Shipping ETFs Crushing the S&P 500 as Hormuz Blockade Rages On

Summary

The ongoing blockade in the Strait of Hormuz, stemming from the Iran-U.S. war, has created a paradoxical profit surge for the shipping industry. While the crisis has disrupted global oil flows and pushed crude prices roughly 60% higher year to date, shipping companies have been benefiting by charging premium freight rates to navigate the risk. This is justifiable as tanker operators now demand significantly higher compensation for war risk insurance, longer voyage routes avoiding the strait, and the sheer scarcity of available vessels. Reliable maritime data suggests that spot rates for tankers have jumped significantly over the past couple of months as a result of the ongoing Middle East crisis. Consequently, this windfall has been bolstering shipping-focused exchange-traded funds (ETFs), as investors are increasingly flocking to these vehicles as a hedge against the very volatility that is hampering other sectors of the economy, thereby allowing them to massively outperform the S&P 500 in the year-to-date period. Now, before diving straight into the specifics of these ETFs, investors, considering whether this rally has "legs" or is merely a short-term spike, should understand whether there are factors beyond the immediate chaos of the blockade boosting this upward trajectory for the maritime industry, to determine the long-term sustainability of their portfolio’s growth. We have analyzed these factors in detail below. Factors Beyond Blockade Driving the Shipping Boom Undoubtedly, the primary catalyst driving the shipping industry’s boom lately is the effective closure of the Strait of Hormuz, a chokepoint through which nearly one-fifth of global oil production flows. The blockade has caused freight futures for crude oil tankers to "skyrocket," with the cost of moving oil becoming a better trade than oil itself. However, beyond the war itself, several interconnected factors are driving the shipping industry's extraordinary gains. For example, global trade continues to expand amid the war, with strong demand coming especially from emerging markets in Asia, where manufacturing, consumer demand, and e-commerce are keeping cargo volumes high. At the same time, rerouting vessels around disrupted chokepoints is lengthening voyages, exacerbating the supply-demand imbalance. This, in turn, has been pushing up freight rates, fuel costs, and insurance premiums higher, improving carrier earnings. Moreover, chronic underinvestment in new tanker vessels over the past decade has created a tight supply environment, so any surge in demand sends freight rates soaring. In short, geopolitics is amplifying an already strong backdrop of steady trade growth, constrained capacity and elevated shipping costs. What Lies Ahead: Volatility or Sustainability? Over the last week’s development, it is understandable that a ceasefire at the Strait of Hormuz remains elusive as tensions continue to persist between the United States and Iran. So, considering the war situation continues for some more days, the near-term outlook for the shipping ETFs appears strongly positive. However, if the war ends soon, freight rates could collapse as quickly as they rose, leading to a sharp reversal in these funds. Moreover, weak consumer confidence in Europe and fluctuating container shipping demand from the United States remain strong headwinds for this industry’s growth trajectory. Nevertheless, structural growth drivers, like rising consumer demand from the emerging markets of Asia and underinvestment in new tanker vessels, should provide a long-term cushion after the war ends. Consequently, while the absence of geopolitical friction may trigger short-term volatility, the industry's balance remains tied to whether these underlying growth catalysts can outweigh broader economic headwinds. Shipping ETFs in the Spotlight Considering the aforementioned discussion, the following shipping ETFs have dramatically outpaced the S&P 500's year-to-date gain of 4.1% and deserve a spotlight now: Breakwave Tanker Shipping ETF BWET This fund, with net assets worth $31.4 million, offers exposure to the crude oil tanker shipping market through a portfolio of near-dated futures contracts on indices that measure the cost of shipping crude oil. It charges 350 basis points (bps) as fees. BWET has surged a massive 699.3% year to date and traded at a volume of 0.07 million shares in the last trading session. SonicShares Global Shipping ETF BOAT This fund, with net assets worth $81.8 million, offers exposure to global shipping companies engaged in the maritime transportation of goods and raw materials, including consumer and industrial products, vehicles, dry bulk, crude oil and liquefied natural gas. It charges 69 bps as fees. BOAT has soared 30.3% year to date and traded at a volume of 0.04 million shares in the last trading session. Breakwave Dry Bulk Shipping ETF BDRY This fund, with net assets worth $36.7 million, offers exposure to the daily change in the price of dry bulk freight futures. It charges 350 bps as fees. BDRY has rallied 35.2% year to date and traded at a volume of 0.51 million shares in the last trading session. U.S. Global Sea to Sky Cargo ETF SEA This fund, with net assets worth $18.8 million, tracks the performance of marine shipping, air freight and courier, and port and harbor operating companies. It charges 60 bps as fees. SEA has soared 21% year to date and traded at a volume of 0.02 million shares in the last trading session. Boost Your Portfolio with Our Top ETF Insights Zacks' exclusive Fund Newsletter delivers actionable information, top news and analysis, as well as top-performing ETFs, straight to your inbox every week. Don’t miss out on this valuable resource. It’s free!Get it now >> Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report U.S. Global Sea to Sky Cargo ETF (SEA): ETF Research Reports SonicShares Global Shipping ETF (BOAT): ETF Research Reports This article originally published on Zacks Investment Research (zacks.com). The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.