Shipping ETF (SEA) Off To A Hot Start

by on February 3, 2010 | ETFs Mentioned:

With barely more than a month in the books, 2010 is shaping up to be a bipolar year for global equity markets. After surging ahead in the first week and a half of January trading, a sharp pullback handed many benchmarks one of their worst monthly performances since the recovery began. But when the calendar turned to February, equities took off again on a mini-rally.

January’s big sell-off has left many equity ETFs trying to get back to break-even on the year. Of the 559 non-leveraged, non-inverse ETFs in the ETF screener, only about 100 are up year-t0-date, and there are some surprising names at the top of the list. Banking funds have surged in the first month of the year, as have certain emerging and frontier markets (Turkey and Colombia are among the top performing equity markets so far). Also near the top of the list is the Claymore/Delta Global Shipping Index ETF (SEA), an ETF designed to offer exposure to the global shipping industry.

Under The Hood Of The Shipping ETF

The cleverly-named SEA is based on the Delta Global Shipping Index, a benchmark that measures the performance of the maritime shipping industry. Included in this  segment are companies deriving at least 80% of revenues from 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 (“LNG”) or dry bulk goods.

Seaspan Corp., which charters containerships to major liner companies, is SEA’s largest holding. Also given significant weights are General Maritime Corp., owner of a large crude oil tanker fleet, and Teekay LNG, which provides LNG, LPG and crude oil transportation services. SEA invests primarily in developed markets, with Greece (18%), the U.S. (13%), and Japan (10%) accounting for the largest portions of the fund. The fund is tilted towards small cap stocks, which account for about 70% of SEA.

The index underlying SEA utilizes a modified dividend weighting methodology, meaning that shipping stocks paying higher dividends are generally given a higher weighting (although the maximum allocation to a single security is capped at 4%).


Shipping Industry On The Rebound?

The global shipping industry has historically been cyclical in nature, rising during economic booms as shipping rates and commodity prices jump and falling when demand for raw materials drops. The shipping industry was pummeled during the recent economic downturn, as factories idled shifts, inventories accumulated, and a freeze in the credit market translated into delayed payments for maritime transportation companies. Between its launch in September 2008 and the bear market lows less than six months later, SEA lost more than two-thirds of its value.

But over the last year, the shipping industry has been bolstered by a jump in demand for raw materials from emerging markets, as massive stimulus plans in in particular has led to increasing infrastructure needs. As transport between the resource-rich economies of  Australia and South America have increased, the global shipping industry has been one of the primary beneficiaries. Kerri Shannon notes that there are reasons to be bullish on the near-term outlook of the shipping industry, citing the recent uptick in the Baltic Dry Index, a measure of worldwide international shipping prices of various bulk cargoes.

After hitting a high of nearly 11,800 in May 2008, the BDI dropped by more than 90% in the following seven months. “Now, the BDI has climbed back to over 3,000, meaning customers are paying more than they were a year ago to ship materials across the globe,” writes Shannon. “Transpacific shipping lines, mostly consisting of container ships servicing trade to and from Asia, are already reporting vessel use in the mid-to-high-90% range and expect a significant increase in volumes for 2010.”

Even after the big run-up to start the year, SEA still looks attractive from a valuation perspective. The ETF’s weighted average price-to-earnings ratio of 13.6 is well below the broad market, and a price-to-book measure of just 1.2 times screams value as well. But there are some reasons to be cautious as well. China is expected to tighten monetary policy in an effort to reel in inflation and prevent another asset bubble, a move that could have a major impact on the country’s demand for raw materials.

For more looks under the hood of ETFs, sign up for our free ETF newsletter).

Disclosure: No positions at time of writing.