Investors have been flocking to individual stocks like DryShips (DRYS) - Get Report to capture the upswing of the shipping industry, but the Claymore/Delta Global Shipping Index ETF (SEA) - Get Report may provide a safer opportunity.
As China's demand for steel continues to soar, investors are starting to move back into shipping. SEA is a good way to invest in this cyclical sector while minimizing the risks that come with picking individual shipping stocks.
SEA tracks the Delta Global Shipping Index, which measures the performance of companies listed on global developed markets within the maritime shipping industry. SEA's portfolio includes dry bulk goods and the leasing and/or operating of tanker ships, container ships, specialty chemical ships and ships that transport liquefied natural gas or dry bulk goods.
The fund's components are based on market capitalization and liquidity, factors that help promote liquidity in the ETF as a whole. SEA includes 30 holdings, with a 58.74% weighting in industrials and a 41.26% weighting in energy. The fund's expense ratio is a reasonable 0.65% considering that the fund is specialized.
While dry bulkers, including media favorite DryShips, have been grabbing the headlines lately, it is beneficial to SEA's investors that both dry ships and tankers are included in the underlying basket.
The demand for oil tankers tends to be relatively stable, as oil is used for many purposes across the globe. The demand for container ships fluctuates with the economy as consumers spend less money on goods like sneakers.
The demand for bulker ships fluctuates even more wildly and depends largely on demand in China and emerging markets in need of goods like steel. SEA includes a variety of shipping companies and ships in its portfolio, helping diversify investors in an inherently volatile industry.
The shipping industry has been driven recently by the demand for steel in China, met by giant ships ferrying the commodity from Australia and Brazil to China's shores. Rates for large Capesize ships jumped yesterday after 13 straight days of declines. Dry bulk shipping has been gaining momentum after being badly beaten down during the global economic crisis, and continued growth in China will undoubtedly help rates.
The top 10 holdings in SEA include:
Teekay LNG Partners
Alexander & Baldwin
Tsakos Energy Navigation
Ship Finance International
The most important ratio in the shipping industry is "bottoms" (the number of ships) to demand for transported goods. When there is more product than bottoms the rates go through the roof, and when there are more bottoms than cargo the rates go down to bare operating expenses.
Shipping is the most direct way to move necessary items like oil and grain from one country to another, so while the industry may fluctuate in the short term, the long-term need for these companies is unwavering. SEA provides investors with a tool to access the shipping industry without having to take a chance on a single company or single type of ship -- a valuable vessel in a volatile industry.
At the time of publication, Dion had no positions in the stocks mentioned.
Don Dion is the publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.
Dion is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.