This ETF Might Float Your Boat If You're Looking to Capitalize on Shipping

If you've ever spent any time in the Northeast, you probably have heard about the mystical direction provider in Maine who, when asked for directions, simply says, Ya caan't get theare from heare. Over the last year, this admonition has been best applied to the essential plumbing of our economy, the supply chain. What started out as staffing issues for specialized manufactures morphed into staffing issues for regular manufacturers, which morphed into staffing issues for everyone. And then, last March, the first truly meme-able event of 2021 occurred in the Suez Canal, which was the grounding of the Ever Given container ship; it affected 10% to 12% of global trade. While some ships were re-routed around the Horn of Africa, of all places, most waited for the blockage to clear, increasing the wait for those onboard goods. Through the rest of last year staffing issues continued to plague manufacturers and made their way to the docks and ports themselves, leading to shortages of everything from bacon to microchips. Did I forget to mention car dealer markups? Oh, and don't forget the actual cost of shipping. It is often said that investing is a zero-sum game, that someone's pain is another's opportunity. Given all the supply chain pain we have been experiencing and by all estimates will continue to experience, could there be opportunity in transport, or even better, in shipping-focused ETFs? Let's see what funds are out there. XTN The 35 basis point SPDR S&P Transportation ETF tracks the S&P Transportation Select Industry Index, which in turn tracks companies that are classified in the GIC's framework as Transportation sub-industry. This index focuses on the following transportation segments: Air Freight & Logistics, Airlines, Airport Services, Highways & Rail Tracks, Marine, Marine Ports & Services, Railroads, and Trucking. In looking at the exposures in this fund it is about 70% focused on freight, which leaves the other 30% or so percent focused on passenger airlines. Given the trends of work from home, COVID variants and once again, staffing issues, I'm not sure that passenger airlines are going to be the place to be in 2022. My take is these companies had their moment in the sun from a rebound perspective in second quarter of 2020. Further, for some reason, S&P has seen fit to classify Lyft and Uber as Trucking companies, so there is about 4.7% of other consumer exposure there as well. IYT The 41 basis point iShares U.S. Transportation ETF tracks the S&P Transportation Select Industry FMC Capped Index, which as you may be able to tell from the name is essentially the same index that is used by XTN. The only difference is the weighting methodology. While the uncapped index utilizes a market cap weighting approach, this index utilizes some capping, or weighting restriction, rules. Per the methodology, any single position greater than 22.50% is capped at 22.50% and the excess weight allocated to remaining names in the index. Seemingly splitting the difference between the 5/50 IRS diversification rule and the 5/40 UCITS (European ETF) diversification rule, the index methodology states that the aggregate weight of all names in the index above 4.5% cannot be greater than 45% of the overall index weight. The premise here is that re-allocating weight this way increases the assets under management (AUM) capacity of any fund tracking the index. With capping, airline exposure is reduced to just above 14% and the rideshare exposure is about 6.5%. Overall, IYT has close to half the consumer exposure via airlines and rideshare companies, so this fund gets investors closer to participating in the windfall that is higher shipping rates. Speaking of shipping... BOAT The 69 basis point SonicShares Global Shipping ETF was launched just this past year and tracks the Solactive Global Shipping Index, which focuses, unsurprisingly, on companies engaged in the water transportation business. The index relies on the Factset/Revere equity classification schema and pulls constituents from seven sub-industries, four of which focus on petroleum and liquified natural gas (LNG) transportation and account for roughly 33% of the index weight. These exposures fall outside the scope of what our goal is regarding capturing the broader scope of the supply chain, but the beauty about getting new information is that it can be a catalyst for shifting your overall view. Read on. Wrap It Up Regular readers know I am all about getting the most pure exposure when it comes to matching funds with strategy, so you might not be surprised with the outcome here. XTN outperformed the SPDR S&P 500 ETF SPY last year, IYT came within 2% of matching SPY and since its August 4, 2021, launch, BOAT has outperformed all three. While my original strategy was to capture the entirety of the supply chain, it seems like the juice in this opportunity involves going straight for the shippers and sidestepping the ports, logistics and the rest of it. Approximately 90% of global goods spend time at sea, after all. There does seem to be more volatility around BOAT returns than with IYT or XTN, but if you've got your volatility sea legs then welcome aboard.

This ETF Might Float Your Boat If You're Looking to Capitalize on Shipping

Supply chain issues would indicate that investing in the shipping space might produce a payoff; here are a few ways to do it, though I favor one in particular.

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