The lumber sector has just entered into a period of seasonal strength. How can investors participate in the sector with exchange traded funds (ETFs)?
Seasonal influences for lumber are positive from the middle of October to the middle of February. Average gain per period during the past 20 periods is 6.5 per cent. Traditionally, demand for lumber in North America increases during the period because lumber distributors and the construction industry are ordering lumber for the spring home building and construction season.
What about this year? Demand for lumber for new homes in the U.S. remains less than robust, but gradually is improving. Demand for lumber for home improvements and furniture in the U.S. was notably stronger in September and is expected to continue. Demand by the Canadian home building and construction industries continues to grow slightly. Demand from China and Japan has surged during the past year. Greater exports to Japan have been triggered by reconstruction programs following the tsunami disaster last March.
A word of caution: While the outlook for lumber is encouraging, the outlook for other subsectors in the forest product industry is less so. Newsprint prices have stalled and pulp and container board prices recently have moved lower. Preferred investment choices are equities and ETFs that focus on lumber and related products.
Two exchange traded funds in the forest product sector are available. The preferred choice is the iShares ETF because of its greater focus on lumber producers.
iShares offers the S&P Global Timber and Forestry Index ETF . The fund holds 32 international forest product stocks listed on U.S. exchanges with a focus on large-cap U.S. lumber stocks. Top five holdings are Rayonier, Plum Creek Timber, Weyerhaeuser, Oji Paper and Temple Inland. Its weight in U.S.-based companies is 56 per cent. Management expense ratio is 0.48 per cent.
Guggenheim offers the Timber Index ETF . The ETF tracks the performance of the Beacon Global Timber index, which has 27 holdings that are listed in U.S. exchanges. Top five holdings are Stora Enso, UPM-Kymmene, Svenska Cellulosa, Holmen and Meadwestvaco. Its weight in U.S.-based companies is 24 per cent. Management expense ratio is 0.65 per cent.
Western Canadian lumber producers including Canfor, International Forest Products and West Fraser Forest are in the best position to benefit from higher demand from outside of North America.
On the charts, lumber prices at $236 showed signs of entering their period of seasonal strength last week. Lumber equity prices responded late last week by moving strongly higher. Lumber has support at $224 per thousand board feet. Short-term momentum indicators are recovering from oversold levels. Preferred strategy is to accumulate either the iShares ETF or Western Canadian forest product producer stocks at current or lower prices for a seasonal trade lasting until next February.
Don Vialoux is author of a free daily report on equity markets, sectors, commodities and Exchange Traded Funds. Reports are available at www.timingthemarket.ca . Mr. Vialoux also is research analyst for JovInvestment Management Inc.