WOOD - WOOD: It's No Lumber But It's A Good Sector

2024-01-21 03:16:03 ET

Summary

• iShares Global Timber & Forestry ETF tracks the S&P Global Timber & Forestry Index, offering exposure to companies in the timber and forestry sector.
• Timber and forestry products have a stable market and can act as a hedge against inflation.
• WOOD provides diversification, potential for growth, and aligns with sustainable investing considerations, but carries risks of market volatility, sector concentration, and interest rate sensitivity.

If you've followed me for a while, you know I often talk about Lumber prices because their price movement is factually correlated to housing starts. But what about the equity side? While not as much as a signal, the companies that deal with Lumber can be a good investment. That's where the iShares Global Timber & Forestry ETF ( WOOD ) comes into play. WOOD is an exchange-traded fund that tracks the S&P Global Timber & Forestry Index. This index gauges the performance of companies involved in the ownership, management, or upstream supply chain of forests and timberlands. These companies range from forest product firms, timber REITs, paper packaging businesses, and agricultural product enterprises.

Timber and forestry products are in constant demand for construction, paper products, and increasingly in renewable energy sectors, providing a stable market. Moreover, as a natural resource, timber grows over time, which can lead to an intrinsic increase in value independent of economic cycles, often acting as a hedge against inflation. Forests also play a crucial role in carbon sequestration, which positions the sector favorably within the growing emphasis on sustainability and ESG (Environmental, Social, and Governance) investing. With global initiatives to reduce carbon footprints, companies in this industry may benefit from carbon credits and government incentives. Lastly, the finite nature of land suitable for forestry can create a natural supply constraint, potentially driving up the value of timber stocks over the long term.

ETF Holdings

Holdings include well-known companies domestically and others outside the US, such as:

Weyerhaeuser Company ( WY ): This real estate investment trust ((REIT)) owns, leases, and manages timberlands in the U.S. and Canada. It is the second largest holding in WOOD's portfolio.

Rayonier Inc. ( RYN ): A REIT engaged in timberland ownership and management across the U.S. and New Zealand.

West Fraser Timber Co. Ltd. (WFG): A diversified wood products company based in Canada.

Interfor Corp. ([[IFSPF]], [[IFP:CA]]): A Canada-based supplier of quality forest products to global markets.

Sector Composition and Weightings

More than 54% of the fund is focused on the Paper & Forest Products side, with Containers & Packaging over 21%. This isn't your typical fund, which is why I like it so much.

Peer Comparison

When comparing WOOD with similar ETFs, it's important to consider factors such as expense ratio, performance, and holdings. For instance, the Invesco MSCI Global Timber ETF ( CUT ) is a potential alternative. However, it has a higher expense ratio of 0.61% versus 0.42% for WOOD. WOOD has also outperformed CUT as the price ratio below shows.

Pros and Cons of Investing in WOOD

Advantages

1. Diversification : Investing in WOOD offers exposure to a unique asset class that could serve as a potential hedge against inflation and diversify an investor's portfolio.

2. Potential for Growth : As global demand for timber and related products continues to rise, companies in this sector could benefit, potentially leading to appreciable returns for WOOD.

3. Sustainable Investing : Timber is a renewable resource, and companies in this sector often follow sustainable forestry practices. Investing in WOOD could align with an investor's ESG (environmental, social, governance) considerations.

Disadvantages

1. Market Volatility : Commodity prices, including timber, can be highly volatile and influenced by numerous factors such as weather, global economic conditions, and trade policies.

2. Sector Concentration : WOOD's heavy concentration in the timber and forestry sector could pose a risk if the sector underperforms.

3. Interest Rate Risk : As with all REITs, the ones in WOOD's portfolio might be sensitive to interest rate changes. Rising rates could increase their borrowing costs, potentially hurting their profitability and stock prices.

Conclusion

The iShares Global Timber & Forestry ETF is a good way to diversify your equity holdings through exposure to the timber and forestry sector. In the current economic climate, where inflation and interest rate concerns are paramount, an investment in WOOD could provide a unique hedge and potential for returns. It's worth considering in your portfolio.

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