The Best Index of World Commerce

03/26/2009 1:46 pm EST

Focus: GLOBAL

Tom Lydon

Editor and Publisher, ETF Trends

Tom Lydon, editor of ETF Trends, says investors closely watch the Baltic Dry Shipping index for a reading on the world economy.

There are many leading indicators that investors use to track the economy and exchange traded funds (ETFs); some suggest the best way to track the long-term big picture is by watching the price of shipping dry bulk, or the Baltic Dry Index.

The Baltic Dry Index tracks the average cost of carrying dry cargo such as iron ore, grains, finished steel, and coal [on 26 routes].  This can be a good indicator of the activity in the global economy, because it allows one to measure the demand for raw goods, which further indicates future industrial activity.

While there are ETFs that represent the shipping sector, none tracks the Baltic Dry Index. But that doesn't mean one should ignore this index; it can tell us a lot about the global economy and the shipping sector at large.

There are five types of ships transporting goods around the world:

  • Container ships, which carry finished products;
  • Bulkers carry dry cargo such as iron ore and grains, finished steel, coal, etc.;
  • Tankers carry liquid bulk, oil, chemicals, molasses and so on;
  • Ro Ro carries "roll on, roll off" goods, such as cars; and
  • Reefers ship bananas, oranges, and similar items.

The BDI covers the second type of ship, bulkers.

As countries resume creating products for eventual export, they'll need the raw materials. After those products are finished, they'll once again ship them to where they're needed. Any pickup in this sector, then, could be a signal that a recovery is in the offing.

Additionally, economist Susan Lee states the following reasons we should listen to the messages the Baltic Dry Index is sending:

  • The index captures activity at the beginning of the production process.
  • It looks at ocean shipping, which focuses on international trade, the critical driver of global growth.
  • The shipping business is highly dependent on credit, so the index indicates if the credit markets are tight or loose.

The index has been hit hard in the global downturn, and some believe that it has nowhere to go but up. (It has risen in recent weeks—Editor.)  Take a look at the following ETF to get a sense of where shipping is headed: Claymore/Delta Global Shipping Index (NYSEArca: SEA). Its correlation with the Baltic Dry Index is 0.61. The correlation isn't 1:1 because of SEA's exposure to equities.

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