The international shipping market relies significantly on the dry bulk shipping sector, known for its high levels of risk and volatility (Drobetz et al. 2012). This is primarily due to uncertainties stemming from factors like the global economy, the volume and nature of seaborne trade, and government policies (Yin et al. 2017). Dry bulk shipping stands out as the primary category of seaborne trade when considering the volume of traded cargoes. In 2013, the volume of dry bulk surpassed 5.5 billion tons (excluding container cargoes), representing 53% of the total volume of global seaborne trade. Nevertheless, it’s essential to note that the dry bulk shipping market tends to experience substantial volatility (Chen et al. 2012).
Researchers have consistently shown great interest in modelling the price dynamics, specifically spot- or time charter rates, within such markets (Drobetz et al. 2012). Due to the persistent uncertainties in the global shipping industry and the unpredictable fluctuations in spot rates, the quantitative analysis of spot rates or the pricing of the shipping freight market has consistently captured the interest of researchers within the shipping community (Chen et al. 2012). The extant literature suggests that the global bulk shipping market has experienced an extended peak period since 2003, which is notably prolonged given the increased complexity of markets (Jing et al. 2008). The cyclical nature of the dry bulk market can be attributed primarily to the oscillations in the global economy. Furthermore, inherent aspects of the shipping industry, including shipbuilding cycles and speculative investments in ships, also play a role in the variability of freight rates (Drobetz et al. 2012).
As a result, dry bulk shipping has consistently been recognized as one of the most volatile industries (Yin et al. 2017). Presently, the Baltic Exchange offers four distinct dry bulk indices categorized by different ship types: the Baltic Capesize Index (BCI), Baltic Panamax Index (BPI), Baltic Supramax Index (BSI), and Baltic Handysize Index (BHSI). The Baltic Dry Index (BDI) is derived as a weighted average of these individual indices. At present, the primary decision-making tools in the spot and FFA markets are the BDI indices (Chen et al. 2012).
Examining the correlations between spot and the dry-bulk Exchange Traded Fund (ETF) prices in dry bulk shipping is quite important, as these factors play a substantial role in helping shipping companies safeguard their profits and mitigate potential risks within the unpredictable market (Yin et al. 2017). In addition to these cointegrating rates, external factors such as market demand and supply, along with certain economic indices, are acknowledged as influential variables affecting the dynamic fluctuations of spot and the dry-bulk ETF prices (Drobetz et al. 2012). Academics and practitioners find interest in the relationship and interactions between spot rates and their derivatives, as the lead-lag dynamics between them provide insights into market efficiency and the potential for arbitrage opportunities (Drobetz et al. 2012).
Exchange traded funds (ETFs)
ETFs are gaining popularity in the asset management industry, capturing an expanding share of transactions in financial markets (Ben-David et al. 2018). An exchange-traded fund (ETF) serves as an investment vehicle for a collection of securities, akin to an open-ended fund (Alexander and Barbosa 2008). An Exchange Traded Fund (ETF) is a type of investment fund and exchange-traded product, with shares that are tradeable on a stock exchange. ETFs are designed to track the performance of a particular index, sector, commodity, or asset class. They offer investors diversification, liquidity, and the ability to trade throughout the day like individual stocks. The extant literature suggests that the impact of derivatives on the quality of underlying securities’ prices has been a longstanding concern in financial literature (Ben-David et al. 2018).
Specifically, an ETF allows transactions at market prices throughout the trading day. ETF market makers publicly provide firm bid and offer prices, earning profits from the spread. They engage in buying or selling on their own account to offset temporary imbalances in supply and demand, thus stabilizing prices (Alexander and Barbosa 2008). A fundamental regulatory requirement dictates that ETF shares can only be created and redeemed at the fund’s net asset value (NAV) at the end of the trading day. The bid-ask spread itself compensates market makers for managing order imbalances and inventory risk. However, with the rise of efficient electronic trading platforms, there is intense competition, leading to a downward pressure on bid-ask spreads. Consequently, market makers are actively exploring ways to minimize exposure uncertainty (Alexander and Barbosa 2008).
The dry-bulk ETF
Referring specifically to the maritime sector, the dry-bulk ETF reflects the forthcoming price of freight for a specific basket of vessel sizes and routes during a predetermined period. Common contracts pertain to vessel sizes such as Capesize, Panamax, and Supramax for dry bulk, as well as Very Large Crude Carriers (VLCC) and Suezmax vessels (Lin and Chang 2020). These freight futures contracts are structured on a monthly basis and mirror the average spot freight price throughout a given month. As freight is not a tangible commodity, there is no physical delivery involved. Instead, the contracts are cash-settled against the arithmetic average price of spot freight published by the Baltic Exchange (Lin and Chang 2020).
The Baltic Exchange issues daily freight assessments for various shipping routes, reflecting current shipping rates. These route-specific assessments for the corresponding vessel classes are used to calculate the monthly average against which freight futures are settled. For Capesize spot freight, the daily 5TC Capesize index is derived from the weighted average of five major global routes. Similarly, the 4TC Panamax index aggregates four distinct Panamax routes, while the 10TC Supramax index includes ten Supramax routes (Lin and Chang 2020).
A dry bulk ETF provides investors with unlevered exposure to the overall dry bulk shipping industry, without the need for a futures account. As investors buy and sell shares of the ETF, fund managers adjust the portfolio to reflect the performance of the underlying assets. Notably, 50% of the dry bulk ETF basket consists of Capesize freight futures, 40% consists of Panamax futures, and the remaining 10% is allocated to Supramax contracts. Since the ETF is heavily weighted toward Capesize and Panamax exposure, changes in its value may reflect market sentiment toward these vessel segments (Pelagidis and Panagiotopoulos 2019). Positive investor sentiment could, in turn, increase demand for these vessels and potentially affect spot market prices, demonstrating a link between financial flows and physical market dynamics.
Due to the nature of being a basket product, the creation and redemption of dry-bulk ETF shares involve trading in several component indices, many of which may have limited liquidity and incur high transaction costs. As highlighted by Alexander and Barbosa (2008), the expense of mitigating market risk through creations and redemptions is notably higher than the cost of hedging with freight futures directly. This friction has implications for tracking efficiency and pricing accuracy, particularly in periods of heightened market volatility or investor flows.
ETFs and volatility of the underlying asset
Derivatives markets are often criticized for causing an increase in the volatility of the underlying market, despite improving information speed and quality flowing to the spot market (Dinwoodie and Morris 2003). Some argue that liquidity shocks in derivatives markets may influence cash market prices by introducing noise (Ben-David et al. 2018). The covariance of stocks in the same basket rises due to shared exposure to these shocks (Ben-David et al. 2018). The liquidity shocks can propagate to the underlying securities through the arbitrage channel, and ETFs may increase the nonfundamental volatility of the securities in their baskets (Ben-David et al. 2018). In this context, (Ben-David et al. 2018) exploit exogenous changes in index membership and find that stocks with higher ETF ownership display significantly higher volatility. In other words, ETF ownership increases the negative autocorrelation in stock prices (Ben-David et al. 2018).
Leveraged ETFs, introduced in mid-2006, represent a relatively recent category of index products (Shum et al. 2016). These synthetic funds do not physically hold the underlying assets but instead derive returns through private swap or forward agreements with one or more counterparties (Shum et al. 2016). Unlike non-leveraged ETFs that track index prices continuously throughout the trading day, leveraged ETFs are designed to follow daily returns, with net asset values (NAVs) reported only once a day at the market’s close (Shum et al. 2016). Their daily management, which involves rebalancing toward the end of the trading session, is considered opaque, making these products suitable only for “sophisticated” investors (Shum et al. 2016). A contentious debate has unfolded since the financial crisis, with differing perspectives on the effects of leveraged ETFs on end-of-day market volatility (Shum et al. 2016). Some argue that their unique daily rebalancing activities pose systemic risks, while others contend that their market impact is too insignificant to drive up volatility (Shum et al. 2016). The primary concern revolves around the influence of leveraged ETFs on volatility at a specific point in the day, particularly during the daily rebalancing activities toward the end of the trading session (Shum et al. 2016).
Referring specifically to the maritime sector, the non-storable nature of the underlying asset, a service in this case, poses challenges in applying fundamental analysis commonly used in storable commodities. The absence of a storage relationship weakens the link between spot and forward prices, and the participation of non-shipping market participants in the forward market adds complexity to trading motivations (Nomikos and Doctor 2013). Once again, the driving force behind the observed patterns appears to be arbitrage activities between ETFs and the underlying assets (Ben-David et al. 2018). Additionally, the evidence indicating that ETF ownership contributes to increased security turnover implies that ETF arbitrage introduces a new layer of trading to the underlying securities (Ben‐David et al. 2018). Arbitrageurs buying the ETF and hedging by selling the underlying portfolio create downward price pressure on the underlying securities, leading to non-fundamental volatility (Ben‐David et al. 2018). ETFs attract a new clientele of high-turnover investors, exacerbating the impact of liquidity shocks (Ben‐David et al. 2018).
To provide a theoretical basis for the link between financial instruments such as ETFs and market volatility, we draw on the work of Ben-David et al. (2018), who analyse the impact of ETF ownership on the volatility of underlying assets. Their findings indicate that stocks held by ETFs exhibit significantly higher daily and intraday volatility, a phenomenon largely driven by arbitrage activity between ETFs and the underlying assets (Ben-David et al. 2018). This arbitrage process injects an additional layer of trading and speculative dynamics into the market, increasing turnover and, consequently, volatility. This framework helps explain how ETFs, while providing market exposure and liquidity, can also act as conduits for volatility transmission. Applying this understanding to the dry bulk freight market, the trading of dry bulk ETFs can similarly introduce speculative pressures and amplify short-term volatility in the spot freight rates for Panamax and Capesize vessels. Thus, the volatility observed in the physical market may not solely reflect underlying fundamental factors but also the influence of financial trading activity, consistent with the broader literature on volatility propagation in derivative and ETF markets.
Complementing this, Li et al. (2024) study the volatility risk premium embedded in ETF options and provide empirical evidence that this premium significantly influences realized volatility of the underlying securities. Their work shows that options markets contain implicit information about future volatility and that the volatility risk premium can predict fluctuations, especially ‘good’ volatility, more accurately. This strengthens the theoretical foundation that derivatives markets not only reflect but also transmit volatility information to the underlying assets, supporting the notion that ETFs and related derivatives can drive volatility through both trading and informational channels.
That said, speculators engaging in the shipping market through the low-cost access and relatively low entry barriers of futures market positions can have adverse effects on volatility of the spot rates (Nomikos and Doctor 2013). Derivatives markets are often criticized for causing an increase in the volatility of the underlying market, despite improving information speed and quality flowing to the spot market (Dinwoodie and Morris 2003). Thus, the assumption is that, without ETFs, liquidity trades would not affect the underlying security (i.e., the Capesize and Panamax dry bulk spot rates) with the same intensity (Ben-David et al. 2018). This study investigates whether the advent of the dry-bulk ETF has affected the volatility of the spot rates in the maritime sector.
The evolving role of freight derivatives and exchange-traded financial instruments has drawn attention from both the maritime and financial sectors, prompting scholars to examine their implications from multiple perspectives. Dinwoodie and Morris (2003) explore the cautious adoption of Forward Freight Agreements (FFAs) among tanker owners, attributing it to deep-rooted risk-seeking tendencies and limited technical knowledge, despite the instruments’ clear potential for hedging against freight rate volatility. Their survey reveals that while FFAs are widely acknowledged as an important innovation, usage remains uneven, highlighting a need for greater education and improved market liquidity. In a related but more financially driven context, Ko and Chang (2024) examine dynamic relationships in the dry bulk shipping market using structural VAR models with spot, time charter, and FFA rates, highlighting volatility transmission and forecasting relevance. Their findings underscore that freight derivatives markets can transmit shocks across freight benchmarks, reinforcing the view that financial trading channels may influence volatility dynamics in shipping markets.
Expanding the focus to broader financial markets, Ben-David et al. (2018) analyse the impact of ETF ownership on underlying asset volatility, showing that stocks held by ETFs exhibit significantly higher daily and intraday volatility. They argue that this volatility is primarily driven by arbitrage activity between ETFs and the assets they track, with higher turnover reinforcing the idea that ETFs inject an additional layer of trading into markets. Shum et al. (2016) focus more narrowly on leveraged ETFs and their end-of-day rebalancing behaviour, providing evidence that such trading activities contribute to elevated volatility near market close, especially during turbulent periods. Their findings have direct implications for regulators and raise concerns about predictable trading patterns inviting predatory strategies. Meanwhile, Nomikos and Doctor (2013) shift the lens back to the freight space, testing a suite of quantitative trading strategies within the FFA market. They demonstrate that, despite common challenges like low liquidity and sample limitations, these strategies often outperform passive benchmarks. To address robustness in their testing, they enhance the Hansen (2005) Superior Predictive Ability (SPA) test to accommodate smaller datasets, a methodological contribution with broader applicability.
Together, these studies show that financial instruments such as FFAs and ETFs are reshaping market behaviour by linking speculation, liquidity, and volatility in complex ways. Whether in freight markets or equity portfolios, their usage demands a deeper understanding of market microstructure, investor behaviour, and regulatory oversight. Building on these foundational insights, the present study offers a novel investigation into the influence of the dry-bulk ETF on the volatility of spot freight rates for both Panamax and Capesize vessel segments, markets that have remained largely underexplored in the context of ETF-driven financialization. While existing literature has predominantly centred on the role of Forward Freight Agreements (FFAs) (e.g., Nomikos and Doctor 2013) or examined volatility implications of equity and commodity ETFs more broadly (e.g., Ben-David et al. 2018; Ko and Chang 2024), this research ventures into new terrain by probing how speculative activity tied to dry-bulk ETFs might propagate volatility into the physical freight market. Unlike FFAs, which serve primarily as hedging tools for freight market participants, dry-bulk ETFs function as investment instruments accessible to a wider investor base, thereby influencing spot market dynamics indirectly through mechanisms such as arbitrage, portfolio rebalancing, and shifts in investor sentiment. In doing so, this study bridges an important gap between the financialization literature and empirical freight market analysis, shedding light on the tangible consequences of financial innovation for shipping rate stability. The findings carry significant implications not only for operational stakeholders, such as shipowners, charterers, and investors, but also for regulators tasked with overseeing the systemic risks introduced by emerging financial instruments in commodity-linked sectors.
