Interactive Investor

Red-hot property market sets wood ETF alight

26th April 2021 11:40

Tom Bailey from interactive investor


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Due to a booming US housing market there is a shortage of lumber. 

Exchange-traded funds (ETFs) tracking commodities have generally performed well over the past six months, from oil to copper. This has largely been the result of the global economic recovery investors expect to see this year. Commodities, be they energy or metals, perform better when the economy performs well.

However, one result of this economic recovery has been the strong performance of lumber – or wood. Year-to- date, the iShares Global Timber&Forestry ETF $ Dis GBP (LSE:WOOD) has returned 12% in sterling terms. Over the past six months, it has returned just under 30% and on a one-year basis it is up over 70%.

Driving this performance has been the boom in the US housing market. For the past few months, house prices in the US have been soaring. Demand has been underpinned by continued low interest rates and people looking for new, more spacious homes due to the shift to working from home. An increase in savings among Americans during lockdowns is also likely playing a role.

We have seen a similar phenomenon in the UK, with certain parts of the housing market going strong, also influenced by low interest rates and working from home, with the added bonus of the stamp duty tax holiday.

However, whereas this has buoyed the share price of some housebuilders in the FTSE 100 and FTSE 250, in the US it has translated into a surge in the cost of wood. Lumber futures in the US are now around $1,400 per 1,000 board feet length, the highest they have ever been – even during the housing boom in the 2000s.

That’s because, as well as a surge in demand, there are supply constraints. While there is plenty of timber – wood that has not yet been chopped down – sawmills are struggling to turn those trees into usable wood fast enough to satisfy demand. This is largely due to so many sawmills going bust in the wake of the 2008 financial crisis. However, there are also reports of labour shortages at sawmills in use, meaning they are struggling to operate at full capacity.

All this has translated into strong performance for the iShares Global Timber&Forestry ETF. However, the ETF is not a pure-play on lumber prices. It tracks the S&P Global Timber & Forestry Index, which is comprised of the 25 largest publicly traded companies engaged in the “ownership, management or the upstream supply chain of forests and timberlands”.

This includes companies that sell lumber, such as West Fraser Timber (TSE:WFG), the largest holding in the ETF. Companies such as this have been able to capture the benefit of these price rises. West Fraser Timber has seen its share price increase by 50% over the past six months. The index the ETF tracks also includes companies less connected to the theme, such as paper products companies and paper packaging companies.

The ETF has an ongoing charge of 0.65%.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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