Jump Ship With This ETF

As if its more than 40 percent decline over the past year does not confirm as much, the Guggenheim Shipping ETF SEA has, pun intended, hit stormy seas. SEA's slide is not surprising. Waning emerging markets commodities demand has pressured the rates SEA's constituents can charge.

Then there is all the chatter about the tumbling Baltic Dry Index, but investors should note SEA is not as correlated to that index as some think. The ETF follows the Dow Jones Global Shipping Index, which can hold American depositary receipts (ADRs), global depositary receipts (GDRs) and master limited partnerships (MLPs), according to Guggenheim. 

The reality is SEA is more tightly linked to the Baltic Dirty Index and that reality is not encouraging. Companies that build oil tankers are faced with double quagmire: Rising steel prices and falling resale prices for their ships. That doesn't even take into account oil demand that arguably isn't where it should be at this point in the economic recovery.

Now, notable investors are growing concerned about the outlook for shipping companies.

“Private equity is turning its back on shipping after a glut of funding over the last five years contributed to overcapacity in the industry, according to Andrian Dacy, the head of JPMorgan Asset Management’s Global Maritime business,” according to Bloomberg. 

There is another fundamental issue plaguing SEA: Exposure to Greek stocks. The ETF devotes 10 percent of its weight to Greek stocks, one of the largest such allocations aside from the Global X FTSE Greece 20 ETF GREK. Of course, it should be remembered that the Global X FTSE Greece 20 ETF is down more than 55 percent over the past year.

Combine the aforementioned factors and it is understandable why SEA trades with a price-to-earnings ratio below nine and a price-to-book ratio of 0.7. However, that might be more value trap than value, particularly at a time when pros may be compelled to depart the shipping sector.

“Investment firms including WL Ross & Co., Oaktree Capital Group LLC scooped up vessels at near record-low prices since 2010, intending to ride a global recovery in shipping that has so far failed to materialize amid a sustained slump in the container and bulk-carrier markets,” according to Bloomberg.