Timber ETFs Head-to-Head: CUT vs. WOOD
With the housing market seemingly showing some green shoots, many are growing more optimistic that we have seen the bottom in this important sector. Prices are starting to slowly trend upwards in some markets while home sales levels, while nowhere near their peak, are comfortably above the lows that they experienced during the dark days of 2008-2010.
This trend has been especially welcomed new for ETFs targeting the building and construction industry as these funds have been among the top performing products from a year-to-date look. In fact, the iShares Dow Jones US Home Construction ETF (ITB) is up an impressive 66% since the start of the year, suggesting that at least for those in this industry, the recovery is definitely underway in the housing sector (see Real Estate ETFs: Unexpected Safe Haven).
However, despite this impressive run in the home construction ETF segment, investors haven’t seen anywhere near that level of return in a closely related industry and one that is vital for much of the home construction market, timber.
Currently, there are two ETFs tracking the broad timber equity market, the Guggenheim Timber ETF (CUT) and the iShares S&P Global Timber & Forestry Index Fund (WOOD). These funds have both added a little over 12% so far in 2012, nothing to be ashamed of, but obviously nowhere near what investors have seen in some of the key home construction ETFs either (see Timber ETFs to Benefit from the Housing Recovery).
Given this sharp underperformance, but the highly correlated nature of home construction and timber, some investors might see more of a value when looking at the timber market at this time. After all, the timber space will also benefit from increasing optimism over housing while also giving investors outsized yield payments as well.
Furthermore, since timber stocks haven’t run up like their homebuilding counterparts, they may still be trading at more favorable PE and Price/Book ratios than their home building cousins. Lastly, if the latest round of QE has an inflationary impact, we could see producers of commodities turn into some of the biggest winners to close out the year, suggesting that it could be time to give timber ETFs a closer look if you believe that housing can continue to recover (read Is ROOF a Better Real Estate ETF?).
Yet, investors should note that while CUT and WOOD both have a focus on the timber industry, there are some slight differences between the two products. While either could make for a good choice to play a timber price boom, we have highlighted some of the key disparities between the two ETFs below:
Guggenheim Timber ETF (CUT)
This fund tracks the Beacon Global Timber Index which is a benchmark that includes roughly 30 companies. The main focus is to target firms that own or lease forested land and harvest the timber for commercial use in any form be it lumber, paper, or paper packaging.
The product puts close to one-third of its assets in American securities while Japanese and Brazilian firms also make up over 10% each as well. In terms of top holdings, the fund is well spread out as the top company, Weyerhauser (WY), only makes up 5.8% of assets while all of the top ten securities make up at least 4.3% of the fund (see Time for a Commercial Real Estate ETF?).
In terms of popularity, CUT has a decent following with just over $135 million in AUM. Meanwhile, the average daily volume is solid at 43,000 shares, suggesting that bid ask spreads should be relatively tight for this fund and total trading costs shouldn’t be much higher than the explicit 0.48% expense ratio.
iShares S&P Global Timber & Forestry Index Fund (WOOD)
iShares’ entrant in the timber ETF market tracks the S&P Global Timber & Forestry Index, a benchmark that has just less than 30 securities in total. This index focuses in on companies from around the world that are engaged in the ownership, management, or upstream supply chain of forests and timberlands, giving it exposure to forest product firms, REITs, and paper product companies.
Despite its global focus, just over half the assets go towards firms that are based in the U.S. while another 10% are allocated to Canadian firms. The product is also less spread out, as WY takes the top spot at just under 10% of assets while Rayonier (RYN) also receives a weighting of more than 9% as well (also read Five Best Performing ETFs (so far) in 2012).
The fund is cheaper than its Guggenheim counterpart by a relatively wide margin, as fees come in at just 48 basis points a year. However, while assets are comparable at just over $168 million, volume is far less for WOOD, as less than 20,000 shares move hands every day, suggesting a relatively wide bid ask spread for this iShares product.
Data Point | CUT | WOOD |
Expense Ratio | 0.65% | 0.48% |
Total Holdings | 31 | 27 |
Assets in the U.S. | 34% | 52% |
Dividend Yield | 2.1% | 2.7% |
Return (1/1-9/14) | 15.8% | 12.8% |
Average Volume | 43,000 | 17,000 |
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