Timberland investment has become an increasingly attractive alternative asset class for diversification and inflation hedging. There are several ways investors can gain exposure to timberland assets. This article will explore investing directly in timberland, timber-focused funds and ETFs, timber REITs, and timber commodities like lumber futures.
Characteristics and benefits of timberland investment
Timberland offers stable cash flows from harvesting trees over long time horizons. The biological growth of trees provides a hedge against inflation. Timberland also provides portfolio diversification benefits due to low correlation with traditional assets. Large minimum investments, illiquidity, lack of pricing transparency, and exposure to natural disasters are risks to consider.
Investing directly in timberland
Acquiring timberland directly provides full control over assets but requires substantial capital outlay. Investors can buy existing timberland properties, provide financing for timberland acquisitions, or acquire timberland alongside an experienced operator through joint ventures and partnerships.
Timber-focused funds and ETFs
Timber funds pool capital from investors to acquire timberland assets. They provide exposure to portfolios of properties and professional management. Timber ETFs like WOOD track indices of timber companies and REITs. Funds and ETFs offer liquidity and lower investment minimums compared to direct investment.
Investing in timber REITs
Timber REITs like WY and RYN invest in timberland and pay dividends based on income from selling timber. REITs offer liquidity, professional management, and portfolio diversification. Investors can buy shares of timber REITs on public stock exchanges.
Trading lumber futures contracts
Lumber futures allow trading the price of timber commodities directly. Investors can speculate on lumber price movements and hedge timber investments. But futures require extensive research and active risk management. Physical delivery mechanisms also make them complex for novice commodity traders.
Timberland assets can be accessed through direct investment, funds and ETFs, REITs, or lumber futures. Each method has different liquidity, risk, and return characteristics for investors to weigh. Prudent timber allocation involves assessing portfolio needs and conducting due diligence into managers and properties.