A supply and demand imbalance, partially due to COVID-19 and the upcoming holiday season, may be a boon for exchange traded fund investors looking to potentially enhance their portfolios ahead.
In the recent webcast, Can Investors Capitalize on Supply Chain Disruptions? New ETF Opportunity, Frank Holmes, CEO of U.S. Global Investors, highlighted the potential opportunity in the global shipping industry, with roughly 80% of the world volume in trade goods carried by seah, and the percentage is even higher for developing countries.
Holmes argued that the PMI might be a better leading indicator for the shipping industry as it supports shipping and cargo demand. As of November 2021, the ISM Manufacturing PMI was at 61.1 – readings above 50 reflect an expansionary environment. Additionally, he believed that global manufacturing strength could continue to support shipping cargo demand. The long-term trends also support ongoing demand for shipping as merchandise trade volumes have steadily increased since the turn of the century.
Holmes also noted that along with the robust demand for goods, the current spike may be attributed to fleets stuck at anchor due to congestion or Covid-19 testing-related delays that have caused the ongoing supply chain disruptions at seaports.
Along with shipping demand, Holmes pointed out that air freight rates are also trending 220% above 2019 levels, reflecting the ongoing global economic rebound and repressed demand for goods and raw materials. American Airlines even recently used a Boeing 777 to carry medical supplies overseas for the first cargo flight in 36 years. During the pandemic, the Anchorage airport has become the busiest as a global waypoint for air freight deliveries.
Looking ahead to the following year, the average investor believed that supply chain issues will remain among the top issues Congress will tackle for 2022, followed by immigration and environmental/climate change.
Along with air freight, the airline industry also sees a return to regular travel flights. On November 8, the U.S. began allowing fully vaccinated international travelers. U.S. air passenger traffic hit a new pandemic high over Thanksgiving, with 2.45 million passengers boarding flights on November 28.
With the current trajectory of the airline industry, Holmes projected that U.S. airline revenues could return to pre-pandemic levels in the second half of 2022.
U.S. Global is currently working on the U.S. Global Sea to Sky Cargo ETF (NYSEArca: SEA), which will track the U.S. Global SEA Index. The underlying index includes companies involved in the marine shipping, air freight/couriers, or other transportation industries, as determined by independent industry listings (collectively, “Cargo Companies”) with an allocation of 70% of the index’s weight to sea shipping companies and 30% to air freight companies at the time of each quarterly reconstitution and rebalance of the index, according to an SEC exemptive relief filing.
Specifically, the top six shipping companies with a combined ranking of market capitalization, cash flow return on invested capital, cash-flow-to-price, and earnings-to-price get a 5% weighting each. The next seven shipping companies, by a combined ranking of market capitalization, cash flow return on invested capital, cash-flow-to-price, and earnings-to-price get a 4% weighting each. The next six shipping companies, by a combined ranking of market capitalization, cash flow return on invested capital, cash-flow-to price, and earnings-to-price get a 2% weighting each. Lastly, the top 10 air freight companies by a combined ranking of market capitalization, cash flow return on invested capital, cash-flow-to-price, and earnings-to-price each get a 3% weighting each.
Additionally, investors have turned to the U.S. Global Jets ETF (NYSEArca: JETS) as a way to access the recovery in the global airline industry. JETS has also become a popular mechanism for many retail investors to gain diversified exposure to the airline industry instead of betting on single airliners. JETS follows the U.S. Global Jets Index, which uses fundamental screens to select airline companies, with an emphasis on domestic carriers, along with global aircraft manufacturers, airport companies, internet media, or other services related to airlines.
Financial advisors who are interested in learning more about the global supply chain can watch the webcast here on demand.