Shipping ETF Takes on Water

NEW YORK ( TheStreet) -- Idle ships are sinking the Claymore/Delta Global Shipping ETF ( SEA), a fund that tracks companies within the global maritime shipping industry.

While demand for some types of vessels remains strong, the companies which comprise SEA's portfolio own and contract a broad range of ships, making the fund vulnerable to the recent draught.

Companies at the top of SEA's roster, like Seaspan ( SSW), Teekay Tank ( TNK), General Maritime ( GMR) and Euronav ( EURN), face a difficult climate in the wake of the global economic crisis as ready fleets outstrip demand in many sections of the industry.

SEA's underlying portfolio includes shipping companies that derive more than 80% of their revenues from one of the following segments of the shipping industry: the seaborne transport of dry bulk goods and the leasing and/or operating of tanker ships, container ships, specialty chemical ships and ships that transport liquid natural gas or dry bulk goods.

Strong demand for raw materials like steel has helped to keep bulk ships busy, but a drop in buyers of finished goods is keeping container ships stuck in harbors. According to a recent New York Times article, one tenth of the world's container ships are estimated to be idle.

Empty ships are clogging international ports as commercial vessels sit idle -- a trend that has not been missed by industry insiders. A recent report from the Baltic and International Maritime Council, an independent international shipping association, noted that, "the sheer number of ships currently swinging around their anchors either waiting to load or discharge throughout the month of January has been exceptional."

The shipping industry is prone to boom-and-bust cycles, and SEA has picked up some steam since December 2009 lows. For the one-month period ended Jan. 21, SEA is up more than 10%.

Exaggerated gaps in demand between bulk and container ships will make SEA an unstable investment in the short term, and investors should use other ETFs to access profitable areas of the shipping industry.

While SEA is a well-designed way to gain exposure to the shipping industry as a whole, supply issues make more targeted funds preferable investments in the months ahead.

Demand for raw materials like coal and steel, much of which are transported by the global maritime industry, can be accessed through funds like Market Vectors Steel ( SLX) and Market Vectors Coal ( KOL). These funds target companies that deal specifically with these raw materials.

Over the long haul, shipping companies will self-correct and investors will be safe to broaden their focus. When times get tough for global shippers, companies accelerate scrapping or selling off ships, and they postpone or cancel new build orders. Towards the end of 2010, this process should help many of SEA's holdings to rebound.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion owns Market Vectors Coal.

Don Dion is 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.

Dion also is 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.

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