The home construction and renovation boom playing out during the pandemic has sent lumber prices soaring, alongside the handful of exchange-traded funds related to the sector.
The price of lumber recently hit a record US$1,600 per thousand board feet, up significantly from about US$260 at the start of the pandemic 14 months ago.
There is no ETF that specifically tracks the price of the commodity – and for good reason, says Daniel Straus, director of ETFs and financial products research at National Bank Financial Inc. in Toronto.
“Lumber itself is one of the more illiquid commodities out there, and for a functioning ETF you really want to have a very liquid marketplace with a lot of transaction volume.”
Indeed, lumber’s illiquidity is one reason among many behind the supply/demand imbalance that’s led to surging prices. Other factors include low inventories, labour shortages and trucking delays, Mr. Straus says.
A handful of ETFs trading on U.S. markets offers indirect exposure to these market realities through forestry and homebuilding companies and a few home furnishing stocks. Below is a look at four industry ETFs that have been performing well in recent months:
iShares Global Timber & Forestry ETF (WOOD-Q)
Assets under management (AUM): US$445-million
Management expense ratio (MER): 0.46 per cent
Year to date (YTD) return: 21.5 per cent (All data from Morningstar as of May 7 close)
The largest of the only two forestry-focused ETFs by AUM, the iShares fund is also the most concentrated indirect play on lumber, says Lara Crigger, managing editor at ETF Trends and ETF Database in New Orleans.
“WOOD only holds 25 companies, and among them are the largest companies that own or manage timberland,” she says.
Since hitting a low in March, 2020, at the start of the pandemic, WOOD has increased by about 138 per cent, driven by the performance of major forestry firms. Its top three holdings include Canada’s West Fraser Timber Co. Ltd., and U.S. real estate investment trusts Rayonier Inc. and Weyerhaeuser Co.
ETF analyst Yves Rebetez at Credo Consulting Inc. in Toronto, which provides market research for Canadian asset managers, notes that while no Canadian-listed ETFs are available, despite forestry being a major industry in Canada, “maybe investors could buy instead a West Fraser and Canfor position and call it day.”
Invesco MSCI Global Timber ETF (CUT-A)
AUM: US$118-million
MER: 0.61 per cent
YTD return: 19 per cent
The more diversified option for investors is CUT with more than 80 companies in its portfolio. Yet “CUT is actually small as U.S.-listed ETFs go,” Mr. Straus says, referring to its AUM. That makes it slightly less liquid than its competitor. Another reason investors appear to have favoured WOOD over CUT, based on recent performance, is because the latter has a slightly higher management expense ratio.
CUT has more exposure to companies involved in paper and packaging: 41 per cent of the portfolio includes consumer cyclical stocks versus 16 per cent with WOOD. CUT also has less allocated to basic materials such as lumber, or about 42 per cent versus WOOD with about a 60-per-cent allocation.
This partly explains why the ETF has slightly trailed WOOD in performance, Ms. Crigger adds. CUT has risen by about 125 per cent since its low in March, 2020. Its top three holdings are paper and packaging companies International Paper Co., Avery Dennison Corp. and Westrock Co.
SPDR S&P Homebuilders ETF (XHB-A)
AUM: US$2.3-billion
MER: 0.35 per cent
YTD return: 38 per cent
Homebuilder ETFs such as XHB are an equally good way for investors to gain access to the same economic forces behind soaring lumber prices, Mr. Straus says.
“The homebuilders ETF has indirectly been participating in this same very dynamic that has been going on in lumber,” he notes. The ETF is up about 230 per cent since March, 2020.
Mr. Straus says the ETF is arguably a better way to play the current market forces because home building and home renovations can better absorb rising lumber costs. The ETFs also include home furnishing and appliance companies.
“If your input costs go up, then your margins go up with them if you’re able to pass the added cost of to the end consumer.”
He notes that’s the case for many of the 36 companies it holds. The ETF’s top three holdings are furniture retailer RH (formerly known as Restoration Hardware Holdings, Inc.), home furnishings company Williams-Sonoma Inc. and homebuilder PulteGroupe Inc.
iShares US Home Construction ETF (ITB-Cboe BZX)
AUM: US$3-billion
MER: 0.42 per cent
YTD return: 38 per cent
The larger of the two by AUM, the iShares offering also has more holdings, or 48, and a slightly higher MER compared to XHB.
“Yet, both ETFs really offer the same exposure,” Ms. Crigger says.
Despite the slightly higher cost, ITB has outperformed the SPDR ETF since the market low in March, 2020, increasing by about 260 per cent.
Over the past decade, ITB has seen an annualized return of about 20 per cent versus 16 per cent for XHB. ITB has more exposure to consumer cyclical names, or about 76 per cent of the holdings, compared with about 63 per cent for XHB. ITB’s top three holdings as of May 5 include homebuilders D.R. Horton Inc. Lennar Corp. and NVR Inc.
Still, Mr. Rebetez is quick to note the performance of these ETFs, driven by demand for housing and renovations, and underlying issues such as a lack of lumber supply, is likely to abate at some point leading to lower prices.
“In the world of oil, you often hear that the cure for high oil prices is high oil prices, which eventually cause pricing, demand and production realignment,” he says. “I’d expect that post full reopening (of the economy); this may well also play out here with lumber.”