Hear me out…
Dry bulk shipping is lame.
What exactly is it?
I’ll tell you.
Dry bulk shipping are those massive boats you see in the ocean with huge cargo holds for moving everything from coal to grain.
And the last time the dry bulk shipping index was this popular dates back to the end of 2007…
Right before the market crashed.
And the majority of companies never recovered. And the few that survived became shadows of their former selves.
But there’s a dry bulk ETF that doesn’t invest in shipping companies.
Instead, it follows the dry bulk price index used to set freight rates.
The dry bulk index weights the freight rates for various size vessels into an index. This composite helps companies set their prices as well hedge using different products like options and futures.
Most companies in this market struggle to survive.
So why on earth would institutional advisors search out an ETF related to this market?
It might have something to do with the fact the ETF is up +100% YTD.
Specifically, we’re talking about Breakwave’s Dry Bulk Shipping ETF BDRY!
How has a dry bulk ETF managed to significantly outperform most of the companies in this sector?
The answer is shocking.
The BDRY breakdown
The BDRY is different than most ETFs.
It doesn’t a bunch of shipping companies.
Instead, BDRY gives owners exposure to the movements in the dry bulk index.
And it does this by using futures contracts.
Futures contracts are a lot like options. The big difference is the transaction must execute at expiration. There is no option to do or not do it. It’s an obligation.
That can lead to juicy returns.
But it can also be dangerous.
Luckily for BDRY, they don’t have to worry about one of the biggest risks out there – delivery.
Freight futures aren’t a physical product like oil or gold.
Instead, they settle in cash. That means they pay out or receive the difference between the futures and the actual price.
Sounds great, what’s the catch?
There are actually two.
First, the fees for this ETF aren’t cheap. You’ll spend over 3% a year, which is about as high as they come for ETFs. Your average an S&P 500 ETF is around 0.01%.
For folks that like to trade, that isn’t much of an issue. Investors may not like it too much.
The second comes from a concept known as contango. This means the ETF loses money over time even if the dry bulk index goes nowhere.
The farther out in time you go, the more expensive futures get.
What that means is every time you sell the current month to buy one further out, that contract further out will always cost more.
The bottom line
This ETF is a great trading tool and potentially a short-term investment over a course of months. But in the long-term, it will lose value all else being equal.