ETF Talk: Sailing the SEA of Opportunity

This week’s ETF Talk features the brand new Claymore/Delta Global Shipping ETF (SEA), the first exchange-traded fund (ETF) of its kind to offer investors a cost-efficient way to gain access to the transportation industry’s global shipping sector.

This new fund provides exposure to 30 global shipping-related stocks, and because these stocks operate around the globe, SEA offers some nice geographic diversification. The holdings of the index, as of July 31, 2008, were most heavily weighted in Greece, the United States, and in Bermuda.

This ETF seeks investment results that correspond generally to the performance of an equity index called the Delta Global Shipping Index. The fund has a stated goal of investing at least 90% of its total assets in common stock, American depositary receipts (ADRs) and global depositary receipts (GDRs) that comprise the index. The fund also seeks to tap investments that have economic characteristics substantially identical to the index’s securities.

Chip Hanlon, chairman and chief executive officer of Delta Global Indices LLC, recently described the global shipping industry’s outlook positively. "With approximately 80% of all shipments being transported by water, the increase in demand has pushed shipping activity up considerably and gained significant interest among investors," Hanlon said.

Since the fund is brand new, it has not paid a dividend yet. But when a dividend is paid, it will be distributed quarterly. As of August 28, 2008, the top three holdings in SEA included Euroseas Ltd., 4.59%; Navios Maritime Holdings, 4.25%; and Seaspan Corp., 4.18%. While the fund has been actively trading on the NYSE for only a little more than a week, it already had risen more than 2% by the Aug. 29 close. However, there is a caveat to consider. While the future for the global shipping industry, and SEA, looks strong, there are some key financial risks associated with this sector that you definitely should weigh before investing.

First, companies in the global shipping sector are subject to fluctuations in the price and supply of energy fuels, steel, and raw materials. Such companies also are affected by adverse changes in seaborne transportation and weather patterns, as well as unpredictable events, such as hurricanes, fluctuating commodities prices, international political developments, and labor strikes. As with all ETFs that focus on a single industry, SEA holds more risk than if it was broadly diversified across numerous industries and sectors of the economy.

Similar to any new fund, SEA has a limited track record and currently falls short of the trading volume of 100,000 shares a day that I like to see before entering a position. Therefore, I recommend observing how SEA performs during a longer period of time before you consider buying the fund.

As always, I encourage my readers to send me their ETF questions. If you have one that you want me to answer in an upcoming issue, please click here. We are facing volatile market conditions and an overall downward trend right now. As a result, it could pay off for you to take a cautious approach and let the most daring investors take the risks in this unpredictable market.