Choppy Seas For The Guggenheim Shipping ETF

March 5, 2018 9:48 am
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Choppy Seas For The Guggenheim Shipping ETF

Rising commodities are not translating to upside for the Guggenheim Shipping ETF (NYSE:SEA). SEA, a high-dividend play on global shipping companies, plunged nearly 3.7 percent last week and is lower by 8.4 percent over the past month, bringing its year-to-date loss to 7 percent.

Challenges linger for shipping container companies, not the least of which include following through on the improved profitability seen in 2017.

“Sustaining last year's improved profitability in 2018 may prove challenging for container shipping companies,” Fitch Ratings said in a recent note. “The fact that some companies are likely to have remained loss-making in 2017 highlights the ongoing weakness in sector fundamentals due to persistent overcapacity, which may undermine a longer-lasting recovery.”

How SEA Sails

SEA, which has been trading for nearly eight years, follows the cap-weighted Dow Jones Global Shipping Index. The exchange traded fund holds American depositary receipts, global depositary receipts and master limited partnerships.

SEA “offers potential to benefit from global commerce growth through exposure to the global shipping industry — oftentimes a leading indicator for global commerce and economic trends,” according to the issuer.

The holds 26 stocks and is attractively valued with a price-to-earnings ratio of 13.7 and a price-to-book ratio of just 0.88. However, those attractive valuation metrics exist for unattractive reasons.

How To Sustain A Recovery

“Sustainable recovery of freight rates depends on continuous and consistent capacity discipline in the industry,” said Fitch. “Freight rates are volatile and many previous increases reversed when the supply and demand imbalance returned. Supply growth is expected to have been about 4 percent in 2017, with a further acceleration to over 5.5 percent in 2018, again exceeding demand growth. This may put pressure on rates and make it challenging to sustain the profitability achieved in 2017.”

Although some of SEA's components pay high dividends, the ETF's trailing 12-month yield is just 1.67 percent, meaning its investors are largely dependent on capital appreciation. Mergers and acquisitions could provide another potential catalyst for SEA.

“We believe most container shipping companies will continue to regard their market position along with the operation of mega ships as key to their success, which may prompt further M&A and new vessel orders as the top three companies try to sustain their market leadership and smaller companies seek to increase scale,” said Fitch.

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