How A Shipping ETF Jumped 120% To Become The Biggest Trade Of The Recovery

How A Shipping ETF Jumped 120% To Become The Biggest Trade Of The Recovery
Stéphane Renevier, CFA

almost 3 years ago3 mins

What’s going on here?

The best investments aren’t always the sexiest. While investors debate whether space travel or lab-grown meat is the next big thing, one unglamorous exchange-traded fund (ETF) tracking the cost of shipping raw materials has more than doubled since the beginning of the year – and with its underlying index still 80% below all-time highs, further progress could remain in store.

Last quarter’s best-performing non-leveraged ETFs (Source: ETF.com)
Last quarter’s best-performing non-leveraged ETFs (Source: ETF.com)

What does this mean?

Ever Given any thought to how companies move industrial goods around? The Baltic Dry Index (BDI) tracks the cost of transporting “dry” raw materials by cargo ship along more than 20 major routes around the globe. Vessels the length of three football fields – and often just a little wider than the Suez Canal – are constantly carrying unpackaged commodities like grain, coal, iron ore, and steel, and the BDI keeps tabs on how much that’s setting their owners back.

Source: Breakwave Advisors
Source: Breakwave Advisors

The index, updated daily, represents the average cost of shipping cargo across these various routes, slightly weighted towards those plied by the largest vessels. Prices are determined by supply of and demand for space on dry bulk carriers, with a rising BDI a reliable sign of strong demand from commodity buyers needing more raw goods for industrial production. Interestingly, the market is almost exclusively driven by actual shipping and commodity trading specialists, rather than speculative investment.

That said, there’s a way for even small-scale retail investors to get exposure to this niche market? The Breakwave Dry Bulk Shipping ETF (ticker: BDRY) is the only ETF exclusively focused on this area. Instead of just owning shares of shipping companies, BDRY is a “commodity pool”: it buys freight futures contracts on dry bulk indexes directly. And while it doesn’t exactly follow the movements of the BDI due to slightly different allocation methods, BDRY gets pretty close.

Why should I care?

Governments around the world are currently planning fiscal stimulus in the form of big investments in infrastructure projects. Since the raw materials required are often extracted overseas, demand for dry bulk shipping has risen, outstripping supply and pushing up prices. After all, it takes months to draw up spending plans – but years to build a new ship.

BDI

The big question is whether, after rising 120% in three months, BDRY still has further to climb. My own view is that it does – although a repeat of the BDI’s mid-2000s antics is unlikely.

Today’s economic environment looks encouraging for global trade. The release of massive pent-up consumer demand, combined with the record infrastructure investment mentioned above, should lead to a greater appetite for raw materials and therefore higher shipping costs. And while that’s already reflected in many commodity prices, I think shipping rates have yet to fully adjust.

BDRY also offers investors attractive diversification. It’s a different angle on the global recovery trend and could help you avoid overconcentration in, say, energy and industrial stocks. Still, it’s important to remember that this sort of play is just as vulnerable to a resurgent virus or any other threat to economic growth.

What’s more, easy access to such an obscure market comes at a relatively high cost. The ETF has an annual expense ratio of around 3.2%, and a pretty wide bid-ask spread given its low liquidity. BDRY isn’t for everyone – and it’s definitely more suited to a medium-term tactical trade than a long-term investment.

Even if you’re not interested in implementing the idea, however, you may still want to add the BDI to your watchlist of key economic indicators. Not only is it one of the purest and most transparent gauges of global growth, but it’s also available in real time, unlike traditional touchstones such as GDP and industrial production. Move over, Dr. Copper…

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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