How do you explain a fund like the Breakwave Dry Bulk Shipping ETF (BDRY)?
Week after week, this tiny shipping-ETF-that-could has vastly outperformed all other ETF challengers. Over the past month, BDRY is up 24.5%, more than any other ETF, while over the past three months, it’s risen a whopping 63%:
Chart courtesy of StockCharts.com
That’s the kind of performance story investors usually love, yet BDRY remains small and poorly traded, with just over $2 million in assets and barely $188,000 in average daily volume. Once you dig in to the costs, it’s not hard to see why.
Different Kind Of Commodity
BDRY is the only ETF to offer exposure to dry bulk freight, meaning the raw, unpackaged commodities—such as coal or oil—that are being shipped across the sea by cargo carriers (as opposed to tankers or container ships).
As such, BDRY tracks how much it costs to move goods around, rather than the cost of the goods themselves, making it a fascinating window into global trade. Moreover, the fund is both exposed to the trade war and not; for example, as China steps up purchases of grains from other countries besides the U.S., dry bulk freight futures will benefit, even if prices of U.S. grains falter.
BDRY tracks a basket of 13 near-term futures contracts on three major indexes tracking the charter rate for shipping dry bulk freight. These three indexes are distinguished by the size of ship in question: Capesize (the largest), Panamax and Supramax.
The portfolio is weighted according to size, too: Capesize futures constitute 50% of the portfolio, Panamax comprises 40% and Supramax 10%. Contracts are rolled continuously to maintain a constant position, and the whole portfolio is rebalanced annually.
Structured For Traders
Notably, BDRY is a commodity pool—a structure many issuers of commodity ETFs are moving away from, because it issues a headache-inducing K-1 form at tax time (read: “K-1 Taxes Hurdle For Commodity ETFs“).
But the commodity pool structure has its benefits, too: It allows ETFs to hold actual physical contracts, without restriction; and it offers a more favorable tax experience for short-term traders.
However, few traders—short-term or otherwise—actually seem to be using BDRY. The ETF sees minimal volume on a daily basis, though its asset flows are prone to occasional spikes:
Source: ETF.com Fund Flows Tool; data as of Sept. 5, 2019
High Cost Of Ownership
To be fair, volume and assets in BDRY would probably always been fairly low, given that not many investors know what dry bulk freight futures actually are. Despite their crucial importance to international trade, dry bulk freight remains a fairly obscure corner of the commodity industry; most investors are looking to either hedge or speculate on the price of some underlying commodity, not the price of contracting the boat to bring it from place to place.
But what’s also likely crimping investment in BDRY is the fund’s frankly astonishing total cost of ownership.
BDRY possesses a 3.09% annual expense ratio, according to FactSet, though the fund’s website lists an expense ratio of 1.85%. (As best we can tell, the website’s cited expense ratio doesn’t seem to include the fee the fund pays to its own sponsor, Breakwave, nor the cost of licensing the portfolio from them.)
A high expense ratio isn’t necessarily a deal breaker, of course. Plenty of traders jump in and out of funds with hefty management fees all the time; after all, an expense ratio is only levied across the time period in which you have assets in the fund; meaning that, if your holding period is short, your management cost should be as well.
But that cost only becomes negligible for extremely liquid funds, when the cost of entering and exiting the trade is also super low. That’s not the case with BDRY. Currently, the fund sports a substantial average spread of 0.76%—and that’s catching BDRY at a good moment. Historically, the spreads have been much higher, as high as 2% or even 3%.
Pros & Cons
With a hefty expense ratio and spreads you could drive a truck through, BDRY’s total cost of ownership prices out all but the investors most dedicated to dry bulk freight—which, let’s face it, was a small pool of fish to start with.
Still, the fund is the only ETF to cover an extremely interesting niche of the commodity market, one deeply exposed to how the trade war is changing global commerce. Also, Breakwave continues to be one of the few folks in the industry talking about something that may upend global trade as we know it—that the entire global maritime fleet must change fuel types by the start of next year (read: “Camp Kotok: Wall Street In The Woods”).
Should you invest in BDRY? That’s each investor’s choice. But it’s one heck of an interesting fund, that’s for sure.
Contact Lara Crigger at [email protected]
