Shipping ETF Up 230% This Year: What Lies Ahead?
Global economic recovery has brightened the demand outlook for all vessel categories, leading to a spike in the shipping rates this year. No wonder, Breakwave Dry Bulk Shipping ETF BDRY, which followsthe Capesize 5TC Index, Panamax 4TC Index & Supramax 6TC Index measure rates for shipping dry bulk freight, has gained 231% this year.
But it seems that the smooth sailing can be halted for the fund ahead. Shipping rates are at multi-year highs, but yet to reach the bull cycle peaks of the past, said Rashpal Bhatti, vice president of maritime and supply chain excellence at mining giant BHP, as quoted on CNBC.
A commodity boom is driving the prices as demand for shipping is high. Ultra-easy monetary and fiscal policies are driving global economic growth and the demand for goods. “Inefficiencies and port congestion could also contribute to increasing shipping costs,” per some analysts. This is happening because ships are getting held by Covid-19 quarantines.
But if inflation continues to rise as it is being a problem currently, governments may hike interest rates and “that could turn the business cycle and shipping cycle around”, one analyst said, as quoted on CNBC. The industry may not be up for a continued period of robust growth just yet. Mark Williams, managing director of Shipping Strategy, a maritime consultancy does not see this is super cycle but believes that “it has the potential to become one”, as quoted on CNBC.
He said rates for capesize vessels — the largest category of ships that carry dry cargo and raw materials such as grain, iron ore and coal — are hovering around the levels seen in mid-2019. Reuters recently that average daily earnings for capesizes were $31,880 — a jump of more than 10 times from February last year, if we go by the CNBC article.
What Are Silver Linings?
Fleet sizes are not expected to grow significantly in the next few years, per industry watchers, as noted by the CNBC article. No addition of new ships and the phasing out of certain older vessels should keep the fleet size low and freight rates higher. So, freight rates are likely to remain high, at least in the second half of 2021.
Mark Williams expects a “really firm market” in 2022 and sees a “very strong chance” of it continuing into 2023. Still, he believes that the industry is not yet in a supercycle.
Against this backdrop, investors can see the fund BDRY sailing smoothly in the near term. If Covid cases stabilize globally and economic improvement remains really material, BDRY could then sustain the rally for the long term.
BDRY in Focus
The fund offers investors unlevered exposure to dry bulk freight without the need for a futures account. It intends to progressively increase its position to the next calendar quarter three-month strip while existing positions are maintained and settle in cash. The initial freight futures allocation will be 50% Capesize contracts, 40% Panamax contracts and 10% Supramax contracts, rebalancing annually, as needed, during the first two weeks of the month of December. The expense ratio of the fund is 3.32%.