Time To Fall For Timber?

Published on Friday, 20 April 2012 14:17 Written by Todd Shriber

A lot of folks may not realize it, but there’s not one, but two ETFs devoted to timber trading in the U.S. today. One them is the Guggenheim Timber ETF (NYSE: CUT), which will turn five years old later this year. With its appropriate ticker, CUT is unheralded as a diverse way of playing multiple economic scenarios.

As what appears to be a commodities fund, CUT benefited from the return of the risk on trade earlier this year and now finds itself up almost 9% on a year-to-date basis. That sword cuts both ways, no pun intended, and as the demand for riskier assets has waned in the past, CUT has fallen 4.6%. Part of the reason for that tumble is that investors take one look at CUT and assume it’s a direct play on the housing market. Residential real estate data points have slumped recently and that has led to some selling pressure on CUT.

CUT tracks the Beacon Global Timber Index, which includes firms that own or lease forested land and harvest the timber for commercial use and sale of wood-based products, including lumber, pulp or other processed or finished goods such as paper and packaging, according to the Guggenheim Web site. In other words, this ETF is not a pure housing play.

Home to 31 stocks, CUT is home to a few companies with housing exposure, but most of the ETFs constituents dwell in the paper universe. CUT even offers 18.3% exposure to the financial services sector an allocation of almost 4.4% to consumer discretionary stocks. The ETF’s top-10 holdings combine for about 45% of the fund’s weight.

CUT is also international in nature. More than half of the fund’s holdings are foreign companies or securities and CUT offers exposure to 11 countries. The U.S. leads the pack with a weight of almost 38%, but Japan and Brazil combine for another 28.4%.

Along those lines, CUT’s country weights are arguably a drag on the fund at the moment. On a year-to-date basis, Brazilian stocks look good, but drill down on the past five or six weeks, and that story turns ugly. Japan isn’t helping CUT’s cause. No matter how cheap Japanese equities, global investors are still only nibbling at Japan’s stocks. Not only that, but CUT features exposure to five European countries, and while the allocations to Portugal and Spain are relatively scant, they might be enough to give investors some pause about CUT.

There is a bull case for CUT and it comes from two factors. First, timber is actually a great, though often ignored inflation fighter. Second, some emerging markets such as South Africa, are experiencing timber shortfalls and that could prove to be a boon for CUT. Maybe it is worth taking a small of slice of CUT at the moment, but do so only if the ETF finds support at its 200-day line in the even of a pullback.