How to Invest in Timber
Timber my be viewed to be a part of nature, but this resource is used widely in a number of industrial applications and is a widely-traded commodity. Timber is most important to the construction industry, as it is a raw material used heavily by homebuilders.
Timber is attractive to some investors because it has been shown to smooth overall volatility when added to a stock-and-bond portfolio.
Lumber futures are traded on major exchanges, and certain exchange-traded funds offer exposure to companies engaged in the production of this commodity.
Ways to Invest in Timber
There are 3 ways to invest in Timber: ETFs, Futures, and Stocks. Click on the tabs below to learn more about each alternative.
What are Timber ETFs?
While there are no exchange-traded products available in the U.S. that offer exposure to physical timber or lumber futures, there are multiple funds that invest in stocks classified within the timber industry. The profitability of the underlying companies is sensitive to market prices, making these funds potentially attractive options.
One ETF choice is the iShares S&P Global Timber & Forestry Index Fund (WOOD). This ETF is global in nature, offering exposure to about 30 stocks in about ten different countries. Another option is the Guggenheim Timber ETF (CUT), a similar ETF that is also global in nature. CUT is tilted more heavily to international stocks, and has about 25 individual holdings.
What are Timber Futures?
Investors seeking exposure to forestry natural resources may be able to use futures contracts to establish exposure. While the market for these commodities in not nearly as big as for other resources, liquidity is not much of a concern.
One option is Random Length Lumber Futures, which trade on the CME under the symbol LB (LBS on the CME Globex). Each contract represents 110,000 board feet, and the underlying product is 2-inch x 4-inch lumber that is between 8 and 20 feet long. Contract months for Random Length Lumber include January, March, May, July, September, and November.
Also traded on the CME are futures contracts for Softwood Pulp and Hardwood Pulp, though these markets can be very thinly-traded.
How to Buy Timber Stocks
Investors looking for timber exposure may want to consider investing in stocks of companies that are involved in the timber and forestry industry. That includes firms that own timberlands or forests or are engaged in the management or upstream supply chain. Companies related to this industry can include forest products companies, timber REITs, paper products companies, packaging companies, and agricultural products companies.
There are a number of companies engaged in various aspects of the timber industry, and these stocks should generally perform well when timber prices rise. Some examples include Sino-Forest Corporation, Rayoniew, Plum Creek Timber, and West Fraser Timber Co. For more ideas, see the list of holding for either of the two timber ETFs, CUT and WOOD.
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