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ETFs to Win/Lose on Suez Canal Blockage

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A huge cargo ship Ever Given has been stuck since Mar 23 in the Suez Canal, a key trade transit for about 12% of the world’s seaborne trade, per a CNBC article. The jam has brought traffic to a halt in one of the world’s busiest waterborne trade routes that splits Africa from the Middle East and Asia.

More than 150 ships are waiting to cross the 120-mile Suez Canal. Each day of the deadlock disturbs more than $9 billion worth of goods, according to The Associated Press, citing data from shipping expert Lloyd's List, noted by the CNBC article.

Tugboats and dredgers have been put into operation to free up the ship, but the operation could take weeks, one of the executives involved has cautioned, as quoted on CNBC. Risks of the ship breaking during the process of dislodging may worsen the situation.

If this happens, “the canal would be blocked for an extended period of time, which could result in significant disruptions to global trade, skyrocketing shipping rates, further increase of energy commodities, and an uptick in global inflation,” per JPMorgan strategist Marko Kolanovic, as quoted on CNBC.

Global supply chain, in any case, has been facing delays due to the coronavirus-led lockdowns. Now, the Suez issue has made matters worse. The ongoing pent-up demand should increase the prices of essential commodities, machine parts and consumer goods that have been ordered online.

The massive ship has shown no signs of movement so far, compelling ship-owners and traders to mull over a lengthy alternative route around the Cape of Good Hope on the southern tip of Africa. This rerouting would increase costs meaningfully. 

Against this backdrop, below we highlight a few ETF areas that could gain/lose ahead in the light the Suez Canal situation.

Winners

Breakwave Dry Bulk Shipping ETF (BDRY - Free Report)

The above-mentioned logistics issue is a positive for shipping rates as it has caused disruptions in shipping and tends to push shipping rates higher. If the situation takes weeks, ships that were heading to load in Northern Europe won’t make it now. In that case, a new ship needs to be found, probably at a higher rate.

Bank of America’s analysts said “a Suez closure of a few weeks would be very positive for spot freight rates — by effectively removing supply by adding 20-30% to sailing distance via Cape of Good Hope,” as quoted on CNBC.

Such a scenario is great for BDRY,which tracks the Capesize 5TC Index, Panamax 4TC Index & Supramax 6TC Index measuring rates for shipping dry bulk freight. The fund was up about 12% on Mar 25 (read: Top & Flop Zones at Half-Way Q1 & Their ETFs).

United States Brent Oil Fund LP (BNO - Free Report)

Energy commodities are likely to gain in the coming days. Research firm StoneX indicated that 24 of the vessels that are waiting in transit are carrying crude, 15 are refined product tankers, and 16 are liquified natural gas/liquified petroleum gas product carriers.

However, the massive impact on the oil market from the canal blockage is unlikely. Crude flows from the Middle East to Europe are falling lately due to a long-term realignment of trade. Agreed, ample oil flows from the North Sea to Asia, but it’s usually carried on tankers that are too large to transit through the canal, as indicated on a Bloomberg article.

SPDR FTSE International Government Inflation-Protected Bond ETF (WIP - Free Report)

Since a prolonged disruption could hurt LNG flows primarily to the European market and other goods will also be held up, inflation is expected to tick up. If inflation rises, TIPS ETF should gain.The underlying FTSE International Inflation-Linked Securities Select Index of the fund WIP is designed to measure the total return performance of inflation-linked bonds outside the United States with fixed-rate coupon payments that are linked to an inflation index.

Loser

U.S. Global Jets ETF (JETS - Free Report)

Several tankers carrying jet fuel and gasoil are stuck on the Persian Gulf-Europe route along with empty tankers passing through to load North Sea oil, S&P Platts reported on Mar 25, quoted on CNBC. This could be a headwind to airlines ETF JETS. The airline industry, in any case, has slipped into troubled waters again thanks to the rise in global virus cases.

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