ETF Winners And Losers On Trump's Canadian Timber Tariff

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Includes: CUT, EWC, FXC, ITB, WOOD, XHB
by: Zacks Funds

U.S. President Trump has announced plans to slam a tariff of up to 24% on imports from the Canadian softwood lumber industry. The Trump administration indicated that it would levy countervailing duties ranging from 3% to 24.1% on Canadian lumber producers, as reported by Bloomberg.

In any case, Trump has always been vocal about renegotiating the North American Free Trade Agreement - or totally removing it. The agreement had tied up the U.S., Canada, and Mexico for more than two decades. The deal permitted manufacturers and farmers to do seamless business. Now, this agreement may be threatened as Trump intends to bring jobs offshored to countries like Mexico back to America.

As of now, Canada intends to protect its lumber industry and may even resort to litigation to fight this newly-announced import tax policy, as per the source.

Market and ETF Impact

Timber ETFs at New 52-Week High

Along with several traders, we also believe the action, if it materializes, may lead lumber prices to scale up, as lumber imports from Canada will now become costlier. And domestic lumber companies may also be able to charge some price premium in the face of lesser foreign competition.

Investors saw two timber ETFs iShares S&P Global Timber & Forestry Index Fund (NASDAQ:WOOD) and Guggenheim MSCI Global Timber ETF (NYSE:CUT) hitting a 52-week high on April 25, 2017. In any case, these funds returned well in the last five trading sessions (as of April 25, 2017). CUT and WOOD were up 4.2% and 3.1%, respectively.

WOOD focuses on companies from around the world that are engaged in the ownership, management, or upstream supply chain of forests and timberlands, giving it exposure to forest product firms, REITs, and paper product companies. Despite its global focus, almost half of the total assets (43.87%) are in the U.S., followed by 10.61% in Canada and 10.42% in Japan. The annual fee comes in at just 47 basis points.

CUT tracks the MSCI ACWI IMI Timber Select Capped Index, which is a benchmark that includes roughly 83 companies, that are engaged in the ownership and management of forests and timberlands and production of finished products which use timber as raw material.

The product puts nearly one-third of its assets in American securities (46.95%), while Finland firms make up over 11% of the fund. It charges 55 bps in fees.

Are Homebuilding ETFs at Risk?

Timber is highly correlated with the housing market, as timber and related products are required for new houses. As a result, along with many traders, we also think that higher timber prices should translate into higher home prices.

The NAHB estimates the new lumber tariff to push up Canadian lumber costs for U.S. customers by 6.4% and in turn raise the price of an average single-family home by $1,236, per an article published on CNBC.

This puts the focus on homebuilding ETFs like SPDR S&P Homebuilders (NYSEARCA:XHB) and iShares US Home Construction (BATS:ITB). The funds are performing decently, though, thanks to still-low interest rates, an improving labor market, and 10-year high existing home sales.

Canadian Currency Under Pressure

The Canadian dollar plummeted to a four-month low against the greenback, following the announcement of Trump's lumber tariff. Guggenheim CurrencyShares Canadian Dollar Trust ETF (NYSE:FXC) lost about 1% in the last five trading sessions (as of April 25, 2017).

Canada ETF not Free from Risk

As per an article published on CNBC, historically, a falling Canadian dollar weighs on its domestic stocks. A study conducted by CNBC on April 24, 2017 (taking data since April 2007) showed that iShares MSCI Canada ETF (NYSEARCA:EWC) lost about 1.69% on average when loonie lost 0.5% against the greenback.

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