Make Money in Growing Timber and Paper Stocks the Easy Way

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Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the timber industry to prosper over time as our planet's population continues to grow and build, and you like the prospects for paper, as well, the Guggenheim Timber ETF (NYS: CUT) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The timber ETF's expense ratio -- its annual fee -- is 0.70%, which is a bit higher than many ETFs, but also considerably lower than the typical stock mutual fund.

This ETF has performed reasonably, but it's also very young, with just a few years on the books. It outperformed the S&P 500, on average, over the past three years, but is underperforming it so far in 2012. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

With a low turnover rate of 29%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
Several timber and paper stocks have had strong performance over the past year. Rayonier (NYS: RYN) , up 20%, is a timber-focused real estate investment trust, obligated to pay out most of its earnings in dividends. (Many companies in this arena are now REITs.) It recently yielded 3.5% and should benefit from an inevitable, eventual recovery in the global housing and construction market. (Note that paper-related companies do face a bit of a headwind, as electronic alternatives replace some paper needs and environmental concerns grow.)

International Paper (NYS: IP) , up 11%, actually sold off its timberland assets recently, focusing more on pulp and paper. It carries some not-insignificant debt, but it also seems very capable of managing that, and offers a dividend yield above 3%, as well. The company recently bought Temple-Inland, as well.

Other companies didn't do as well last year, but could have an effect in the years to come. Weyerhaueser (NYS: WY) and Plum Creek Timber (NYS: PCL) , down 8% and flat, respectively, will also benefit from a housing recovery, but that's not all. Like some of their peers, they're involved in more than mere lumber for construction, dealing in pulp, paper, packaging, and more. This kind of diversification can be helpful when one market is suffering. Yielding 4.2% recently, Plum Creek is a component of Jim Royal's "world's best dividend portfolio."

The big picture
Demand for timber, pulp, paper, and more isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

Learn aboutthe 5 ETFs That Could Soar in 2012. And if you're looking for some great investments beyond ETFs, consider these12 Dividend Stocks for 2012.

At the time this article was published LongtimeFool contributorSelena Maranjianholds no position in any company mentioned.Click hereto see her holdings and a short bio.You can follow Selena on Twitter@SelenaMaranjian.The Motley Fool owns shares of Plum Creek Timber and Weyerhaeuser and has created a covered strangle position on Plum Creek Timber. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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