There are three primary diversification characteristics embodied by Claymore's new ETF, the Claymore/Clear Global Timber Index ETF (AMEX: CUT): capitalization; international diversification; and, correlation. Potential investors must realize that the fund, when added to a portfolio as a diversification instrument, generates these characteristics by interaction with other investments: by itself, it is a non-diversified timber and paper/pulp-products fund.
Firstly, the ETF is not solely comprised of large capitalization companies. In fact, a full 77.5% of the ETFs holdings represent small- and mid-cap corporations. For those with ETFs or individual equities focusing principally on large caps, the following breakdown will offer a modicum of diversification:
- Small-cap: 33.03%
- Mid-cap: 44.47%
- Large-cap: 22.50%
Secondly, the ETF's holdings are concentrated in markets primarily outside of the United States (73.6% ex-US). While holdings may vary, and while it is understood that these companies do business around the world, and not only in their parent markets, Claymore currently divides its 27 holdings among: North America: 39.65%
- Europe: 27.00%
- Australasia: 19.85%
- South America: 9.00%
- Africa: 4.50%
Specifically, CUT's national allocations equate to:
- United States: 26.4%
- Canada: 13.25%
- Japan: 11.50%
- Finland: 9.00%
- Brazil: 9.00%
- Sweden: 9.00%
- Australia: 5.95%
- South Africa: 4.50%
- Spain: 4.50%
- Ireland: 4.50%
- Hong Kong: 2.40%
The three largest holdings include Grupo Empresarial at 5.36% (an Iberian and South American integrated forest and wood processing company traded on the Madrid Exchange as M: ENC), Sino-Forest Corp at 5.07% (a Chinese commercial forestry plantation operator traded on the Toronto Exchange as T: TSE), and Mead Westvaco Corp (NYSE: MWV) at 5.03% (a packaging company with global reach anchored in the US and traded as). Rounding out the top five includes Votorantim Celulose e Papel SA (NYSE: VCP) at 4.89% (a Brazilian pulp and paper producer), and Oji Paper Group (OJIPF.PK)) at 4.60% (a Japanese pulp & paper, and converted products, producer traded on the pinksheets.)
Thirdly, timberland, which reveals commodity-like characteristics in that it can be harvested, warehoused (literally, or remaining unexploited), delivered, and regrown has, provided unique correlation figures for the years 1987-2006. According to the National Council of Real Estate Investment Fiduciaries, NCREIF, timberland's highest positive correlations are to the S&P500, and to the CPI, or inflation, at ~0.40. Conversely, its greatest negative correlation is to the National Association of REITs, and to general real estate, at ~ -0.10 and ~ -0.27, respectively. For those who believe that timber is very similar to real estate, the NCREIF offers the following counterpoint:
Although both [timber and real estate] use real property, or land, to support income-generating activities, there are very few other shared economic attributes. Where land value for commercial property may comprise a significant percentage of total real property valuations, for timberland the percentage value of land to total property value is about ten percent. Other differences between 'traditional' real estate and timberland include (abridged):
- Timberland is a growing asset that requires low added capital over time relative to asset value; and,
- Prices for timberland are less volatile than commercial real estate as the economic cycle for timberland, from planning to harvest, is longer.
However, we must recall that while the Claymore/Clear Global Timber Index ETF represents timber – and a fair amount of it – it also represents paper/pulp-, packaging-, and industry-related chemical producers. Further, the components of timber are owned through companies servings as proxies, so none of the holdings are either timber futures or actual timberland. Thus, those previously mentioned correlations serve as guidance, not hard and fast locks on how this timber ETF will hedge your portfolio.
Still, there is a very real case to be made for allocating a portion of a well-crafted portfolio to this new ETF: diversification. From the market cap, international, correlation perspective, this ETF will allow investors access to a previously non-available class. Finally, as Binkley and Washburn note in "Do Forest Assets Hedge Inflation?", the land and growth components of timberland hedge inflation in the long run, but that due to log or stumpage price volatility, standing timber values do not, in the short term, hedge inflation" suggests that an investment in CUT is for the long term, and not a correlative play on other "hard asset" ETFs including mining, precious metals, and petrochemicals.
- Claymore Securities
- Campbell Group
- Bolsa Madrid
- Binkley, Clark S. & Washburn, Courtland L. in Land Economics. "Do Forest Assets Hedge Inflation?", Vol. 69, No. 3 (Aug., 1993), pp. 215-224
Disclosure: Author is long CUT.