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. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  2. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  3. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  4. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  5. Mutual Funds & ETFs

    Pimco’s Top Funds for Retirement Income

    Once you're living off the money you've saved for retirement, is it invested in the right assets? Here are some from PIMCO that may be good options.
  6. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  7. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  8. Mutual Funds & ETFs

    ETFs Can Be Safe Investments, If Used Correctly

    Learn about how ETFs can be a safe investment option if you know which funds to choose, including the basics of both indexed and leveraged ETFs.
  9. Mutual Funds & ETFs

    The Top 5 Large Cap Core ETFs for 2016 (VUG, SPLV)

    Look out for these five ETFs in 2016, and learn why investors should closely watch how the Federal Reserve moves heading into the new year.
  10. Investing News

    This Is Why Every Chipotle Is Closed for One Day

    Chipotle Mexican Grill Inc. (CMG) has had a rough year when it comes to food safety. Management is hoping that closing all locations for a company-wide meeting Monday will help resolve the issues ...
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center