2 Timber ETFs: Some Key Differences

February 01, 2020

[This article appears in our February 2020 issue of ETF Report.]  

 

Only two U.S.-listed ETFs are categorized by FactSet as “Global Timber,” and while both funds access the same market segment, they offer different angles on exposure and coverage.

Both ETFs have been around for more than a decade, and both have amassed sizable assets over time. The iShares Global Timber & Forestry ETF (WOOD) has $277 million in assets under management, and the Invesco MSCI Global Timber ETF (CUT) has $132 million. They certainly sound like similar products based on their names.

These ETFs do share the similar objective of accessing the timber market, but WOOD is perhaps a little more in-depth and specific. The fund, in its prospectus, notes that it covers companies “engaged in the ownership, management or upstream supply chain of forests and timberlands. These include forest products companies, timber real estate investment trusts (“REITs”), paper products companies, paper packaging companies and agricultural products companies.”

Meanwhile, CUT’s prospectus simply states that its index covers GICS “sub-industries of forest products, paper products, paper packaging or specialized real estate investment trusts (“REITs”) classified as ‘Timber’ REITs.”

 

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Different Weightings, Costs
The very specific description of WOOD’s investment goal versus the less detailed statement regarding CUT’s objective is perhaps best reflected in the fact that WOOD’s index is very narrow in scope, covering approximately 30 holdings, while CUT’s portfolio has 80 holdings.

And since both funds track indexes from providers that share a security classification system, the Global Industry Classification Standard, it’s not surprising that almost all of WOOD’s holdings are included in CUT’s component list.

In fact, of WOOD’s holdings, only Sumitomo Forestry, weighted at 3.29%, doesn’t make an appearance in CUT’s portfolio.

There’s no question that CUT is the more expansive fund, with more than double the number of holdings. However, it’s not as globally diversified, with a nearly 48% weighting to the U.S. WOOD allocates only about 35% to U.S. stocks. Investors more concerned with the “global” part of “global timber” would probably do better to look to WOOD.

WOOD is also the cheaper product, with an expense ratio of 0.46%, while CUT costs 0.55%.

Performance
Both ETFs seem out of favor with investors right now, having faced asset outflows in 2019. CUT lost $28.6 million last year, while WOOD lost $49.4 million. On one level, that’s surprising, because equity ETFs did quite well in 2019, and pulled in roughly a net of $162 billion for the year. On another level, it’s not really that shocking given that both ETFs lagged the S&P 500 Index by a significant margin last year.

Indeed, while CUT and WOOD saw total returns for 2019 of 23.34% and 19.76%, respectively, the SPDR S&P 500 ETF Trust (SPY) saw a return of more than 31%, and the iShares MSCI ACWI ETF (ACWI) was up more than 26%. In other words, an investment in timber last year was not the most rewarding allocation for investors.

That said, over the long term, timber has generally trailed the broader market. What timber offers is some diversification. Interestingly, although CUT outperformed WOOD in 2019, WOOD has beat the broader fund from a historical perspective over the three-, five- and 10-year periods.

 

For a larger view, please click on the image above.

 

In addition to exhibiting historical outperformance relative to CUT, WOOD has somewhat better trading data, with more than twice CUT’s average daily volume of shares traded, at 43,900, and millions of dollars of shares traded per day versus an average of less than $500,000 for CUT. The broader fund actually has a narrower average trading spread of 0.16% versus 0.24% for WOOD, though.

Conclusions
Timber is best known as a category favored by institutional investors looking to put large amounts of capital into play. However, ETFs have democratized this play on infrastructure and natural resources so that average investors can access exposure to the space at an affordable rate.

If you’re looking to get the broadest possible representation of the timber space, CUT would seem the best choice for investors. Moreover, CUT’s greater focus on the U.S. seems only to have helped the ETF in a year when the U.S. stock market outperformed almost every other country.

But despite its recent outperformance, CUT has still underperformed WOOD over the long term. WOOD is cheaper than CUT, is more tradeable and offers purer-play exposure to the timber industry.

Ultimately, both funds have a lot to recommend them, but investors must consider their portfolio needs when deciding between the two.

 

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