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A Conversation with Breakwave Advisors: The Impact of Global Trade and Geopolitical Conflict on Dry Bulk Shipping Markets

Viewpoints investors, one of the TIFIN Financial Personality types, are interested in the emerging technologies, industries, and trends shaping the future. We sat down with Breakwave Advisors, creators of the Breakwave Dry Bulk Shipping ETF (BDRY), to learn more about one such industry, dry bulk shipping, and how it has been impacted by recent global trade and geopolitical events.

BDRY provides long exposure to the dry bulk shipping market through a portfolio of near-dated freight futures contracts on dry bulk indices. Dry bulk consists of mostly unprocessed materials that are destined to be used in the global manufacturing and production process.

TIFIN Personality: BDRY offers investors a way to take part in a very difficult to access market in an especially interesting point in time for the asset class. Tell us why that is.

Breakwave Advisors: Dry bulk remains a vital part of the global economy, as it transports some of the most important commodities needed for the societies around the world. 80% of all global trade is on ships and dry bulk is the largest sector in shipping and plays a major role when it comes to global infrastructure, energy and food supply.

We think BDRY is a very unique product in that it provides access to a market that most investors can’t access directly. The underlying asset in the BDRY portfolio is shipping freight futures. Freight futures are contracts similar to other commodities like oil, natural gas, grains, etc. and represent the future market expectation for the cost of transportation. However, unlike other futures, freight futures are not accessible to the average investor, even the more sophisticated ones. BDRY provides easy access to this market for all investors, with the simplicity of buying a stock like all other ETFs.

TIFIN Personality: What are some factors that have been impacting BDRY and the dry bulk markets?

Breakwave Advisors: BDRY provides exposure to the near-term freight movements, which in turn could be affected by various reasons, from economic development to geopolitical changes to weather disruptions.

A great example is the recent geopolitical developments with the war in Ukraine. The energy shift in Europe towards coal as a result of Russian sanctions has increased demand for coal, and dry bulk rates have responded positively to the higher demand for coal imports. In addition, the limited exports of grains out of the Black Sea have increased demand for grain supplies elsewhere, and thus demand for ships to transport such grains has also increased. Geopolitics play a major role when it comes to shipping.

Another example has to do with trade relations. China’s cutting off imports of Australian coal in 2020 is an example that had an impact on this market. Coal actually remains a hot topic at the moment. On one side, the energy transition is pushing the popularity of coal away, but with global energy issues, coal is still an available solution that many countries need. China is ramping up their coal energy output and is expected to continue to do so in the future. And it must come from somewhere, likely on a ship, presenting an opportunity for the dry bulk freight market.

TIFIN Personality: Speaking of agricultural imports, Ukraine’s wheat production accounts for 11.5% of the world market and Russia’s share is 16.8%. How has that impacted freight markets?

Breakwave Advisors: Right now, there’s a lot of talk around the availability of grain around the world since so much of it comes from Ukraine and Russia. Grain is a major food source for so many countries, so it’s likely to come from other places to fill the gap. When you source grain from double the distance, that has a major impact on freight rates. The war has distorted the supply chain and higher prices of transport around the globe.

TIFIN Personality: What are some other drivers related to dry bulk that investors should make note of?

Breakwave Advisors: In dry bulk shipping, seasonality is real. Some of that is due to weather. For example, consider the seasonality of construction in China: They don’t really build much during the cold winter compared to summer and fall, and that will impact rates across the year for iron ore shipments, the main steelmaking ingredient. In addition, bad weather in the southern hemisphere during the winter months can impact exports out of countries like Australia and Brazil. All the above have a major effect on freight rates.

TIFIN Personality: What are some additional considerations for investors considering this market?

Breakwave Advisors: Freight is an uncorrelated industry. The level of freight rates depends on supply and demand of ships. As a result, freight prices and freight futures are a great way to diversify a portfolio, especially during periods of distress when correlations among other assets increase. Finally, inflation tend to positively affect shipping, in general, and that should also be reflect in higher freight rates.

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Breakwave Advisors, the Fund Manager for BDRY, provides compensation to TIFIN Grow, LLC or one its affiliates to be a sponsored fund which provides the fund greater visibility. A conflict of interest exists between ProcureAM and TIFIN because of this compensation arrangement. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs.

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