Lax Lumber Lifts Two ETFs

ETF Trends

Perhaps it is a sign of investors’ diminishing expectations of near-term inflation. Or maybe it is an ominous sign for high-flying housing ETFs. Whatever the interpretation is, there is no getting around the fact that lumber futures are tumbling.

For much of February and early March, Chicago-traded random length lumber, which trades in contracts of 110,000 board feet, was priced in a range of $380 to slightly over $400. Since early March, speculative traders, or those that are not looking to take delivery of physical lumber, have been reducing their long exposure to the commodity while commercial hedgers have been looking to buy contracts at favorable prices, according to commitment of traders data.

In a scenario that is similar to what investors see with chemicals companies when natural gas prices fall, two often overlooked equity-based ETFs are benefiting from lumber’s slide. [Timber ETFs Rebuilding After Hurricane Sandy]

Since March, lumber futures have lost about 24%, according to TradingCharts.com.  Even embattled gold ETFs such as the S PDR Gold Shares (GLD) have performed better over the same time frame.

Lumber’s woes have been good news for the iShares S&P Global Timber & Forestry Index Fund (WOOD) and the Guggenheim Timber ETF (CUT) . Both ETFs finished slightly lower on Tuesday, but not before each touched new 52-week highs as lumber futures closed “limit down.”

Over the past 90 days, both funds are sporting gains in the area of 8%. That could be the result of CUT and WOOD being the best ways for many investors to establish a short position in lumber without the risks and volatility of the futures market. Additionally, timber assets have kept up and even outperformed during periods of rising inflation and since the start of the 20th century, timber has outperformed the S&P 500 and increased 15% each year since 1987 through 2011. [ETFs To Consider If You're Worried About Inflation]

While CUT and WOOD may not garner the headlines that other commodities ETFs do, and these days that might be a good thing, neither can be considered small. CUT, which is almost six years old, has over $233 million in assets under management. WOOD, which turns five next month, has $307.2 million in assets. WOOD has pulled in over $50 million in new assets this year, according to Index Universe data.

Lumber’s declining prices are clearly proving to be a boon for CUT and WOOD, but aggressive, bearish traders may want to consider another way of profiting from lumber’s tumble. Housing stocks tracked by  iShares Dow Jones U.S. Home Construction Index Fund (ITB) have historically shown intimate correlations to lumber prices.

It pays to a remember some professional traders view lumber as a forward looking indicator and the last time lumber and housing prices diverged this widely, summer of 2011, housing shares subsequently sold-off.

 

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ETF Trends editorial team contributed to this story.

Full disclosure: Tom Lydon’s clients own GLD.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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