Shipping ETF Sails Higher as Baltic Dry Index Rebounds

The Baltic Dry Index gained notoriety before and infamy during the global financial crisis. Few investors realize the Baltic Dry Index has existed, in some form, for nearly 200 years. After the index garnered almost everyday mentions in the mainstream financial press during the crisis, it is fair to say at least few investors know it is a gauge of the costs of shipping various raw materials around the world. The index measures daily charter rates for pricing on Handysize, Supramax, Panamax, and Capesize dry bulk carriers that haul an array of commodities such as coal and iron ore. Said another way, the Baltic Dry Index itself is not a tradeable security, but it can be a good gauge of risk appetite. And since the Baltic Dry Index (BDI) cannot be traded, investors can turn to the Guggenheim Shipping ETF SEA as a way of expressing their views on the global shipping sector. The Guggenheim Shipping ETF, does not track the BDI. Rather, the ETF's underlying index is the Dow Jones Global Shipping Index. Still, the fund is home to 26 shipping, many of which are impacted by the daily charter rates that are derived from the BDI. Last year, SEA and its constituents dealt with a global a supply glut, among other issuers. Predictably, that weighed on the ETF and sent the BDI from around 1,165 in July to 750 in December. The new year has brought better performances for both BDI and SEA. Year-to-date, the index has gained 8.73 percent, according to Bloomberg data. Indicating that SEA and the BDI are not perfectly correlated, the ETF is up "just" 3.72 percent to start the year, but SEA's rally started before 2013 was rung in. SEA has trending higher for several months and is up 12.5 percent in the past 90 days. Buoyed in part by rising iron ore prices, a direct result of China's improving economy, rates for Capesize vessels are approaching $5,000 per day. Those are the vessels that ship coal, iron ore and related fare. There is speculation that Chinese iron ore supplies have dwindled to multi-year lows, which should be good news for SEA. However, there is a cautionary tale to acknowledge with this ETF. SEA is not entirely correlated to dry bulk demand. In fact, the ETF is more of an energy play as some of its constituents such as Frontline FRO and Nordic American Tanker NAT are oil tankers or shippers of liquefied natural gas. SEA's exposure to shippers of energy commodities could mean one of two scenarios could play out. Either the ETF is acting as a forward-looking indicator and has started to price in robust global oil demand this year and the fund will surge further. Or the fund has risen in anticipation of higher oil demand and if that demand does not materialize, the ETF is likely to falter yet again. Something else to consider before setting sail with SEA. The types of vessels operated by the ETF's constituents use what is known as bunker fuel. Knowing exactly what bunker fuel is not necessary, but knowing the price has noticeably risen over the past seven months is. Bottom line: Undoubtedly, SEA and its constituents are in better shape today than they were in 2009. They are probably better off than they were for the bulk of 2012 and the ETF has the potential to continue its bullish ways if global commodities demand supports a move to the upside. That said, small positions are perhaps the best way to participate in this ETF over the near-term. For more on ETFs, click here.