Shipping ETF SEA Riding Global Recovery

September 13, 2013

The rising tide of the shipping industry is lifting SEA’s returns and asset inflows.

The shipping industry is finding smooth sailing after a few years of rough seas. The exchange-traded fund industry’s only pure play on an industry so central to global commerce, the Guggenheim Shipping ETF (SEA | B-47) is reflecting the shifting fortunes of the global economy.

SEA’s returns have been solid in the past year thanks to rising raw material demand from the second-largest economy in the world, China, and flows into the $43 million fund have clearly been accelerating this summer. SEA isn’t the only indicator of the global economy’s improved prospects, and it’s not the most important, either. But it’s a viable play on the global recovery.

Indeed, the widely followed Baltic Dry Index—which tracks global freight rates for ships carrying dry-bulk commodities such as coal, iron ore and grain—finished Wednesday 4.6 percent higher, lifting it to its highest closing since January 2012, according to the Wall Street Journal. It has risen 36 percent this month alone.

The index provides an assessment of the price of moving the major raw materials by sea, and is also seen as an economic indicator of future economic growth and production. Not surprisingly, the index hit an all-time low in the autumn of 2008, after Lehman Brothers collapsed and the global economy had to be put on life support.

But China’s raw materials consumption is now picking up again after slowing earlier this year, boosting commodity prices and shipping rates and spelling positive inflows for SEA, which tracks the Dow Jones Global Shipping Index.

The index allocates about two-thirds of the portfolio to “industrials” and the other third to energy, which suggests that, roughly speaking, around two-thirds of SEA’s holdings are likely to reflect what the Baltic Dry Index seeks to represent. In other words, there is a correlation between the fund and the index, but it is imperfect.

In any case, the ETF has taken in $12.87 million year-to-date through Sept. 11, and $7.6 million from Aug. 1 through Sept. 11, according to data compiled by IndexUniverse.

Also, the fund’s share price, which closed at $19.75 on Thursday, is up by almost 7 percent in the past month, 22 percent this year and 31.5 percent in the last 12 months.

Jim Corridore, senior associate director, equity research at S&P Capital IQ, added that the pickup in activity in China, along with improved global economies in other regions, is going to fuel increased shipping activity.

“We think we’re at the start of a very slow, bouncing-along-the-bottom, steadily improving global economy, led by the U.S., acceleration in China and the eurozone finally picking up,” he said.



Tread Lightly

Paul Baiocchi, senior ETF analyst at IndexUniverse, said that the Baltic Dry Index “has been on fire lately, but there hasn’t been a perfect correlation between the fund and the index because the fund is only up 12 to 14 percent over the past month.”

Baiocchi harkens back to the dark days of last decade’s financial crisis as a reason investors should be leery of the recent run-up of the shipping indexes and SEA.

Between January 2006 and October 2007, the Baltic Dry Index increased more than 400 percent, according to a report released by the Federal Reserve Bank of St. Louis in March 2009. This steady rise was largely due to the significant growth in the global economy for manufactured products.

But the index declined sharply to 6,052 points by late January 2008, only to rise again, this time reaching an all-time high of 11,440 points in June 2008.

“The increase in the BDI could be attributed to the surge in crude oil prices, which had increased by more than 52 percent in the first five months of 2008 to $140 per barrel at the end of June,” according to the report.

However, a sharp slowdown in industrial production worldwide, and the consequent decline in oil prices, contributed to a precipitous decline in the BDI. As of Nov. 31, 2008, the index was at 715 points—a 94 percent drop from its June 2008 high and its lowest level since January 1987.

“One thing I think that’s holding it back is that when we had the credit crisis in 2008-2009, these shipping stocks got absolutely clobbered because they finance in very-short-term increment agreements between shippers and their customers to control goods between the time they get put on a ship to the time they arrive,” said Baiocchi.

On A Different Track

Other transportation-bent ETFs are also performing well this year, although they inhabit a different corner of the market. Investors have injected $25.2 million so far this year through Sept. 11, the $46 million SPDR S&P Transportation ETF (XTN | B-58), which is up 43.67 percent in the past 12 months.

However, the fund, which tracks the S&P Transportation Select Industry Index, redeemed $10.3 million from Aug. 1 through Sept. 11, according to data compiled by IndexUniverse. The trucking sector currently makes up the fund’s biggest allocation at 35.30 percent, while the marine sector amounts to just 3.91 percent.

Also, the $631.7 iShares Dow Jones Transportation Average ETF (IYT | B-72) has experienced recent inflows of $75.8 million from Sept. 1 through Sept.11, but has suffered outflows of $98.7 million this year through Sept. 11. The fund is up by almost 25 percent this year.

The fund tracks the Dow Jones Transportation Average Index, and while it allocates 30 percent of its portfolio to railroads securities, only 8.72 percent of its assets are in the marine sector.

In comparison, SEA tracks not the Baltic Dry Index, but, as noted above, the Dow Jones Global Shipping Index, which also measures the stock performance of high-dividend-paying companies in the global shipping industry.


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