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Investing in timberland has been popular among pension and endowment funds.

But individual investors now have access to two U.S.-listed exchange-traded funds offering a play on wood. The iShares S&P Global Timber and Forestry ETF (WOOD-Nasdaq) started trading recently on the heels of the Claymore/Clear Global Timber ETF (CUT-AMEX) launched in December.

While the ETFs have appeal because timberland does not move in concert with stock and bond markets, investors should examine their holdings to determine the forest from the trees.

"If you are buying these because you think you are getting a good proxy for owing land with farmable trees on it, you are not," said Scott Burns, a Chicago-based Morningstar analyst who covers ETFs.

"There is some of that in there. But it really is timber, forestry, paper and sawmills."

Investing in purer plays such as U.S.-listed timber real estate investment trust (REITS) would be a better bet, he said.

Timberland is gaining popularity among long-term investors. Revenue flows from sales to lumber and paper companies. When timber prices are low, owners can stop cutting to let trees grow and increase in value. Land sales also make this asset a real estate play.

"If you look at the long-term returns of private timberlands over the last 35 years, it beats all other investment classes by two or three percentage points," said analyst Richard Kelertas of Dundee Securities.

Institutional and wealthy investors can invest directly in timberland through timber investment management organizations, but it costs millions. An individual would need $5-million (U.S.) to invest through Manulife Financial Corp.'s U.S.-based subsidiary, Hancock Timber Resource Group.

While the new ETFs offer an easy play on timber, the problem is that they include stocks like struggling U.S. forest-products giant Weyerhaeuser Co., Mr. Kelertas said.

Weyerhaeuser, whose stock is off 41 per cent from its 52-week high of $84.28, "has done terribly" because it owns businesses other than timberland that are doing poorly, he said.

A better way to play the sector is through pure-play timber stocks, he suggested. While they have also declined, they are not off as sharply as other forest products companies, such as lumber firms hit hard by the U.S. housing slump.

"We say to keep buying [them]on dips," Mr. Kelertas said. "There is a global worldwide shortage that is developing for quality timber.

"... As the world becomes more obsessed with global warming, more and more forest areas will be protected as carbon sinks to absorb the carbon. ... There will be less timber available for commercial use."

Among Canadian-listed timber plays, he has a "buy" rating on Sino-Forest Corp., the largest commercial forestry plantation owner in China, with a one-year target price of $31.50 (Canadian). "The Chinese can only supply half of their own wood requirements, so they have to import quite a bit," he said. "The Chinese logs ... are becoming more valuable."

TimberWest Forest Corp. (target, $20.50) is also on his radar screen, not only because of its timberland, but because it owns land on Vancouver Island that is being sold off for development. It is "a bit of a real estate play," he said. "Plus, you get a $1.08 distribution per year."

Acadian Timber Income Fund (target, $11.20) is a very pure play timber play, but he downgraded the income trust to a "neutral" rating after it reached his target. Acadian, 45-per-cent owned by Brookfield Asset Management Inc., owns timberland in Eastern Canada and the Northeastern United States.

U.S. timber REITs are "a good long-term asset but are trading close to peak valuations" because a lot of money has been chasing them, said analyst Steven Chercover of D.A. Davidson & Co.

The analyst has "buy" ratings on timberland plays like Potlatch Corp., with a target price of $55 (U.S.), because it is exploring a spinoff of its pulp-based business to boost shareholder value, and Rayonier Inc. (target, $52), which also has a pulp business that is offsetting weaker harvest volumes. He has a "neutral" rating on Plum Creek Timber Co. (target, $45).

Andrew Corn, founder of Clear Asset Management LLC, which designed the index tracked by the Claymore/Clear Global Timber ETF, acknowledged that the pure timber plays in the 27-stock fund "would be performing better" than its index as a whole.

But limiting the fund to timber plays would not allow the ETF to fulfill various regulatory requirements, such as the number of stocks needed in a fund, and not have global diversification, said Mr. Corn.

While the ETF lost 27 per cent since it was launched eight months ago, he suggested that investors not be too harsh on its performance, considering timber is a long-term investment. "It's a really short time in a lousy market to judge it."

Some North American-listed timber plays

Yesterday's 52-week 52-week One-year Three-year
Company name Symbol price high low return return
Sino-Forest Corp. TRE-T $16.39 $26.15 $13.22 - 4.0% 496.00%
TimberWest Forest Corp. TWF.UN-T $12.67 $18.28 $11.61 - 29.2% - 14.1%
Acadian Timber Income Fund ADN.UN-T $10.57 $12.70 $9.30 - 6.9% N/A
Potlatch Corp.* PCH-N $42.11 $50.50 $37.00 - 5.4% 11.20%
Plum Creek Timber* PCL-N $41.32 $48.45 $37.52 - 5.5% 9.50%
Rayonier Inc.* RYN-N $41.50 $49.55 $35.36 - 14.2% 16.10%

* in $U.S.



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