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 (NYSE:
) 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
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
Buoyed in part by rising iron ore prices, a direct result of
China's improving economy,
rates for Capesize vessels are approaching $5,000
. Those are the vessels that ship coal, iron ore and related
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
) and Nordic American Tanker (NYSE:
) 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
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
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
For more on
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