Lumber prices have been volatile in recent months. The price of lumber futures contracts soared to a record of $1,711 per thousand board feet in early May 2021, more than 200% higher than the previous 12 months. The price crashed to roughly $400 per thousand board feet by August 2021 before recovering above $700 by October -- still higher than during the same month in 2020.
Many analysts believe lumber prices will continue climbing through early 2022 as homeowners decide to upgrade their current space rather than move amid tight inventory levels.
Investors have two ways to play a potential rise in lumber prices. They can buy lumber stocks or purchase a timber-focused exchange-traded fund (ETF). Here's a closer look at the two ETFs focused on the lumber industry: the iShares Global Timber & Forestry ETF and the Invesco MSCI Global Timber ETF.
1. iShares Global Timber & Forestry ETF (WOOD -0.07%)
The iShares Global Timber & Forestry ETF provides investors with broad exposure to companies that produce forest products, agricultural products, and paper and packaging products. The fund aims to track the S&P Global Timber & Forestry Index. It managed more than $250 million of net assets as of July 2022.
The iShares ETF's top holdings include several of the largest timber REITs, as well as global timber companies. This ETF had 27 stock holdings in July 2022. The five largest by value were:
- Rayonier (RYN -0.13%): 8.74% of the portfolio's value
- West Fraser Timber (WFG 0.24%): 8.69%
- Weyerhaeuser (WY 0.76%): 8.66%
- Svenska Cellulosa (OTCMKTS:SVCBF): 7.51%
- PotlatchDeltic (PCH 0.24%): 7.25%
These top five holdings comprise 40.9% of the total value of the fund. Three of the companies -- Rayonier, Weyerhaeuser, and PotlatchDeltic -- are real estate investment trusts (REITs) focused on generating revenue by owning timberland. They harvest and sell the lumber to mills they own or those operated by third parties. West Fraser Timber is a diversified wood products company based in Canada. It produces lumber, plywood, pulp, newsprint, wood chips, and other wood products. Sweden-based Svenska Cellulosa is Europe's largest private forest owner.
One factor investors should consider is the iShares ETF's expense ratio. At 0.46%, it charges a reasonable management fee.
2. Invesco MSCI Global Timber ETF (CUT -0.47%)
The Invesco MSCI Global Timber ETF focuses on timber REITs and companies selling forest products, paper products, and paper packaging. The fund aims to track the MSCI ACWI IMI Timber Select Capped Index. The Invesco ETF managed over $80 million of total assets as of July 2022.
The Invesco ETF holds more stocks than the iShares Global Timber & Forestry ETF, with 75 as of July 2022. Its five largest holdings by value were:
- Avery Dennison (AVY -0.21%): 5.48% of the portfolio's value
- Amcor (AMCR -0.55%): 5.41%
- Packaging Corp. of America (PKG -4.69%): 5.10%
- Weyerhaeuser (WY 0.76%): 4.94%
- WestRock (WRK -2.02%): 4.94%
The five holdings make up a little over 25% of the total value of the Invesco ETF's portfolio. One of the biggest differences with the Invesco ETF is that it provides investors with broader exposure to the wood products marketplace. Four of the largest holdings focus on maximizing the value of wood fibers by using them to make paper and packaging products, as well as lumber products. In addition, the Invesco ETF offers exposure to the timber market, led by timber REIT Weyerhaeuser. That company is one of several holdings in the ETF that manage timberlands and/or operates lumber mills.
The Invesco ETF's broader approach to the lumber market has one notable benefit. It's not as volatile since it has less direct exposure to the wild fluctuations of lumber prices. However, that also gives it slightly less upside potential in a rising lumber price market.
This ETF's expense ratio, at 0.72%, is higher than the iShares Global Timber & Forestry ETF. However, that's still a reasonable management fee.
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Diversified ways to invest in lumber
Investors have two ETF options to play the potential recovery in lumber prices. Both offer broad exposure to the sector but with slightly different twists. The iShares Global Timber & Forestry ETF has higher exposure to timber company REITs and has a lower expense ratio. Meanwhile, the Invesco MSCI Global Timber ETF offers broader exposure to the wood products sector, making it potentially less volatile. Either way, both ETFs should benefit from rising lumber prices, making them solid options for investors looking to profit from a potential surge in prices in the coming months.
