The world's fleets of cargo ships are aging, and demand for commodities is surging. That means the cost of shipping will go up, pushing up prices and crimping supply.
The top performing ETF year to date is Market Vectors Steel
SLX, which has returned 72.65%.
Other ETFs with big gains were iShares Dow Jones (NYSE:DJ) U.S. Oil Equipment IEZ, iShares S&P Global Materials Sector Index Fund, MXI and WisdomTree Basic Materials DBN. The iShares ETFs returned 41.60% and WisdomTree Basic Materials returned 38.43% year to date.
The price of oil was a big factor for the iShares ETF, and that price in part reflects the cost of transport, just as with many other commodities.
Shipping costs are measured by the Baltic Exchange Dry Index, an indicator of prices for transporting freight. That index has risen 145% year to date and 171% over the past 12 months.
Lag time between decommissioning old ships and building new ones also drives costs. It can take three years to build a large cargo vessel. Many are just being started now.
Commodity prices tend to rise with the index because they have to be physically moved. ETFs that track commodities themselves will therefore rise with it.
Stocks of commodity producers will also rise. But those companies that produce processed commodities such as steel might be under pressure as the cost of raw materials goes up.
Dan Chamby, portfolio manager at BlackRock (BLK)
who manages the Global Allocation Fund, says investors should think about the components of commodity ETFs.
He also notes that stocks of shipbuilders and oil rigs also do well when commodities face upward price pressure. So when looking at commodity ETFs it pays to think about whether such companies are in them.
Market Vectors Steel has ArcelorMittal (MT)
MT as its second-biggest piece, and the ADR has gained nearly 80% for the year. As a steel producer, one might think it would be sensitive to increases in iron prices.
But Bob Shearer, another BlackRock portfolio manager, notes that the global economy has been able to absorb the increased prices without demand falling off -- even with gold and oil reaching new highs. [Source: Investor's Business Daily]