Up 3,600%, this freight fund has posted the biggest gains of all on Iran war oil shock

As investors hunt for investment gains across the globe and diverse asset classes, from U.S. AI stocks to inflation hedges and crude oil contracts, something more mundane operating in the shadows of the global economy has racked up the biggest gains of all: freight tankers.

The Breakwave Tanker Shipping ETF (BWET), which tracks the price of shipping oil, is up roughly 3,600% year-to-date as of early September, according to Morningstar data through Sept. 11, making it the best-performing non-levered fund in the U.S., as the U.S.-Iran conflict squeezes tanker traffic through the Strait of Hormuz turning a once-obscure freight investment into one of Wall Street's best trades.

Supply chain and shipping routes will likely be further scrambled by Iran-backed Houthi rebels taking control of Yemen's key seaport of Mocka last week, a spot which allow the militia to wreak havoc with Red Sea shipping. The Red Sea had been used as an "alternate" to the perilous Persian Gulf. Further north on the peninsula, Saudi Arabian officials ordered a shut down of the kingdom's crucial East-West crude oil pipeline last week as a precautionary measure after multiple attacks by drones launched from Iraq.

John Murillo, chief business officer of B2BROKER, which offers trading infrastructure technology to financial institutions, said the most important detail about BWET is that it tracks the price of shipping oil, rather than underlying crude oil prices.

It is the only ETF to track the future cost of transporting crude oil, offering investors exposure to oil tanker futures without having to trade in the futures market directly.

"It has very little to do with the oil price itself or its actual volume and depends mainly on geopolitics," Murillo said. Investors buying this fund are making a bet on how expensive it will be to move a barrel from the Middle East to consumers, he said, "and it became very expensive to do so after the crisis in the Strait of Hormuz began," he added.

Year over year, rates on the Middle East oil tanker routes it tracks are up close to 500%, according to BWET's most recent biweekly tanker report on Sept. 8.

As the hostilities continue, and difficulties persist passing through the Strait and the new choke points appear, many shipping companies have decided to avoid the region altogether, which makes trade routes longer and more expensive. With supertanker rates at record highs, shipping companies are making record profits.

"This explains the fund's sheer growth and also points to the risk," Murillo said.

But the risk of a swift and severe reversal doesn't look to be happening anytime soon, said Kyle Peacock, principal at Peacock Tariff Consulting, a tariff and customs advisory firm. He said it is not just the Iran war that has caused this freight trade to boom. Scrambling of traditional trade routes due to tariffs and widespread drought, with low water levels plaguing ports in Panama and in Europe leaving ships stranded, have created an unprecedented shortage of ships.

"Companies are jumping at prices that might be 300 percent higher than they were paying, but that is the only ship available," Peacock said. "The shipping companies may have to route a ship farther, but their income is increasing tenfold," he said, as freight customers that have to move their goods drive up the prices as they compete for very limited space.

Tariffs have also caused ships to be rerouted to destinations not typically served as heavily. One of Peacock's clients moved a manufacturing facility from China to Hungary to avoid tariffs. "These new trade routes are taking from the supply of vessels," Peacock said.

In typical freight times, the container ship companies dictate the routes, but right now, urgency in the market is leading routes to be determined by the highest bidder, Peacock said. "Long-time clients are being bumped from carriers for the highest bidder," he said. "It is at a tipping point, because what trade route is now more profitable is how carriers are looking at it ... backwards from the way it was in the past," he added.

Peacock said relief will be slow to come, but it will come from getting ships marooned in geopolitical choke points back to their ports and the ones stuck in low water out. And, in the long term, he said, a large number of vessels on order will begin to alleviate shipping shortages when those hit the seas, but that will be 18 to 36 months from now.

"There is always a reserve of diesel, there is always a reserve of gas, but there isn't a reserve of vessels," Peacock said, estimating that 200 or more vessels are under construction now in various countries.

BWET stated as much in its most recent tanker report, writing, "The recent rapid increase in freight rates has led to significant new vessel ordering, with the orderbook now standing at well above average levels, and although in the near term such a supply/demand misbalance is small, we expect a meaningful negative balance to develop longer term leading to an industry downcycle."

Eric Fullerton, vice president of product marketing at Project44, a supply chain intelligence platform, said this type of disruption is becoming the new norm and will keep shipping prices inflated for the near future. "This is twice in the past three years either governments or groups have weaponized trade routes for geopolitical gain. We have never seen that before," Fullerton said, referring to disruptions earlier in the Suez Canal and now the Strait of Hormuz and last week's new Houthi attacks on key Red Sea shipping lanes.

Prior to the beginning of war with Iran, average geopolitical shipping disruptions might clock around 1,000 a week, but that number jumped to over 9,000 at the peak of the crisis, according to Project44, which has flagged 140,276 total shipping disruptions this year, defined as when a vessel has to be diverted.

Disruptions have been gradually declining, but are still twice as high as before the outbreak of the Iran war.

"We are looking at an incredibly high volume of disruptions that are concerning," Fullerton said, citing military conflicts and trade wars. "This has upended operations in a significant way," he added.

Due to the success of this strategy, he expects weaponized trade to continue. "These are very strategic negotiation tactics for these groups and countries, so the fear is that governments and groups will continue to target the supply chain to increase their negotiating power for geopolitical events," Fullerton said.

The effects on the global economy go well beyond the tanker trade, as inflation around the world indicates, with petrochemicals and feedstocks feeding the global economy. "Feedstock is packaging — the things that come from the Gulf are the stuff that makes stuff, a lot of ingredients, and isn't necessarily end products," Fullerton said.

### More freight ETF trading options

Peacock said ocean-bound transit isn't the only freight mode benefiting right now, with air cargo commanding premiums. Air freight rates were up 18.1% year-over-year in August, according to the Baltic Air Freight Index, a notable jump given that August is typically a slow season for air cargo.

Investors looking for a way to play both trends at once have an option: the U.S. Global Sea to Sky Cargo ETF (SEA), which splits its holdings roughly 70% sea shipping and 30% air freight companies, gives broader exposure to the same disruptions driving BWET's gains without the concentration risk that comes with betting entirely on tanker futures.

"A lot of air cargo is experiencing the same thing ... right now cargo is more profitable than passengers," Peacock said.

There is also a more diversified trade on ocean freight through the SonicShares Global Shipping ETF (BOAT), which invests in shares of companies operating in the global maritime shipping industry.

Fullerton expects it to be a year or two before the supply chains resemble anything close to normal, and that is without war and tariffs exacerbating normal shipping delays, which could be a port strike, extreme weather, or a cyberattack.

"A company managing tariff exposure through nearshoring is also managing freight cost volatility from Hormuz, is also exposed to the next port labor dispute. That stacking is the actual story, not any single event," Fullerton said.

But with SEA's year-to-date return at 42%, and BOAT posting a YTD return of 70%, according to Morningstar data through Sept. 11, no freight fund trade comes close to the narrow oil tanker futures bet made by BWET.

It as about as narrow as a trade can get outside a levered single-stock ETF, holding exposure to less than ten futures contracts on tanker traffic transiting routes from the Middle East to the Americas and Asia, as well as from West Africa to Europe. And BWET doesn't come cheap, with an expense ratio of 3.50%. It also uses an investment structure, known as a commodities pool, which is designed for the trading in futures but creates unique tax considerations that make the fund a better fit for tactical traders than long-term investors.

But Murillo says it is the underlying global dynamics fueling the oil tanker futures that investors would be wise to keep in mind, since the geopolitical situation can change rapidly and the freight market is notoriously volatile. Restrictions on shipping lanes, vessel shortages, and war-related premiums and insurance spikes can all prove short-term in nature. Signs of some diplomatic progress between Iran and Middle East neighbors did emerge over the weekend, though progress between the U.S. and Iran to reduce hostilities in key oil shipping routes remains elusive. "This conflict is unpredictable, and it may end at any time. When it happens, freight rates will go down, and so will the fund," he said.