Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the shipping industry to thrive over time as the global economy improves and more goods are transported around the world, the Guggenheim Shipping ETF (NYSE: SEA) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The Guggenheim ETF's expense ratio -- its annual fee -- is 0.65%. The fund is fairly small, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in. For those interested in income, its dividend yield was recently a solid 3.5%.
This ETF doesn't have enough of a track record to really assess it. (Though, for the record, it underperformed the world market over the past year.) As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
What's in it?
More than a handful of shipping companies had strong performances over the past year. Capital Product Partners LP (CPLP -1.59%), for example, surged 61%, and it recently sported a dividend yield above 11%! (Be careful with too-huge dividends, though.) The company's debt level had been growing briskly, worrying some, but it shrank in the last quarter, thanks to the issuance of some Class B units. Management noted, "We remain positive on the fundamentals of the product tanker market, as the improving supply side and the expected tonne mile demand growth should continue to drive period demand for product tankers and positively affect the medium term outlook of our cash flows."
Navios Maritime Partners (NYSE: NMM) gained 22% and is another dividend highflyer, with a yield recently near 12%. Its payout currently exceeds its earnings, but earnings and revenue have been steadily growing. Worrying some, though, is the company's location in troubled Greece, as well as the fact that long-term contracts for next year don't look too strong at this point. (That's true for others in the industry as well.)
Other companies didn't do as well last year but could see their fortunes change in the coming years. Nordic American Tankers (NAT -1.50%), based in Bermuda, sank 17%. If you're looking for income and think the previous companies' yields of more than 11% aren't enough, Nordic American recently yielded more than 12%. Its bears fret about its debt level, though, along with the fact that it has issued more shares in order to address debt. Others point to an aging fleet and negative free cash flow, and signs that an industry turnaround isn't imminent.
Frontline (FRO 0.97%), down 13%, is an example of why it's smart to be wary of sky-high dividend yields: After reducing its dividend sharply in recent years, it eliminated it entirely. It, too, has faced a mountain of debt, but it recently returned to posting positive free cash flow, and its debt level has declined significantly. It, and its peers, also stand to benefit from various stimulus initiatives worldwide, such as the United States' QE3 measures, and China's plans to spend more than $200 billion on infrastructure.
The big picture
Over the long run, demand for shipping isn't going away. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
Shipping companies may roam the world, but you'd do well to invest in companies that can dominate the world. Click in to our special free report, "3 American Companies Set to Dominate the World," to read about some of them.
