West Port Congestion To Hurt These ETFs

By | February 18, 2015

Scalper1 News

The slowdown at 29 West Coast cargo ports is getting worse with operations having been suspended yet again last weekend. This represents the second partial shutdown at these ports in a week and is the result of an escalating labor dispute with the dockworkers’ union. The International Longshore and Warehouse Union, representing 20,000 dockworkers, has been in negotiations for nine months with the Pacific Maritime Association, with no effective labor deal till now. It is estimated that the partial shutdown will result in a loss of billions of dollars in trade, especially with Asia, hampering trade of electronics, clothes, toys and car parts. Notably, the 29 ports handle nearly half of all U.S. maritime trade and more than 70% of imports from Asia, representing around $1 trillion of cargo a year (read: Is Cheap Oil Driving Transport Earnings and ETFs? ). The conflict is disrupting the supply chain of American exporters, automakers, manufacturers, farmers and retailers, and is taking a toll on consumer goods, food, clothing and other products. It is also leading to higher expenses in the form of additional airfreight cost and other transportation fees that will likely dilute the profit margins of companies. Additionally, the impact has also been felt in the transportation sector due to slower freight traffic by trucks and rails. The National Retail Federation warned that a full strike or lockout at the West Coast ports could cost the economy $2.1 billion a day. Last time, the shutdown of West Coast ports for a 10-day period in 2002 had cost the U.S. economy about $1 billion a day. The situation has placed the retailers, who have to ship their inventories abroad before the busy spring shopping season, in a quandary. The labor strife has put a pause on shipping and may cost retailers as much as $7 billion this year. Notably, the U.S. footwear retail industry, which solely depends on imports, seems in deep trouble (read: Should You Keep Holding the Retail ETFs? ). The agricultural industry is no way behind as exports have fallen as much as 50%. California’s citrus industry has already seen a 25% decline in its export business, losing about $500 million in sales according to the trade group California Citrus Mutual. The deadlock is further threatening the $2.4 billion citrus industry at a time when the demand for California citrus usually peaks. Further, the meat and poultry industry is losing more than $40 million per week, as per the North American Meat Institute. Even if the nine-month labor dispute is resolved, it could take a couple of months for the economy to return to normal. Given this, a number of industries could see further slowdown from this 29-port dispute, pushing down the stocks and ETFs in the coming months. Below, we have highlighted three funds that are in focus. Though these products have a Zacks ETF Rank of 3 or ‘Hold’ rating, these could see rough trading in the days ahead given the port gridlock. iShares U.S. Consumer Goods ETF (NYSEARCA: IYK ) This fund provides exposure to 115 stocks that are engaged in a wide range of consumer goods, including food, automobiles and household goods. It tracks the Dow Jones U.S. Consumer Goods Index and charges 43 bps in annual fees. The fund is highly concentrated on the top five firms with the largest allocation going to Procter & Gamble (NYSE: PG ) at 10.8%, followed by Coca-Cola (NYSE: KO ) and PepsiCo (NYSE: PEP ) with at least 7% share each. All the three firms have an unfavorable Zacks Rank #4 (Sell), suggesting their underperformance in the months to come (read: Coca Cola, PepsiCo Earnings Stir Up Consumer Staples ETFs ). From a sector look, food & beverage accounts for 48.1% while household & personal products, consumer durables and autos & components round off the next three spots with a double-digit allocation. The product has amassed $656.8 million in its asset base and trades in moderate volume of about 72,000 shares a day on average. The ETF is up 1.8% so far in the year. iShares Transportation Average ETF IYT) The ETF tracks the Dow Jones Transportation Average Index, giving investors exposure to a small basket of 20 securities. The product puts heavy focus on the top five firms at roughly 43.2% with the largest allocation going to FedEx (NYSE: FDX ) , Union Pacific (NYSE: UNP ) , and Kansas City Southern (NYSE: KSU ) . The three firms currently carry a Zacks Rank #3 (Hold). From a sector perspective, about half of the portfolio is dominated by railroads while the delivery service sector makes up for nearly 28% share. The fund has accumulated $1.7 billion in AUM while it sees a good trading volume of more than 515,000 shares a day on average. It charges 43 bps in annual fees and has lost over 1% so far this year. iPath DJ-UBS Livestock Total Return Sub-Index ETN (NYSEARCA: COW ) This note tracks the Dow Jones-UBS Livestock Subindex Total Return, which delivers returns through futures contracts on livestock commodities. The benchmark provides 69% exposure to live cattle and the remainder to lean hogs. The product charges 75 bps in fees per year and has amassed $23.9 million in its asset base. It trades in average volume of about 18,000 shares a day, suggesting additional cost in the form of a wide bid/ask spread. The ETN is down 12.1% in the year to date time frame. Bottom Line These products could underperform in the coming months given that the malaise from the West port bottleneck will likely persist even if the dispute is resolved. As a result, investors should stay away from these ETFs for now. 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