By John Wasik
CHICAGO, June 3 If a tree falls in the forest,
can you make a little money? As the U.S. housing rebound
continues, you can watch the value of your real estate rise. In
addition you can reap gains from resource companies that own and
Since most U.S. homes are still framed with wood, timber
becomes a more valuable commodity as new construction booms.
Home prices gained the most in seven years in March, according
to a recent S&P Case-Shiller housing index report. Housing
starts in April rose 16 percent over the previous month with new
building permits up 14 percent, according to the U.S. Census
North American sawmills are running at the fastest pace in
six years, up nearly 7 percent over last year, according to CIBC
World Markets, a Canada-based investment bank. Growth in China
is also contributing to the rebound. More than 60 percent of log
exports from the Pacific Northwest head to the People's
Timber is also becoming more scarce as forests shrink. As a
commodity, it provides an inflation hedge, too; the S&P Global
Timber & Forestry index has produced an annualized return of
nearly 7 percent over the past three years through April 30. The
current Consumer Price Index is running at an average 1 percent.
Why invest in timber and related resource companies instead
of the obvious play in homebuilder stocks? Those companies have
been rallying for more than a year and are pricey.
The SPDR S&P Homebuilders ETF, for example, a fund
that holds most of the major home-construction companies, is up
more than 50 percent over the past year through Friday, almost
double the price of a consumer cyclical index. That portfolio's
price-earnings ratio - what investors are willing to pay for a
dollar of expected earnings - is 20, compared to 14.4, for the
The underlying S&P index for the timber sector has climbed
more than 31 percent over the past year through May 31 compared
to a nearly 50-percent gain for the S&P Homebuilders Index. The
iShares Global Timber and Forestry Index ETF (WOOD), has p/e of
18; that's not a bargain price either, but timber stocks are a
better value now relative to homebuilding stocks and may have
Most timber companies specialize in specific regions where
they own or lease properties. But to obtain global
diversification, it's best to consider one of two
exchange-traded funds on the market that hold timber, packaging
and real estate investment trusts (REITs) that own lumber
The Guggenheim Timber ETF, holds major producers
like Weyerhaeuser Co and International Paper Co.
It tracks the Beacon Global Timber Index, which holds companies
that own or lease forested land or produce wood-based products.
More than 40 percent of the companies are based in greater
Europe or Asia. It's up 8 percent year to date through May 31
and gained 25 percent last year.
As an alternative, the iShares timber ETF mentioned above
has more than 60 percent of its holdings in the Americas,
including Plum Creek Timber Company Inc and Potlatch
Corp. The iShares fund is a better deal on expenses than
the Guggenheim product, charging 0.48 percent annually for
management, compared to 0.70 percent for the Guggenheim fund.
It's gained 4 percent year to date and 23 percent last year.
Of the two ETFs, the iShares fund offeres more total
international exposure, including 13 percent stakes in Brazilian
companies and 11 percent in Japan, says Eric Dutram, ETF analyst
at Zacks Investment Research in Chicago. Either way, the two
funds are reasonably priced, he said.
Many timber companies give you a bonus if they're vertically
integrated. They could mean they are producing value-added
products like rayon, packaging or paper, which also would
benefit from a broad economic recovery. These companies may also
own or lease land that may result in other mineral plays such as
petroleum or natural gas.
Keep in mind that timber trends can cut the other way. As
funds specializing in a handful of commodities that rise and
fall directly with economic demand, these ETFs are not for
nervous investors. Guggenenheim Timber lost nearly half its
value in 2008 and has a 32-percent five-year standard deviation,
a volatility gauge. That compares to 20 percent for a world
natural resources stock index.
If the housing market goes south again, then these ETFs will
suffer. Consider them only as small parts of a larger portfolio
and not large holdings.