For investors who have been looking for exposure to the global shipping industry via an exchange traded fund (ETF), the search is over: Claymore launched the Claymore/Delta Global Shipping Index (SEA) this morning.
Claymore President Christian Magoon tells us that they see the industry as investment in the infrastructure of the global economy. “As the world continues to be more interlinked in imports and exports, the shipping sector is a proxy for global economic sentiment.”
The basic premise of the shipping industry, Magoon says, is that they rent out capacity to haul things from raw materials and liquids to finished goods, like cars. Right now, the industry is sitting pretty, because they can lease the space for more than the cost of carry, thanks to a shortage in the number of ships available.
The global shipping industry isn’t without risk, though. Two of the biggest factors affecting it are:
1) The health of the global economy. When budgets are stretched, there’s going to be less demand, which will translate into the demand for shipping things. The opposite could be true as well, Magoon says. Strong economic growth could benefit the shipping industry.
2) An overcapacity risk. If too many ships or ports are built, it’s going to affect the industry. The index’s provider, Delta Global, found that only 11% of ships due to be delivered in the coming years are currently under construction. There are also a dozen new ports around the world set to go under construction, but none of them have yet broken ground, largely as a result of the credit crisis. If overcapacity is a risk, it’s one that could be further off than thought.
“There’s this classic supply and demand issue that affects shippers,” Magoon says. Just as they have the potential to do well when things are moving onward and upward, they’ve also got the potential to feel the pinch when economic sentiment is negative.
The 30-component fund is most heavily weighted in Greece, which is 35.3% of the index. The United States is the second-largest component at 19%, followed by Bermuda and the Bahamas at 15% apiece. Not only are the these countries favorable in the access they give to key markets, but they have favorable tax policies to corporations. The expense ratio is 0.65%.
One strong benefit of shipping stocks is their ability to pay dividends, thanks to their structure. While the ETF hasn’t yet declared a dividend, which it will do on a quarterly basis, the dividend on the index is a little over 8%.
“I think what we have here is like the Gold Rush,” Magoon says. “People went out and mined – some did well, many did not. The people who did do well were those who sold blue jeans, picks and axes.”