Is Construction of Timber Focused Exchange Traded Fund Plausible in SAARC Countries With Reference to India?

Timber Based Financial Products

An exchange-traded fund is a hedging instrument against the risk of one specific stock, rather the return from it generates out of the concerned sector as a whole. As a result, not only institutional investors but also retail investors are benefited by it. Since investment in timber is immune to inflation, pays higher returns than do stocks, investment in land yields positive return even during recession and finally it is possible to invest in timber without physical possession of timber via investing in timber-focused exchange-traded funds (ETFs), the timber investment is increasingly receiving importance from the global investing communities. It can be proved that investments in the above products can enable an investor in portfolio diversification such as to achieve an equilibrium level of utility but the success of the investment depends on the financial and legal artifacts of the specific country. It is popular in the developed western countries. For example, in USA two popular timber funds are S&P Global Forestry & Timber Indexed Fund (symbol WOOD) and Timber ETF (symbol CUT). The proof is given below.

Suppose x is the weighted portfolio return in R. The investor’s utility is f(x). D is the set of constraints, for the time being, without any timber-focused ETF. If we now assume that timber-focused ETF is launched in the economy and the investor chooses to include it in her portfolio for diversification purpose, i.e. the ETF return moves in the opposite direction to all other returns, or it props up f(x) during slump and pulls down during boom thereby pushing the investor towards a steady state equilibrium f(x) = f(z)