Over the past couple of years, the shipping industry has been under pressure due to an endless spiral of macroeconomic headwinds and declining rates. A drastic decline in trade shipments and excess capacity has plagued the industry to a large extent, throwing supply and demand out of balance in this market.
But now, shipping appears on the path to recovery thanks to an upswing in the markets. This is reflected by a bit of a recovery in the Baltic Dry Shipping Index over the past few months (read: Guide to Transportation ETF Investing).
This benchmark, which is a measure of the costs to ship raw materials by sea, is up about 15% so far in the year, leading many to believe that the worst might be over for the industry. In fact, the index has gained about one-fourth of its value since its 12-month low.
Reasons for the increase
While capacity constraints, the ongoing turmoil in Europe, a slowdown in emerging markets and stringent regulations might act as headwinds, there are plenty of reasons to be optimistic about the sector. Growing industrial production, stabilizing container freight rates and improving global trade conditions are all boosting the industry and its outlook going forward.
In fact, China, the world's largest shipmaker by tonnage, has seen a 71% year-over-year increase in new ship orders in the first quarter, surpassing South Korea and Japan. This marks an impressive jump from the 44% decline in 2012.
Further, the demand for the fuel-efficient ships is on the rise due to stringent emission requirements and rock-bottom freight rates. Fuel, which accounts for 20% of the total cost, has also held steady this year (read: 4 Ways to Short Oil with ETFs).
The shipping industry is also considered a barometer of the broad market. When transports surge it generally a leading indicator, at least according to the Dow Theory, suggesting that when transports and industrials are moving to new highs it signals great things for the market ahead (read: Two Sector ETFs Posting Incredible Gains).
So now with shipping on the verge of turning the corner, it appears that investors are becoming optimistic on the sector. As such, a look into the shipping ETF could be a great idea with the Guggenheim Shipping ETF (SEA).
The fund, which turned out to be among the worst performers in 2012, is seemingly gaining traction. The ETF has gained more than 9% in the year-to-date timeframe and has a solid yield at 2.31% per annum.
Launched in November 2010, the ETF tracks the Dow Jones Global Shipping Index, which measures the stock performance of high dividend-paying companies in the global shipping industry. Holding 26 securities in its basket, the fund is guilty of concentration, with company-specific risk running high.
The top firm - AP Moller – holds about 15.52% of the assets while Mitsui Osk Lines and Nippon Yusen take the next two spots with more than 8.5% share each. Other securities hold less than 5% share in the basket (see more in the Zacks ETF Center).
In terms of country exposure, United States takes the top position with 20.66% share, closely followed by Denmark (19.84%) and Japan (15.46%).
The product is unpopular with just $34.6 million in AUM and roughly 29,000 shares in average daily volume. This suggests that investors have to pay an extra cost in the form of a wide bid/ask spread beyond the expense ratio of 0.65%.
Despite some of the negatives surrounding the fund and the industry, shipping could be poised to surge later this year. The space has bounced well off its lows and a strong performance is generally necessary from this space in order to have a truly booming economy. So, look to this ETF as a barometer for global demand, and one that may continue to rebound if the economy picks up steam this summer.
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