Recent housing data suggests that 2012 may be the year of turnaround in the housing markets. While a healthy recovery for the markets still seems far away, the prices are now bottoming out. As a result of improving sentiment, the home construction companies and the homebuilder ETFs have been on the run in the past few weeks. Another industry that looks very attractive right now is the timber industry. Any pickup in the housing construction and remodeling activities will result in increased demand for wood. Further, most timber companies deferred their harvest when the demand for wood was low while the assets (trees) continued to grow and so when the housing market returns, the cash flows from harvest operations will increase in a big way. (Also read Steel ETFs Head-To-Head)
Another reason to invest in timber is its low or negative correlation with traditional asset classes. Including this asset class in your portfolio provides excellent portfolio diversification resulting in low volatility of portfolio returns. (Read Create a Diversified Portfolio Using ETFs).
Timber investments also serve as a partial hedge against inflation. While direct investment in timberlands and private equity investment through TIMOs require initial high initial investments; you can choose from the many other investment vehicles which provide exposure to timber, such as timber REITs and timber ETFs. We may however add that neither the timber REITs nor the timber ETFs are similar to owning timberlands. In addition to harvest operations, most timber REITs derive a substantial portion of their earnings from manufacturing operations. Similarly timber ETFs hold equities in firms involved with managing timberlands, but they also have significant exposure to other sectors like manufacturing and financials.
The Guggenheim Timber ETF
CUT seeks investment results that correspond to the performance (net of fees and expenses), of the Beacon Global Timber Index, which tracks the performance of common stocks of global timber companies. The ETF invests in firms that own or lease forest lands and harvest the timber for sale of wood-based products, including lumber, pulp, paper and packaging.
ETF’s expense ratio currently is 0.70% (with operating expenses capped at 0.65% through 12/31/2013). In terms of geographical weighting, US companies constitute 39.61% of the ETF and on the second place is Japan with 18.16% weighting. Top sector is materials (75.93%), followed by financials (19.28%). Started in November 2007, the fund currently manages assets worth $110.93 million.
iShares S&P Global Timber & Forestry Index Fund
WOOD tracks the performance (before fees and expenses), of the S&P Global Timber & Forestry Index which is comprised of approximately 25 of the largest publicly-traded companies engaged in the ownership, management or upstream supply chain of forests and timberlands.
With an expense ratio of 0.48%, this ETF is cheaper than CUT. It is more exposed to domestic companies, with 53.69% of the weighting assigned to US. Launched in June 2008, the fund currently owns assets worth $149.85 million.