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Why Timber ETFs Could Be Stronger This Forest Day

Sanghamitra Saha
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It’s been five years sincea single day (March 21) has been allocated to celebrate the worth of forest reservation amid rising global warming. Recognized as ‘international day of forests’, the day is a tribute to all types of forests and trees – big and small.

While the value of trees is crucial to the restoration of Mother Earth, your investment portfolio can also grow under the calming shade of trees. Let’s delve a little deeper.

Lumber Prices to Shoot Up?

Lumber prices are on a tear thanks to wildfires in Canada’s British Columbia, the world’s top exporter of softwood lumber, last year. Plus, strained trade relation between Canada and the United States. Last April, President Trump slammed import tariffs on five Canadian lumber companies, ranging from 3% to 24%.

The tariff went into effect from November 2017. According to an article published on Wall Street Journal, U.S. homebuilders held high lumber prices responsible for the recent uptick in housing prices. Builders are reported to be hoarding lumber ‘for what is expected to be one of the busiest construction seasons in years’ (read: ETF Winners and Losers on Trump's Canadian Timber Tariff).

Single-Family Housing Starts Still Stand Steady?

The timber segment is apparently a key beneficiary of housing market recovery, as timber and related products are required for new houses. Though housing starts slipped 7.0% to a seasonally adjusted annual rate of 1.236 million units in February, single-family projects rose for the second consecutive months.

Single-family homebuilding, which makes up the largest pie of the housing market, rose 2.9% to a rate of 902,000 units in February. The number of completed single-family houses last month came in at the most since March 2008, while 501,000 single-family housing units under construction was the maximum since June 2008.

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 diversification resulting in low volatility of portfolio returns.

As 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 kind of operating backdrop makes timber stocks and ETFs sturdy investments even in a market crash.

Below, we have highlighted two timber ETFs that investors could consider in their portfolio.

ETF Picks

iShares S&P Global Timber & Forestry Index Fund WOOD

The fund focuses on global companies that are in the ownership, management or upstream supply chain of forests and timberlands, giving it exposure to forest product firms, REITs, and paper product companies.

Almost one-third of the total assets are in the United States followed by 16.2% in Canada and 12.6% in Brazil. The product is less spread out, as Rayonier REIT (8.65%), West Fraser Timber (8.1%) and Weyerhaeuser REIT (7.4%) take the top three spots. The annual fee comes in at 51 basis points. WOOD has amassed about $438 million in assets and was up about 37% in the last one year (as of Mar 20, 2018) (see all Materials ETFs here).

Guggenheim MSCI Global Timber ETF CUT

This fund includes roughly 80 companies that are engaged in the ownership and management of forests and timberlands. The product puts nearly one-third of its assets in American securities (44.75%) while Finland firms make up more than 10% of the fund.

In terms of top holdings, the fund is moderately spread out as the top company, UPM-KYMMENE OYJ, makes up about 5.16% of assets. In terms of popularity, CUT has a decent following with more than $230 million in AUM. The fund charges 57 bps in fees. The fund gained about 25% in the last one year (as of Mar 20, 2018).

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