Lumber futures have been soaring of late as wildfires in British Columbia have forced three big lumber producers to suspend operations.
About a third of total lumber supply in the US is imported from Canada and the province of British Colombia produces about half of Canada's lumber.
Lumber prices have also been rising this year this year due to ongoing trade dispute between the US and Canada over import duties on softwood lumber. The US government alleges that Canada improperly subsidizes lumber, giving Canadian producers an unfair advantage. The US government has started slapping tariffs as high as 30% on some lumber imports from Canada.
A stronger Canadian dollar also has impacted lumber shipments. The loonie has gained almost 10% against the U.S. dollar over the past six weeks.
Earlier this month, NAHB reported that builder confidence fell to its lowest level since late last year thanks to concerns about rising material prices, particularly lumber.
Timber companies benefit from rising lumber prices . Investing in timber makes sense from long-term perspective as well since timber has low correlation with other major asset classes. Timber also acts as an inflation hedge.
Another reason to be positive on timber ETFs is that Vanguard is planning to change the index for its ultra-popular REIT ETF-the Vanguard REIT ETF ( VNQ )--to a different index that includes timber REITs. Timber REITs are some of the top holdings in timber ETFs.