There are many leading indicators that investors use to track the economy and exchange traded funds (ETFs), some suggest the best way to track the long-term big picture is by watching the the price of shipping dry bulk, or the Baltic Dry Index.

For those of you who don’t know what the Baltic Dry Index is, it is an index that tracks the average cost of carrying dry cargo such as iron ore, grains, finished steel and coal.  This can be a good indicator of the activity in the global economy because it allows one to measure the demand for raw goods, which is further indicative of future industrial activity.

As countries resume creating products for eventual export, they’ll need the raw materials. After those products are finished, they’ll once again ship them to where they’re needed.

Additionally, Economist Susan Lee states the following reasons why we should listen to the messages the Baltic Dry Index is sending:

• The index captures activity at the beginning of the production process
• It looks at ocean shipping, which focuses on international trade, the critical driver of global growth
• The shipping business is highly dependent on credit, so the Index indicates if the credit markets are tight or loose

The index has been hit hard and some believe that it has no where to go but up.  Take a look at the following ETF to get a sense of where shipping is headed: Claymore/Delta Global Shipping Index (SEA), which is down 23.3% year-to-date. Its correlation with the Baltic Dry Index is 0.61.

Tags: Baltic Dry Index, Indexing, SEA, Sector ETFs, Shipping