Clients who want to branch out into commodities might consider timber ETFs.
Commodities funds have produced lackluster returns this year, losing 0.08% vs. a 16.22% gain for the Standard & Poor's 500 stock index. The top-performing commodities fund, Catalyst Hedged Commodity Strategy I (CFHIX), gained 7.16%.
But lumber prices have soared this year. The Random Lengths Framing Lumber Composite Index, has jumped from $357 the first week of January to $438 October 20, a 22.6% increase, according to the National Association of Home Builders. The index is constructed from prices at the highest-volume producing regions of the U.S. and Canada. CME futures prices have jumped from $315.30 to $427.50 the same period.
Behind the rise:
• The U.S. imposed tariffs of 3% to 24% on Canadian softwood in April, making imported lumber more expensive. "Canada is the world's largest lumber exporter, and the U.S. buys 80% of those exports," said Thomas Straka, professor of Forestry and Environmental Conservation Department at Clemson University.
• Hurricanes Irma and Harvey have slammed new home construction for now, but demand for lumber should increase as rebuilding picks up speed.
• Western fires have also increased the need for wood, particularly for rebuilding expensive California wine country homes.
The fires and hurricanes have also caused some huge supply issues, said David Logan, director of tax and trade policy analysis with the National Association of Home Builders.
"Wildfires in the Northwest took a lot of capacity offline and squeezed supply in a big way," he said. When Harvey hit Houston, it took out capacity in East Texas, and when Irma came, it did the same in the Southeast."
Seasonally adjusted housing starts, which hit an all-time low in April 2009, have been steadily climbing since. The Atlantic hurricanes hammered seasonally adjusted housing starts in September, falling 4.7% from 1.183 million units in August.
But confidence among builders remains strong: ""With a tight inventory of existing homes and promising growth in household formation, we can expect the new home market to continue to strengthen at a modest rate in the months ahead," said NAHB chief economist Robert Dietz.
Advisers have two strong choices for timber ETFs: iShares Global Timber and Forestry ETF (WOOD) and Guggenheim MSCI Global Timber ETF (CUT). The funds are up 30.72% and 25.18%, respectively, according to Morningstar. Both track global timber companies and REITs, such as Weyerhaeuser (WY), Plum Creek Timber (PCL) and Rayonier (RYN).
Naturally, a housing collapse would fell many of these companies' earnings. But when timber demand slows, companies cut fewer trees — and the ones left simply grow larger. And, while clients may see timber as an inflation hedge, it's also a global growth industry.