week with a lower-than-expected quarterly loss. The company's shares increased 27% last week.

Shares of rival Ryland Group (RYL) climbed 20% during the period. Toll Brothers (TOL - Get Report) rose 11%. The three stocks have lost more than 10% in the past year.

For more information, check out an explanation of our ratings.

Best-Performing Real Estate Funds
for the Week Ending Thursday Mar. 26
Fund Ticker Rating Fund Type 1 Week Total Return
RMR Hospitality and Real Estate Fund RHR D Closed-End 25.19%
RMR Preferred Dividend Fund RDR E+ Closed-End 24.30%
iShares Dow Jones US Home Construction Index Fund ITB D- ETF 14.30%
SPDR S&P Homebuilders ETF XHB D ETF 12.82%
Neuberger Berman Real Estate Securities Income Fund NRO D- Closed-End 12.50%
LMP Real Estate Income Fund Inc RIT D Closed-End 11.25%
RMR Asia Pacific Real Estate Fund RAP D Closed-End 10.91%
ING Clarion Global Real Estate Income Fund IGR D Closed-End 10.37%
RMR Dividend Capture Fund RCR E- Closed-End 9.82%
Alpine US Real Estate Equity Fund EUEYX E Open-End 9.44%
Source: Bloomberg & Ratings
Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.

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ITB $22.58 3.30%
XHB $28.74 2.70%
KBH $10.20 6.50%
RYL $40.83 0.67%
TOL $25.05 3.90%


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