Amid the ongoing controversies pertaining to Trump’s plans and policies regarding immigration curb, travel ban, border tax, termination of trade agreements as well as his desired repealing of the Dodd-Frank Act and fiduciary laws, investors will definitely want to bet on some safe areas.
This is because in spite of hitting highs sporadically since Trump’s victory on hopes of fiscal reflation, a part of the broader market is still ridden with uncertainty in apprehension of the execution of several of his debatable policies (read: If Trump Flares Up Uncertainty, Profit from These ETFs).
Investors should also note that Trump’s promises for fiscal reflation and an improving U.S. economy have raised inflationary expectations meanwhile. This along with Fed’s policy tightening has given a boost to treasury bond yields, causing a sell-off in the fixed-income world.
As a result, many investors have started to look at value plays, some focused on quality stocks and some on alternative investing products to wait out the expected volatility in both the equity and the fixed income market.
But the timber ETF corner, which is relatively overlooked, can be one of the best investments right now.
Below we highlight what makes timber ETFs good plays now:
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.
Acts as a Good Inflation Hedge
U.S. consumer prices grew 2.1% year over year in December 2016, after a 1.7% rise in November and came in line with the market expectations. The inflation rate paced up for the fifth successive month to the highest since June 2014, thanks to higher gasoline and shelter cost.
Along with many analysts, even we believe that as inflationary pressure builds up, timber stocks and ETFs can hedge well against inflation.
Probably it is better than several TIPS ETFs as iShares Barclays TIPS Bond Fund (ETF) (TIP) has added about 1% so far this year (as of February 8, 2017)while timber ETF Guggenheim MSCI Global Timber ETF (CUT) is up 5.2% this year.
Housing Market Recovery
Housing starts in the U.S. surged 11.3% in December from the previous month. The reading came in better than expected. Though construction spending in the U.S. unexpectedly dropped 0.2% in December, it mainly represented the decrease in activity in the government sector. Spending on private projects maintained an uptrend, rising 0.2% (read: What Will Impact Housing ETFs: Strong Earnings or Soft Sales?).
This timber segment is apparently a key beneficiary of housing market recovery, as timber and related products are required for new houses. As a result, remodeling activities and demand for real estate properties across the nation have resulted in the greater need for wood (read: Timber ETFs: The Best Housing Recovery Plays?).
Below, we have highlighted two timber ETFs that investors could consider in their portfolio.
iShares S&P Global Timber & Forestry Index Fund (WOOD)
The fund focuses 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, almost half of the total assets are in the U.S. followed by 10.88% in Japan and 10.76% in Canada.
The annual fee comes in at just 47 basis points. WOOD has amassed about $218.6 million in assets while volume is far less as about 25,000 shares move hands every day, suggesting a relatively wide bid ask spread for this iShares product.
Guggenheim MSCI Global Timber ETF (CUT) in Focus
This fund tracks the MSCI ACWI IMI Timber Select Capped Index which is a benchmark that includes roughly 83 companies, that are engaged in the ownership and management of forests and timberlands and production of finished products which use timber as raw material.
The product puts nearly one-third of its assets in American securities (46.95%) while Finland firms make up over 11% of the fund. In terms of top holdings, the fund is moderately spread out as the top company, International Paper Co (IP), makes up about 5.18% of assets.
In terms of popularity, CUT has a decent following with over $180 million in AUM. The average daily volume is moderate at 30,000 shares, suggesting that bid/ask spread should be relatively wide for this fund and total trading costs should be little higher than the 0.55% expense ratio.
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