Wednesday, July 1, 2009

Investors Seeking Real Estate Exposure Should Consider Timber ETF

The new MacroShares Housing ETF's (UMM) and (DMM) are a provocative new set of investment vehicles, offerring investors exchange traded access to house prices in major metropolitan areas. Although these new securities are intriguing from a conceptual standpoint, there are some specific aspects that may cause investors to pause; namely the 3X leverage, the up/down structure which last summer proved problematic in tracking oil, and the efficacy of tracking a monthly-updated-index with a daily fluctuating, exchange traded product.

As an alternative, it might make sense for investors to consider the Claymore/Beacon Global Timber Index ETF (CUT). The fund's fact sheet outlines the following criterion for a stock's inclusion in the underlying index:

"All stocks in the Index are selected from the universe of global timber companies. Clear Indexes LLC, the Fund’s index provider, defines global timber companies as firms who own or lease forested land and harvest the timber from such forested land for commercial use and sale of wood-based products, including lumber, pulp or other processed or finished goods such as paper and packaging."

Given the obvious role that lumber plays in the housing market, it seemed logical to us that there should be some correlation between CUT and the S&P Case/Shiller 10-City Composite. To test that theory out, we compared the price of the two between November 2007(date of inception for CUT) and April 2009(most recent Case-Shiller data). For the sake of this comparison, we used the price of the timber index ETF on the first trading day of each month.

With an r2 of 0.87, this obviously isn't a pure play on US housing prices; we would point out though that with the fund's global focus - only 32.15% of the fund's holdings as of 3/31/09 are US based corporations - an investor stands to benefit from any global uptick in building activity, regardless of whether the US is able to participate in said uptick.

*no position in any securities mentioned, please read the disclaimer at the bottom of this site

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