ETF Trends CEO Tom Lydon discussed the ETFMG Breakwave Dry Bulk Shipping ETF (BDRY) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.

The Breakwave Dry Bulk Shipping ETF seeks to provide investors with exposure to the daily change in the price of dry bulk freight futures, before expenses and liabilities of the Fund, by tracking the performance of a portfolio consisting of a three-month strip of the nearest calendar quarter of futures contracts on specified indexes that measure rates for shipping dry bulk freight.

To put this right up front, BDRY is the worst-performing non-leveraged ETF of 2020. It’s a casualty of the coronavirus outbreak and fears of a slowing Chinese economy, the second largest in the world. China is an important local for everything shipping-related. BDRY is down -40.8% year-to-date. It suffered from steep pullback due to plunging transit shipping rates to record lows.

So what happened? The shipping ETF retreated as transit rates fell to record lows with ships from oil tankers to container lines being turned away from ports. The two most important routes for Capesizes are the Brazil-China and Australia-China iron-ore runs.

There are a few reasons for this. First, there’s seasonal demand weakness. Second, Brazilian iron-ore export regions are suffering from debilitating floods. Third, there are too many ships scrambling for cargoes in Australia, which is in the middle of its typhoon season. Fourth, the new rule requires the use of more expensive low-sulfur fuel, cutting ship owner returns.

More importantly, the shipping segment has suffered as factories were shut down across China, the world’s largest consumer of commodities, and travel restrictions were put in place to control the spread of the coronavirus outbreak

A Negative Fall For the First Time in Over Two Decades

The sudden fallout has been so widespread that the Capesize Index, which tracks freight costs for the largest carriers of dry bulk commodities such as iron ore, coal, and grain, fell into negative territory for the first time since its creation in 1999. In other words, companies are shipping at a loss on certain trade routes.

Market watchers warned that the diminished demand for transported goods would continue to weigh on the shipping industry for months ahead. It is also essential to consider Chinese imports and exports. Reflecting on the sudden drop in activity, capacity utilization at major Chinese ports plummeted 20% to 50% lower than normal. More than a third of ports said storage facilities were over 90% full, so cargo is just sitting there and not being moved

Looking ahead, an official at China Merchants Port calculated that the coronavirus epidemic could cut annual revenue by 10% to 25% if it comes under control by the end of March, and the hit would be even worse if it lasts longer. Of course, the opposite could be equally true for those risk-takers that are willing to catch a falling knife as the virus outbreak is contained and china goes back to business as usual

Potential investors should be warned that BDRY is the first and only fright futures-based ETF to focus on dry bulk shipping. It is designed to profit from increases in freight futures beyond what is already priced in the market. BDRY tires to provide exposure to the daily changes in the price of dry bulk freight futures by tracking a three-month strip of the nearest calendar quarter of futures contracts on specified indexes that measure rates for shipping dry bulk freight.

Specifically, the Benchmark Portfolio includes 50% exposure in Capesize Freight Futures contracts, 40% exposure in Panamax Freight Futures contracts, and 10% exposure in Supramax Freight Futures contracts. BDRY is designed to reduce the effects of rolling futures contracts by using a laddered strategy to buy contracts while letting existing positions expire and settle in cash

Hear Tom Lydon Discuss BDRY ETF:

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