Shipping ETF In Focus: Choppy Seas Ahead?

September started off on a solid note for the shipping industry, which was under stress over the last few years on macroeconomic headwinds and declining rates. The industry is bouncing back strongly with rising freight rates on the back growing shipments and a slowdown in new ship construction.

This is especially true given the rally in the Baltic Dry Shipping Index, which is a measure of the costs to ship raw materials by sea. The index jumped to a four year high, climbing over 45% over the past one month.

Improving Fundamentals

China, the world's largest shipmaker by tonnage, has seen nearly 156% year-over-year increase in new ship orders in the first seven months of this year.

This is because rising steel production and prices are attracting iron ore (a major component of steel) purchases by Chinese steel mills, leading to growing demand for shipping vessels. Iron ore imports in China grew 11% in August, followed by 17% in July.

The price of steel is likely to rise given the lack of Fed tapering, as commodities could see a boost in this environment.

Further, commodities such as corn and soybeans recently saw increase in prices. As a result, exports for these commodities through ship vessels would climb to record levels by the end of the year, according to the projection by the US Department of Agriculture.

Overall, the increase in shipments of iron ore, coal, grains, minerals, soybean and corn would raise freight rates across the globe, greatly benefiting the shipping industry as a whole.

ETF Angle

In such a backdrop, the main ETF tracking the industry has performed extremely well this year. The Guggenheim Shipping ETF (SEA) gained nearly 6.5% in the past one month and delivered outsized returns of over 24% in the year-to-date time frame. This return clearly outpaced the broad market fund, SPY, and other products in the industrial space by a wide margin.

We think the SEA could be poised for a further surge in the coming months, based on both technical and fundamental factors described below:

Technical Look

The fund currently made its new high of $19.90 and its short-term moving averages have managed to stay above long-term levels. The 9-Day SMA is now comfortably above the longer-term 200-Day SMA, suggesting continued bullishness for this ETF.

Meanwhile, the ETF has seen an increase in trading volume of late further confirming the uptrend in the fund. This is further confirmed by an upswing in the Parabolic SAR, although this figure should definitely be monitored closely.


Fundamentals
The product 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, as company-specific risk runs high.

The top firm – AP Moller – holds about 19.90% of the assets while Nippon Yusen and Sembcorp Marine take the next two spots at 9.56% and 5.54%, respectively. In terms of country exposure, the United States takes the top position with 22.05% share, closely followed by Denmark (20.64%) and Hong Kong (14.30%).

Currently, the ETF is under-appreciated and unloved by many investors as indicated by its AUM of only $42.7 million and average daily trading volume of just under 31,000 shares. The product charges 65 bps in fees and expenses.

Bottom Line
The shipping ETF could be poised to surge throughout the rest of the year given its impressive performance and improving global conditions. The space has bounced from its lows and continues to trend higher on better demand/supply fundamentals.

As such, we recommend investors focus on this ETF as it is a barometer for global demand and overall economic health, and it could be well positioned to add to gains in the months ahead, thanks to strong technical and fundamental factors at play in this often overlooked corner of the market.

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