Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn


'Wood' you invest in timber?

James Gard  |  25 May 2021Text size  Decrease  Increase  |  
Email to Friend
  • The outlook for global timber and forestry
  • Whether chopping down trees (and re-planting them) can be considered sustainable 
  • Options available for investors

Wood has become the latest social media obsession, spawning countless Twitter memes and TikTok videos. With lumber (or timber if you’re an Aussie) prices hitting record highs in recent months, this niche asset class has been thrown into the spotlight amid supply shortages and booming demand for materials to build houses.

Before you head to the garden centre and start stockpiling fence panels, it’s worth taking a look at how the market works. Those fence panels are known as harvested wood products (HWP) which are used by consumers and the building trade. These can take the form of firewood and materials to build houses, but also be made into printer paper and cardboard boxes, both in high demand during the pandemic.

But timber is also a traded financial product, classified as a soft commodity in a wider basket including soya beans, corn and wheat – all of which have been booming this year. Companies that produce it are listed on the stock market (see below), while lumber is tradeable on the Nasdaq as a commodity (ticker LBS), and forms part of a number of indices – such as the FTSE All World Developed Europe Forestry index. ETFs focused on food materials like these were among the best performers on European exchanges in April 2021, according to Morningstar data.

Like other “hard” commodities like precious metals, timber prices are set by supply and demand, the product has a life cycle - and making it produces carbon emissions.

Lumber 1-Yr Price Growth


Lumber Price

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

Data Source: Markets.BusinessInsider.com

Build, renovate and repair

Lumber prices have generally traded within a range of $200-$400 per board feet in the last 20 years but spiked above $1,600 this year amid strong demand for the US housing market.

The coronavirus pandemic has forced structural change on this market but because of lockdown disruption, production has struggled to keep up. American home owners now want larger houses and are looking at areas outside of big cities, says Mikael Jafs, senior investment manager at the Pictet Timber Fund.

A swift economic rebound from the pandemic in the US has helped, where 1.5 million homes are being built a year after a slump in 2020. As well as new houses, DIY and even self-build projects have made lumber even scarcer, say economists at Wells Fargo: “The pandemic spurred demand for more useful living space to accommodate working from home and remote learning. This abrupt shift in demand fuelled a surge in renovation and repair spending and set off a wave of home buying during the second half of last year.”

Chopping down trees, planting more

ESG investors may struggle with the concept that forestry and timber can be sustainable investments – after all, deforestation is a big challenge for preserving habitats and slowing climate change. Illegal logging in countries like Brazil and Indonesia also conjure up negative images of the industry.

Pictet’s Gillian Diesen says investors need to understand that the listed timber companies are using forests for commercial use and not chopping through wilderness. She defines this as “timberland”, which is “sustainably managed forest in highly regulated jurisdictions that protect and uphold the integrity of the forest”.  The mantra of operators in this space is to “cut one, replace three”, she says. Bodies like the Forest Stewardship Council (FSC) enforce higher standards for sustainable forestry and replanted trees can absorb carbon, helping to slow the effects of climate change. Carbon remains locked into timber even if it is used to build a house (burning it does release carbon though). Trees can also be can also made into "biomaterial" products like tyres and drinking bottles, says Pictet's Jafs, although we're a long way off from replacing plastics completely.

Investor options - stocks

One indirect access point for forestry investors is to buy listed lumber/timber companies, which are generally based in North America. One of the largest firms, $16 billion West Fraser Timber (WFG) is among the largest holding in iShares Global Timber & Forestry ETF (WOOD), which has 25 equity holdings. The fund aims to track the S&P Global Timber & Forestry Index.

Top 10 Holdings | WOOD ETF

Woof ETF Top Holdings

Source: iShares

Like many thematic plays, it’s clear that forestry should only make up a small percentage of a diversified portfolio. Lumber prices are currently high and have been historically volatile, but fund managers in the space are long term investors. "Although the price of timber can be volatile, as with all commodities, the forests themselves are valued on a long term basis, so any short term timber price volatility does not impact forest values," says Anthony Crosbie Dawson, director of forestry and private clients at Gresham House.

Beware scammers hiding in the woods

New investors should be on their guard, though, against forestry investment scams – victims are often cold-called and persuaded to invest in forests in far-flung places like Costa Rica. As the FCA explains, beware of unsolicited approaches, seek independent financial advice before taking the plunge and make sure that any investments are made in regulated products like those mentioned above. Booming investment areas like timber and crypto attract scammers who take advantage of investors' "fear of missing out" and desire to make a quick return, the regulator warns on its "ScamSmart" website.

is senior editor for Morningstar.co.uk

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend