These Energy Bets Could Warm Up Your Portfolio

Having a budget can help you with one of the most important financial responsibilities you have: spending less than you earn while still leaving something left over to add to your savings. Yet a budget is only as good as the guesses you make about your expenses -- and sometimes, those guesses turn out to be completely wrong.

If you're savvy, though, you can take advantage of financial innovation to improve your budget's accuracy. With ETFs that can help you protect against price increases of some of the most essential items on your monthly budget, you can use your portfolio to hedge your future needs. With a little planning, you can almost lock in the prices on those necessities, and so you won't have to worry about whether adverse events will break your budget.

Dealing with the weather
One of the hardest things to predict is what your energy costs will be over the course of a year. For those in the coldest parts of the country, the cost of natural gas or heating oil can rise and fall dramatically, leading to huge variations in your monthly utility bills. Further south, the same thing can happen with electricity bills during the hot summer months. In many cases, you're at the mercy of the weather -- and if Mother Nature frowns on you, your budget can end up taking a big hit.

In addition, the one expense nearly everyone has is buying gasoline. Yet as everyone saw back in 2008, prices at the pump can skyrocket quickly -- potentially leaving you in the lurch as you struggle to fill up your tank for basic needs like getting to work.

The better way to budget
Until now, you could only indirectly hedge against price rises of these essential items. You could assume that by buying shares of major oil producers like ExxonMobil (NYSE: XOM  ) or ConocoPhillips (NYSE: COP  ) , you'd benefit from higher oil prices -- but you couldn't be sure that some company-specific problem wouldn't send your shares southward even if oil rose. Similarly, natural gas users could invest in gas-producing companies like Chesapeake Energy (NYSE: CHK  ) and Anadarko Petroleum (NYSE: APC  ) , although they and other natural gas companies have started to hedge their own future exposure to natural gas prices, so their shares might not rise even if gas keeps going up after having doubled since the middle of last year.

Through some specialized ETFs, though, you can now gain more direct exposure to these and other similar commodities. Check out this list:

ETF

Current Price

Each Share Currently Represents Roughly …

United States Natural Gas Fund (NYSE: UNG  )

10.41

1.81 million BTUs of natural gas

United States Gasoline (NYSE: UGA  )

38.38

17.81 gallons of gasoline

United States Heating Oil (NYSE: UHN  )

28.71

13.05 gallons of heating oil

Sources: Yahoo! Finance, NYMEX. Based on Jan. 8 close for shares and front-month NYMEX futures.

These ETFs offer you a chance to hedge the costs of your energy needs. For instance, if you anticipate needing 1,000 gallons of heating oil over the winter months, then buying 77 shares of the heating oil ETF would currently match up with your future needs. If prices rose, then you could expect your shares to rise to cover the additional amount you'd have to pay to your oil company. But if prices fell, you wouldn't benefit -- your investment would lose value to offset the savings when you refill your oil tank.

Not the perfect hedge
Before you jump headlong into these ETFs, though, you need to know how they work -- along with their shortcomings. These ETFs all invest in a variety of futures contracts rather than taking delivery of the actual physical commodity. That can cause huge problems when futures prices don't move in line with spot prices of the commodity.

For instance, even though spot prices of natural gas have more than doubled since last year, the natural gas ETF has actually dropped in value. Similar problems are possible with the other ETFs, although those disparities actually helped investors in the gasoline and heating oil ETFs during 2009.

Take a closer look
Regardless, over relatively short periods, some of these ETFs will track prices fairly well. Used correctly, they could help you prevent a financial catastrophe should we see another spike in energy prices. That kind of protection will help you stay within your budget even when the unexpected happens.

Two hot commodities have both seen big moves. Find out from our panel of experts whether gold will beat oil in 2010.

Fool contributor Dan Caplinger isn't his family's biggest hero when he sets the thermostat at 60. Both he and the Fool own shares of Chesapeake Energy, which is a Motley Fool Inside Value selection. The Fool also has a synthetic long position on the U.S. Natural Gas Fund. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy will keep you warm at night.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 11, 2010, at 1:39 PM, jt8018 wrote:

    Hello all,

    I'm new to the investing game and have opened me an account for what I like to call "my mess around money" I do have a 401k account with my employer,so this is just to see if I can do any good myself.Kind of like a hobby.What I would like to get a better understanding of is ETF's and profits.Are the only profits to be made on an ETF,are when you buy and when you sell? Just say UNG for example,if I buy at 9.82 and it goes to 13.90,do I sell.Or are their dividends paid on these?With my "mess around money" I don't mind taking chances,if I truly believe in the company or fund.When the auto industry took a hit I purchased 1000.00 worth of Ford stock,everyone told me I was an idiot.I purchased it at 1.53 a share & look at it now,each share is worth 11.96-12.03.

  • Report this Comment On January 14, 2010, at 5:00 PM, sirwanksalot wrote:

    jt8018, Consider taking your new pick idea to the same folks who called you an idiot for buying ford @ $1.53. You know what to do if they call you names again.

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