ETF Of The Week: Tale Of 2 Timber Funds

October 24, 2019

Eagle-eyed visitors of the site might have noticed a curious name popping up in our top ETF performers widget: the $235 million iShares Global Timber & Forestry ETF (WOOD). The fund, which has risen 8.15% over the past 30 days, is our pick for ETF Of The Week:


Source: ETF.com; data as of Oct. 24, 2019

 

That's especially notable, considering that over the same period, WOOD has well-outperformed its only competitor, the $132 million Invesco MSCI Global Timber ETF (CUT), which has risen 6.73%.

Yet on longer time frames, CUT is the clear winner: Year to date, Invesco's timber ETF has risen 14.7% compared with WOOD's 12.4%. Over the past 12 months, CUT has risen 3.2%, whereas WOOD has fallen 1.8%.


Source: StockCharts.com; data as of Oct. 24, 2019

 

Both are market-cap-weighted ETFs with a global focus that cover the same relatively narrow investment theme. So how can there be such difference in their performance?

How ETFs Invest In Timber

Timberland has long been the provenance of institutional investors—like pensions and endowments—who directly own tree farms or managed forests for the income they can provide. WOOD and CUT, however, take that concept to the masses, opening up timber investing to retail investors as well as large institutions.

Timber investing can be a solid pick-and-shovels play on the rising real estate and infrastructure markets, but it is also an extremely niche segment, with only a handful of truly investable names. ETFs that would cover this space must make some accommodations to avoid bumping against laws regarding overconcentration in registered investment companies.

As such, both WOOD and CUT diversify beyond just timberland REITs and forestry stocks. They also weight significantly to paper, pulp and packaging companies, and even some recycling and renewable packaging stocks.

Narrow Int’l Coverage, Diverse US Coverage

CUT goes one step further, implementing 5% position caps on individual stocks in the portfolio. But in so doing, CUT must hold a much larger portfolio than WOOD to make up the gap.

As such, CUT holds a wider diversity of sectors than WOOD, dipping into construction suppliers, IT service and consulting firms, oil and gas refiners and banks. It even has a scant 0.05% weighting in the Invesco India ETF (PIN).

Over medium time frames, that sector-level diversity has served CUT well. But over the longest time frames—a three-, five- or even 10-year horizon—WOOD has handily outperformed the competition.

In part, that might be driven by the fact that WOOD is more concentrated in international stocks than CUT, which has almost half (47%) of its portfolio allocated to the U.S. On the other hand, WOOD allocates only 36% to the U.S., a bet that has paid off as the U.S. has struggled with a one-two punch of oversupply in timber and a lackluster housing market.

Furthermore, WOOD is cheaper than CUT by 9 basis points, which might not seem like much, but which can really add up over time. WOOD has an annual expense ratio of 0.46%, compared with CUT's 0.55%.

Which is the better play? Historically, it has depended on whether you are a short- or long-term investor.

One thing to keep in mind, however, is liquidity: Even though CUT trades with lower average daily volume, WOOD tends to trade with higher average spreads.

Contact Lara Crigger at [email protected].

 

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