Small-Cap Timber ETFs Provide Solid Returns

Small-Cap Timber ETFs Provide Solid Returns

Often overlooked in a tech biased market, the value of timberland as an investment has risen faster, with less volatility, than any sector of stocks as measured by the Standard & Poor’s 500 Index. Since 1987 alone, the Timberland Index, a record maintained by the National Council of Real Estate Investment Fiduciaries (NCREIF), has risen roughly 15 percent per year, in contrast to an annualized return of 9.61percent for the S&P 500. This past year prices have risen 40 percent, and futures prices have jumped 49 percent, making lumber the best-performing commodity on the CME. The fact of the matter is that inflation has never been a match for timber, which has risen steadily when compared with overall prices for more than a century.

Producers of timber-related products have traditionally owned vast acres of timberlands to guarantee access to the supply of trees necessary to make their products. Gradually more of these companies are separating from their tree acreage by selling it to investors and companies with the financial and timber management skills to capitalize on production. Thus, manufacturers guarantee access to supply by entering into resource contracts with the new owners. The contracts are almost always made at prices that allow manufacturers to hedge movements and volatility in timber values.

For investors looking into this sector, timber exchange-traded funds, (ETFs) might prove an attractive option. Two small-cap timber ETFs are Claymore/Clear Global Timber Index (NYSE: CUT) and iShares S&P Global Timber & Forestry Index (NASDAQ: WOOD). Both ETFs invest in timber REITs, as well as businesses related to the industry such as paper and packaging. ETFs offer something of a security blanket for those investors that want to lessen the risk of a single company. For instance, CUT is made up of companies globally that own or lease forest land and harvest trees for lumber and other wood-based products.  CUT gained over 28 percent in 2012 and has a dividend yield of 3 percent. It has a market capitalization of $203.13 million. WOOD has a market cap of $234.69 million. There is no dividend yield for WOOD as of yet.

Bear in mind that the cash flow attributes of timber are comparable to those of zero-coupon bonds. Investors have got to wait years for the investment to mature. Trees are planted and depending on the type, they are harvested within 15 to 30 years. Portfolio managers provide diversification and dividends by purchasing tracts of land with differing harvest maturities. That is one of the advantages of a timber ETF option.

There is a better than average growth in the sector today that has been shaped by a multiple factors such as added demand from Asia, reduced supply and a slowly improving housing market. The majority of industry executives and analysts are bullish based on predictions of continued solid growth in housing starts in 2013.

Timber investing has proven to be especially appealing during bear markets. During the Great Depression stocks plummeted more than 70 percent but timber gained 233 percent. In 2008, when the S&P 500 lost 38 percent, the NCREIF Timberland Index gained 9.5 percent. It is especially beneficial as an effective tool for portfolio diversification, since its cost movements have a very low parallel with most other segments; less than +0.1. If for nothing else, timber is a great way to play the housing recovery, no matter what investment route you take.