The inflation numbers, as reported by the government, remain at acceptable levels for the Federal Reserve and investors. However, does anyone really believe that inflation, as measured by the consumer price index (CPI), increased by only 2.9% over the last 12 months?
As consumers, we regularly go to the grocery store and fill up our tanks with gasoline. The prices of many food items have increased in the double-digit percentages over the last year. Some example of price increases includes coffee (+31%), peanut butter (+22%) and flour (+16%). And there is no denying the rise in gas prices, which have doubled since Obama took office in 2008. In my opinion, inflation is here and will only increase in the coming years. (For more, see Earning Forecasts: A Primer.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Timber Hedge
When it comes to hedging investments during an inflationary period, the fan favorite is often buying gold of Treasury Inflation Protected Securities (TIPS). While both should outperform the overall market during high inflationary times, one often-overlooked sector is timber and land stocks.

As inflation increases, the value of the land will also increase, thus making the companies that own the timberland a place to put money was the value of your dollars are declining. Investors could go out and buy some timberland and sit on it until the value rises, but that requires large amounts of cash and a lot of time and effort.

Another option is timberland stocks and ETFs that will be less costly and are liquid in that they can be sold on the open market for a minimal fee.

Timber ETFs
The iShares Global Timber & Forestry ETF (Nasdaq:WOOD) is composed of 24 of the largest publicly traded companies in the forest and timberlands industry. Half of the allocation is invested in stocks based in the U.S., followed by 18% in Scandinavian countries. The top holdings are Weyerhaeuser (NYSE:WY), Rayonier (NYSE:RYN), and Plum Creek Timber (NYSE:PCL). The expense ratio is 0.48% and the 30-day SEC yield is 2.8%. Year-to-date the ETF is up 14%.

The Guggenheim Timber ETF (ARCA:CUT) is composed of 31 stocks. The U.S. accounts for 40% of the ETF, followed by Japan with 18%. The top ten holdings have some overlap with WOOD. However, there is a heavier concentration of international holdings in CUT. The expense ratio is 0.65% and its dividend yield is 2.05%. The ETF is up 11.5% in 2012.

Timber REITs
A real estate investment trust (REIT) that owns timberland is an investment option that also offers an above-average yield. Both RYN and PCL are considered REITs that have a majority of their business coming from the timberland and products produced from that land.

RYN started out 2012 with a bang, rallying to its best level ever in mid-January before pulling back to support in the last six weeks. The $43 to $44 range is support for the stock, which has been able to hold above as it consolidates. The stock pays a 3.6% dividend and has a $5.4 billion market capitalization.

PCL also started out 2012 strong before pulling back to a support level. The major difference is that PCL remains well below its 2008 all-time high. That being said, the chart is bullish and an entry between $38 and $39 gives the investment a high reward-to-risk setup. The stock pays a 4.2% dividend.

The Bottom Line
The upside to investing in the timber sector is that inflation is almost certain in the near future and the charts are bullish. There are also the above-average dividends and the ability of the sector to join in on an overall equity rally. On the flip side, if inflation never creeps its way into the mainstream, it could hold back the sector. There is also the risk of a complete global slowdown that would hurt demand for paper goods that come from timberlands. Right now, the pros outweigh the cons. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  6. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  9. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Oil&Gas Explor&Prodtn

    Learn about the iShares U.S. Oil & Gas Exploration & Production ETF, which provides an efficient way to invest in the exploration and production sector.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... 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. 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 >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
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!