Shipping Index Rationale and an Existing ETF (Guggenheim Shipping ETF – SEA)

Transportation has been revolutionalized since the invention of containers and shipping them in gigantic vessels. It is estimated 90% of the cargos transportations are via ocean nowadays.

Globalization is taking place and will keep expanding at a rapid speed. I anticipate more and more transactions are across the board and thanks to big platform companies such as Amazon and Alibaba, the logistic evolving and improving in accordance. Barring the short-term setbacks that could crop up due to Donald Trump’s tariff imposition to China and China’s hostile gesture, overall, the whole trend is still moving toward a global commercialization. Hence, demand for shipping is rising not declining.

Ships, as is well known, are very capital-intensive products. Shippers who own an array of large vessels are naturally at an advantageous place to gain high margin since they’ve already input massive amount of capital into building or purchasing those ships, so the marginal cost is near zero. While new entrants face a high moat.

There is an existing ETF Guggenheim Shipping ETF (SEA) already on the market. However, a quick look into its performance, in comparison to its broader transportation funds iShares Transportation Average ETF (IYT | B-62) and SPDR S&P Transportation ETF (XTN | A-59), indicate a lackluster return in the past couple of years.

sea etf Further poke into their top holdings are listed below:

holding of SEA XTN IYT.JPG

A quick conclusion we can draw upon the above two charts is that the SEA companies have been falling behind trucks, airline companies, partly can be attributed to the slowdown of the Chinese economy, tightening the need of ocean shipping and worldly resistance to embracing a full-open, across-nation mechanization in recent years.

Applying an optimistic lens in a long run, if we believe globalization eventually taking over, then composing a real shipping index/fund is a worth.

The next key question is how to pick accurately the shippers. SEA’s underlying index methodology states that it applies a high-dividend screen to maritime freight firms. The fund was launched in the middle of 2010, with near $100 Million Asset as of today (March end of 2018), the expense ratio is 0.65%.

Given a bona fide shipping Data, we ought to be able to construct a more accurate shipping index for the market. (to be continued on the construction steps and prototype’s backtesting result)

 

 

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