DIFFERENT shipping investments give different exposures to war, weather, pandemics and other chaos. The two NYSE-listed exchange-traded funds of Breakwave Advisors are — by design — as exposed as they could be.

The price of the Breakwave Dry Bulk Shipping ETF (BDRY) spiked during Covid and is up yet again in recent months, courtesy of Houthi attacks in the Red Sea and the mass diversion of US grain from the Panama Canal.

The price of Breakwave Tanker Shipping ETF (BWET) is acutely leveraged to what happens next in the Israel-Iran conflict and the Strait of Hormuz.

BWET, like BDRY, buys near-dated forward freight agreements to track spot rates.

The difference is that BDRY buys a broad range of dry bulk FFAs (50% capesize, 40% panamax, 10% supramax contracts) whereas BWET is far more concentrated. As much as 90% of the FFAs it buys are for a single very large crude carrier route; the TD3C index from Ras Tanura, Saudi Arabia, to Ningbo, China, via the Strait of Hormuz.

‘Very difficult situation to model’

“When it comes to oil tankers, everyone is pointing to the Strait of Hormuz, but VLCC rates and crude oil haven’t moved yet,” Breakwave Advisors founder John Kartsonas told Lloyd’s List.

“It’s a very difficult situation to model. Iran has been saying it might close the strait for the past 20 years, but this is not the 1970s. The great majority of the oil coming out of the Middle East today is headed to China, India and Southeast Asia — not the West — so why would Iran do it?”

If it did, “the price of oil will react strongly and the price of bunkers will move higher”, Kartsonas said, noting that tanker FFAs, unlike dry bulk FFAs, are inclusive of bunker costs, meaning higher bunker prices for the TD3C route would push up BWET pricing.

On the other hand, analysts have warned that a closure of the strait will shut in crude and constrict VLCC demand, pushing down freight rates.

The strait closure scenario also raises the hypothetical question of how the TD3C rate would be assessed for pricing of the FFAs that account for 90% of BWET’s price if no tankers could travel this route. (An analogous situation: The Baltic Exchange was forced to suspend three indexes for Russia-origin tanker freight following the EU’s ban on Russian crude and products imports.)

“That is a very extreme scenario that has never been tested before,” said Kartsonas when asked how a Hormuz closure might impact TD3C assessments.

“It would be very messy and there would be a lot of debate, and that scenario would probably not last too long, because if it lasted too long, the world would have much more serious problems to deal with than freight futures.”

Shipping ETFs vs shipping stocks

Explaining the appeal of investing in shipping ETFs as opposed to shipowner company stocks, Kartsonas said, “Shipping, in general, is mostly a trade rather than a long-term investment. A shipping stock is valued over a long period of cashflows” whereas shipping ETFs that buy freight futures “reflects today’s rates”.

BDRY has been in the market for six years. BWET debuted just under a year ago, in May 2023. The two shipping ETFs “provide a clean way to participate only in the direction of freight rates — and nothing else. They’re not for everybody, and they’re not products you should always been invested in. You have to pick the right timing.”

BDRY “has tens of thousands of investors at this stage, which is a significant number, even compared to shipping stocks”, said Kartsonas.

Larger investors trade “multiple millions of dollars a day in value”. BDRY’s intraday volatility is among the highest in the ETF universe, an attribute Kartsonas believes is attracting automated trading and high-frequency trading platforms to BDRY, thereby providing more trading liquidity for other investors.

Tanker ETF poised for more volume

Investor interest in BDRY has been relatively steady over the past three years and has swelled as freight markets have moved.

“It comes and goes in waves,” said Kartsonas. “After the past three or four months with the Red Sea and everything else, we are now probably in a lower-interest wave for dry bulk. But as is always the case in shipping, something will happen and volumes will pick up again.”

Investor interest in BWET was constrained during its inaugural year by the relative lack of excitement in the VLCC market.

“On the crude tanker side, Opec has cut production, so there’s less oil to be transported, and the [disruptions] that have affected other segments, like the Red Sea and Panama Canal, are not affecting VLCCs.”

Nevertheless, Kartsonas has high hopes for BWET.

“Geopolitics plays a bigger role in oil trading than dry bulk, the US market is much more familiar with oil than dry bulk, and oil is a much more tradeable commodity in the physical market than iron ore or coal. Oil demand is continuing to grow buy a couple million barrels a day, year after year, and the tanker sector, which has a very low orderbook, is better positioned than any other shipping sector.

“So, I think the tanker market is a definitely a more exciting and more interesting market than dry bulk.”