Timber ETFs Rise Despite Lumber Price Slump

May 18, 2015

 

Charts courtesy of StockCharts.com

 

Finding Diversification

What makes these funds interesting is the fact that they tap into a highly concentrated sector—the top three timber companies represent 60 percent of the overall market—but they each go through great lengths to diversify that company-specific risk.

 

In the case of WOOD, which tracks the S&P Global Timber & Forestry Index—a cap-weighted index of the 25 largest forestry firms around the world—that effort translates into diversifying exposure outside of the timber market. That means owning packaging and agricultural companies as well.

 

In fact, about 60 percent of WOOD is invested outside the forest and timber sector. More than 50 percent of the fund is tied to U.S. companies, and paper product names lead the mix with a 28.5 percent allocation.

 

CUT, meanwhile, opts for a multifactor weighting methodology in order to create a more diverse portfolio. The fund caps individual weightings at 4.5 percent at each rebalance. The U.S. represents only one third of the portfolio, followed by a 16.5 percent allocation to Brazilian names.

 

Paper product companies also lead CUT’s segment exposure, with a 44 percent weighting.

 

From a price point perspective, CUT is much more costly to own. It comes with an expense ratio of 71 bps, and it trades with an average spread of 27 bps, putting the cost of ownership closer to 98 bps, or $98 per $10,000 invested. WOOD charges 48 bps in expense ratio, and with an average spread of 25 bps, it costs about 73 bps to own. 

 

 

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