Timber (lumber) is frequently viewed as an excellent portfolio diversifier and inflation hedge. Timberland investment refers to the purchase of land that tends to produce timber. In the United States, charitable trusts, pension funds, individual investors, and universities own millions of acres of timberland. Investors can own timberland through various investment vehicles (like stocks, bonds, and mutual funds) that have a shareholding in timberland.

How to invest in rising lumber prices

It can be challenging to invest in commodities stocks like lumber because prices can fluctuate for various causes, including geopolitical tensions, natural disasters, and market shocks like the COVID-19 outbreak.

Lumber prices have fluctuated recently. Early in May 2021, the price of lumber futures contracts increased by more than 200% over the previous year, reaching a record high of $1,711 per thousand board feet (MBF).

By August 2021, the price had fallen to about $400 per thousand board feet (MBF), but it had recovered to over $700 by October.

According to several analysts, lumber costs will keep rising through the beginning of 2022 as homeowners opt to enhance their current space rather than move because of low inventory levels.

There are two methods for investors to profit from a potential increase in lumber prices. They can invest in lumber stocks or buy a lumber-focused exchange-traded fund (ETF). Here's a closer look at the top 3 trading strategies focused on the timber industry.

3 Ways to Trade a Rise in the Timber Stocks

Global financial markets have started to be dominated by sideways trends. Many people point to chart patterns on leading companies in some of the most dominant sectors, such as technology and biotech, as evidence that the days of trending markets are now over. However, one sector that is defying this theory is the global timber industry.

• iShares Global Timber and Forestry ETF (WOOD)

This ETF is an excellent solution if you want to participate in the global timber market but are unsure about investing in specific companies. It provides exposure to businesses that make agricultural, packaging items, paper, and forest and agricultural products. Purchasing shares of this ETF during a drop is an excellent approach to increase your exposure to the timber market because it has 25 holdings, including reputable companies like Potlatch Deltic Corp, West Fraser Timber, and Weyerhaeuser.

Consider adding the iShares Global Timber & Forestry ETF to your buying list as another incentive to keep in mind that wood can be utilized as an inflation hedge. You can also add to your portfolio's income with its 0.85% dividend yield. This ETF has gained more than 21% year to date and is one of the most secure ways to increase portfolio exposure to timber products at this time.

• Weyerhaeuser Company (WY)

Given the current timber shortages, investing in Weyerhaeuser, one of the top integrated forest and agricultural product companies, can be wise. Since the company also controls more than 20 million acres of timberland. Weyerhaeuser's core industries include the production and distribution of wood and paper goods, as well as the planting and harvesting of lumber. Roughly 70% of the items produced by the company's wood products segment—hardwood and softwood lumber, veneer and plywood, engineered lumber, and composite panels—are used in modern residential construction.

Weyerhaeuser company recently reported Q1 net earnings of $681 million, $0.91 per diluted share, which was an increase of more than 354% over the net income of $150 million in the same period last year. Additionally, the company achieved its best quarterly Adjusted EBITDA in Q1 at $1.1 billion. This is another successful company gaining profits from residential building activity and progress with house repairs and remodeling, making it a fantastic choice to purchase the dip.

• West Fraser Timber Co. (WFG)

The West Fraser Timber Co. ETF is a diverse manufacturer of wood goods with over 60 locations in the U.S., U.K., Canada, and Europe. As a company that manufactures a variety of timber goods utilized in the housing market, including timber, laminated veneer timber, plywood, medium-density fiberboard, pulp, and wood chips, it presents investors with the ideal opportunity to learn more about this industry. West Fraser Timber is well-positioned to continue profiting from a hot real estate market because most of its products are used in industrial applications, residential building, maintenance, and remodeling.

If the Q1 earnings of West Fraser Timber are any indicator, it is evident that the company is benefiting from increased lumber prices. According to the WFG company, Q1 sales surged by 81% from the previous quarter to $2.3 billion, while adjusted EBITDA more than doubled to $1 billion. The fact that West Fraser Timber is an excellent company to think about adding to on dips is because the United States will continue to seek to import timber from Canada to meet the high demand.

The Bottom Line

Lumber and forestry companies are usually ignored due to the nature of their underpinning businesses. However, considering the sideways momentum of the equity market, it is a good time to focus on the reliable nature of soft commodities. West Fraser Timber Company, Weyerhaeuser Company, and iShares Global Timber and Forestry ETF appear well-positioned today for investors looking to gain exposure to timber.