Breakwave Advisors Managing Partner, John Kartsonas, discusses the Breakwave Dry Bulk Shipping ETF, an Exchange Traded Fund (ETF) dedicated to dry bulk shipping.
The Breakwave Dry Bulk Shipping ETF (ticker: BDRY) is the first and only Exchange Traded Fund (ETF) dedicated to dry bulk shipping. It offers investors the ability to invest directly into dry bulk freight through freight futures, a market that is quite difficult to access for most market participants. BDRY trades like a stock, is listed in the New York stock Exchange, and it is an easy and efficient way for every investor to invest in dry bulk shipping. Although the mechanics for such an innovative product is complex, the idea behind it is very simple: Provide an instrument to access the freight futures market in such a simple manner as buying or selling a stock.
BDRY, which is issued by ETFMG, does not track a specific index, rather it follows a pre-determined methodology that provides no discretion in what the fund holds. BDRY owns futures on Capesize, Panamax and Supramax freight futures with a breakdown of approximately 50%, 40% and 10%, respectively. In addition, the average tenure of the underlying futures is about 60 days. As a result, BDRY follows the direction of spot rates, to the extent that futures tend to react to spot rate movements. Over the last two years, the weekly correlation of BDRY to the Baltic Dry Index, the main dry bulk spot index, has been approximately 75%. Directionally, it is easy to see the relationship between the two, as the chart below describes.
The advantages of BDRY for the shipping investor are numerous. First, unlike the only alternative out there, namely shipping equities, BDRY is not affected by broader stock market volatility, as it is priced against the dry bulk freight futures market. Given that the correlation of freight futures to other major asset classes is extremely low, BDRY is a very good diversifier for investor portfolios. In addition, as a commodity ETF, BDRY does not have risks such as equity dilutions, company-specific risks, management decisions, operational issues, etc. It basically tracks the freight futures market through pre-determined parameters and a specific methodology. Secondly, BDRY is a simple to use product. Opening and maintaining a freight futures account is extremely difficult and costly for individual investors and very cumbersome even for professional investors. BDRY gives every investor the opportunity to participate in the freight market in a very simple way, just like investing in a stock. Lastly, BDRY invests in freight futures that settle in cash and thus imply full utilization and obviously no operational risk, as there are no assets involved. Compare that with operating actual ships, and one can see the benefit of BDRY versus even physical shipping investments.
BDRY was designed with simplicity and wide investor appeal in mind. It is an instrument to invest in an industry that has a lot of particularities when it comes to different asset classes, sizes, trade routes, etc. BDRY is not an instrument for precise hedging, but it is a very good proxy to take a view on the broader dry bulk shipping sector. It is a volatile investment, and riskier than the average ETF, but that reflects the underlying volatility and risk of dry bulk shipping. However, with higher risk usually come higher returns, and thus investors must adjust their risk tolerance and return expectations accordingly.
BDRY is a very innovative product as it opens a hard to access, non-listed market to all market participants. Over the years, dry bulk shipping has provided exceptional returns, but also significant drawdowns. Unfortunately, until BDRY, there was no easy way to capture such moves. BDRY aims at becoming the leading instrument for investors who view shipping as an important part of their portfolio and have been disappointed with the ability of shipping equities to capture the cyclicality of the industry.
Investing in freight futures can be volatile and is not suitable for all investors.
Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. This material must be accompanied or preceded by a prospectus. Please read the prospectus carefully before investing.
The Fund is distributed by ETFMG Financial LLC, which is not affiliated with Breakwave Advisors LLC.