Can The Shipping ETF Continue To Sail In 2014?

shippingThe U.S. equity markets surprised with a long rally in 2013 thanks to the upbeat corporate earnings and a string of robust U.S. data pointing to speedy economic growth. Further, China’s new economic reform plans and improving European conditions supported the revival in the global market.


This has offered a much-needed boost to the global trade levels, benefiting one of the transportation ETFs –Guggenheim Shipping ETF (NYSEARCA:SEA) greatly. The fund offers exposure to the global shipping industry that transports goods and materials around the globe.


While rising consumer confidence improved the demand for the shipment of goods, lower fuel prices (accounting for about 20% of total costs) for most of 2013 kept the costs of the shipping industry in check.


SEA in Focus


The fund tracks the Dow Jones Global Shipping Index and holds 27 securities in its basket. SEA has so far mustered $114.9 million assets.


The index reflects high dividend-paying companies in the global shipping industry. As far as the sector breakdown goes, the fund is concentrated on the industrial sector with about 70% exposure while the rest is attributed to the energy sector.


In terms of geographic distribution, Denmark takes the top spot with more than 22% of focus, followed by the U.S. (20.4%), Hong Kong (14.2%) and Japan (13.6%).  The product charges 65 bps in annual fees for this diversified exposure. The product gained over 37% in 2013.


Will This Uptrend Continue?


Global demand remains in good shape to start 2014. China’s imports rose the most in the five months ended December, suggesting that shipping activity will be increased on the growing demand from the world’s second largest economy. Inbound shipments of iron ore – a key constituent of steel-making, rose 10% year over year while soybean and natural rubber shipment leaped to all-time highs.


In short, SEA is highly correlated to the industrial sector which is on an upswing. Thus, the ETF is expected to gain big time with the surge in global industrial and trade activity. Notably, the composite leading index by OECD inched up to 100.9 in November from 100.7 in October signaling a strengthening economic outlook for most developed nations (read: Direxion Switches Index for Two Leveraged China ETFs).


As per U.S. Energy Information Administration (EIA), the annual average regular gasoline retail price in the U.S. to will fall to $3.46/gallon in 2014 and $3.39/gallon in 2015 from $3.51/gallon in 2013. Increased production will mainly lead to this decline.


EIA anticipates a record-high yearly growth in liquid fuel production in 2014 from countries outside OPEC region. The benign fuel cost outlook should favor the shipping industry ahead.


Finally, the demand for the fuel-efficient ships is on the rise due to stringent emission requirements and rock-bottom freight rates.


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