It seems like the market has returned to its old ways. News and headline risk seems to be driving market returns and broad indexes seem to whipsaw up or down each day. To put it bluntly, volatility has come back with a vengeance. Those huge price swings are a major issue when it comes to long term returns- not to mention being able to sleep well at night.

To that end, funds like the PowerShares S&P 500 Low Volatility (Nasdaq:SPLV) try to mitigate the price movements of the market and smooth out its volatility.

However, there is another way to get smooth, market beating returns without doing much beyond letting your investment grow. For investors, timber could be one of the best anchors for your portfolio.

Rising Values Over The Long Haul

While it is boring, timber is pretty exciting in terms of what it can do for your portfolio. Raw timberland and forest ownership have been great places to position long-term money over the years, as they have historically outpaced inflation. Part of the reason stems from the fact that when prices for lumber are low, companies can withhold harvesting logs. When prices rise, they not only profit on the higher log price, but they make more money per tree since the forest has grown. This renewable asset base has made timber an ideal investment for long-term investors who have decades to wait.

Adding in the fact that timber has a low correlation to other asset classes and the potential for market beating returns, and you start to really appreciate what owning some timberland can do for your portfolio.

According to the National Council of Real Estate Investment Fiduciaries' (NCREIF) Timberland Index, timber has managed to squash all other asset classes over the last 30 years or so. Looking at average returns from 1987-2009, timberland managed to post a 12% annual return. That hefty return managed to outperform the venerable S&P 500 as well as investment grade bonds and the broad commodity iShares S&P GSCI Commodity-Indexed Trust (NYSE:GSG). More importantly, the NCREIF index managed to do this with lower volatility as well. 

Going forward, those sorts of long term returns should continue as demand for raw lumber rises further, while supplies remain tight. Various governments continue to ban the logging of old growth forests and many already-logged forests in nations like Brazil have been converted to agricultural or pasture land. Yet, global demand for timber is skyrocketing. China alone saw its demand for lumber surge 35% as its housing market took off. 

Planting A Forest

Typically, timberland investing was restricted to large pension funds and institutional investors. However, investors now have the ability to add the asset class to their portfolios quite easily. A prime way is through the iShares Global Timber & Forestry ETF (Nasdaq:WOOD).

The ETF offers a broad way to play the entire spectrum of timber firms within one ticker. Currently, WOOD tracks 26 different global forestry-related firms -including Northbrook, Ill. paper products manufacturer KapStone (NYSE:KS) and Spokane, Wash. forest products REIT Potlatch (NYSE:PCH). The fund charges 0.48% in expenses and has a five-year annual return rate of over 15%. Likewise, the Guggenheim Timber ETF (NYSE:CUT) also provides a broad timber play as well. 

The only downside to the two ETFs is that they also include plenty of paper and container firms. That makes them less of a pure timber play. For that, investors should focus on the timber real estate investment trusts (REITs) like Atlanta's CatchMark Timber (NYSE:CTT). While not 100% timberland owners- as they own saw mills and other tree-based side businesses- they are significantly more correlated to the asset class than the previously mentioned ETFs.

One of the best could be industry stalwart Weyerhaeuser (NYSE:WY). The Longview, Wash.-based firm owns nearly 7 million acres of timberland in the U.S. and manages an additional 14 million in Canada. Likewise, Seattle rival Plum Creek Timber (NYSE:PCL) owns roughly 7 million acres. Together both firms are some of the largest timberland owners on the planet. What’s more is that both pay some pretty hefty dividends. The duo yields 3% and 4.2%, respectively.

Finally, midcap non-REIT players like Poulsbo, Wash.-based Pope Resources (Nasdaq:POPE) and El Dorado, Ark.'s Deltic Timber (NYSE:DEL) could be buy-out targets for larger firms looking to add acreage to their timber portfolios. If that doesn’t happen, investors are still treated to timber's long term outperformance- albeit on a smaller acreage scale.

The Bottom Line

Volatility is back with a vengeance in the stock markets and one of the best places to hide from that force is in the forest. Timberland investing has managed to produce stable and steady returns for decades. The previous picks- along with Jacksonville, Fla.'s timber REIT Rayonier (NYSE:RYN) –make ideal ways to add a swath of timber to your portfolio.

Related Articles
  1. Options & Futures

    Timber Investments Cut Down Portfolio Risk

    Timber's low correlation to other asset classes can enhance your portfolio's growth.
  2. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  3. Savings

    Become Your Own Financial Advisor

    If you have some financial know-how, you don’t have to hire someone to advise you on investments. This tutorial will help you set goals – and get started.
  4. Investing Basics

    6 Reasons Hedge Funds Underperform

    Understand the hedge fund industry and why it has grown exponentially since 1995. Learn about the top six reasons why the industry underperforms.
  5. Mutual Funds & ETFs

    Top Three Transportation ETFs

    These three transportation funds attract the majority of sector volume.
  6. Investing Basics

    Tops Tips for Trading ETFs

    A look at two different trading strategies for ETFs - one for investors and the other for active traders.
  7. Mutual Funds & ETFs

    Top 4 Investment Grade Corporate Bonds ETFs

    Discover detailed analysis and information about some of the top exchange-traded funds (ETFs) that offer exposure to the investment-grade corporate bond market.
  8. Mutual Funds & ETFs

    Top 5 Emerging Market ETFs

    Find out which emerging markets ETFs have enough of an asset base, trading volume and low fees to be considered top choices in the segment.
  9. Mutual Funds & ETFs

    How to Profit From Market Volatility Using ETFs

    Volatility funds offer exposure to high greed and fear levels while avoiding predictions on price direction.
  10. Mutual Funds & ETFs

    The Best Currency ETFs

    We look at the best currency ETFs for gaining exposure to various global currencies, based on daily volume and performance.
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  5. Is there a situation in which wash trading is legal?

    Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>
  6. Are there leveraged ETFs that follow the retail sector?

    There are many exchange-traded funds (ETFs) that track the retail sector or elements of the retail sector, and some of those ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!