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A Look at Timber ETFs on Forest Day

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It’s been six years that International Day of Forests is being observed on Mar 21. The day acknowledges the value of forest reservation amid rising global warming concerns.

While trees are crucial for restoration of Mother Earth, your investment portfolio can also grow under their calming shade. Let’s delve a little deeper and see what lies ahead for timber ETFs this year.

There are two main ETFs operating in this space — iShares Global Timber & Forestry ETF (WOOD - Free Report) and Invesco MSCI Global Timber ETF (CUT - Free Report) . The funds offer exposure to Paper & Forest Production, Equity Real Estate Investment Trusts (REITs), Containers & Packaging  and Household Durables (see all Materials ETFs here).

Several of these industries rely on wood fiber. Wood fiber is the primary raw material used by most of these companies, while the primary source of wood fiber is timber. The imposition of tariff on imported Canadian lumber in the Trump era is thus concerning for the industry.

Home building in the United States increased a robust 19% in January. The housing market gathered steam in early 2019 as mortgage rates eased owing to a dovish Fed. This is a sharp reversal from the 2018-end scenario. Single-family starts grew an even faster 25% in January to a 926,000 rate. Permits to build new homes, meanwhile, grew 1.4% to an annual rate of 1.35 million.

Low Correlation With Traditional Asset Classes

Many companies are engaged in the timber industry which has a low or negative correlation with traditional asset classes. Including this asset class in one’s portfolio provides portfolio diversification.

Per an article published on barrons.com, “trees allow you the flexibility to harvest more when prices are high and harvest less when prices are low. This flexibility allows [inventory] to be ‘stored on the stump,’ while continuing to grow, independent of the pace of economic activity.” This operating backdrop makes timber stocks and ETFs sturdy investments even during a market slump.

Price Performance & Valuation

Stocks from Building Products – Wood category yielded a stellar 17.9% return (as of Mar 15, 2019) beating iShares Core S&P 500 ETF (IVV - Free Report) (up 12.9%). It lost 0.4% in the past month versus 1.8% gains offered by IVV. However, the forward P/E of the segment is much higher (27.65X) than IVV (17.19x). Its beta (1.79x) also trumps that of IVV (1.07x).

Paper And Related Products has also been steady, up 14.5% in the year-to-date frame while the segment has lost 3% in the past month. Its forward P/E ratio (9.99x) is much cheaper than IVV, though beta is a bit high at 1.16x.

Containers & Paper Packaging industry, another core allocation of WOOD and CUT, has also put a great show this year with 15.9% return. The segment has added 2.2% in the past month (as of Mar 15, 2019). The segment trades at lower forward P/E of 14.75x. Its beta (1.01x) is also lesser than IVV. So, overall the outlook looks mixed from the valuation point of view.

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