The fires of inflation are heated up again. Oil has broken $110 per barrel, and experts are again predicting $4-per-gallon gasoline prices soon. Many investments are suffering, but there's at least one ETF that sees good news in every price hike at the pump.
The United States Gasoline Fund (AMEX: UGA) is positioned to let investors take advantage of spiraling energy prices. This ETF is the first to track gas prices directly and allows investors exposure to movements in gas prices without having to open a commodity futures account.
Fund facts
- Inception date: 2/22/2008
- Expense ratio: 0.69%
- Net assets: $15 million.
Fund specifics
To track gas prices, United States Gasoline Fund buys gasoline futures, and forward and swap contracts. Because the fund puts up only a portion of its assets to enter into futures contracts, the remaining cash can be invested in Treasury securities; they provide interest income that the fund uses to offset its expenses.
However, it's important to realize that share prices won't necessarily be equal to the price of gasoline. Because futures contracts expire, the fund has to replace them with new contracts. It's common for futures contracts in different months to have different prices. So although the fund should move up and down roughly in sync with gasoline prices, prices in the futures markets may change overall returns substantially.
Because it relies on futures contracts, the fund is considered a commodity pool. The fund is set up to be classified as a partnership for federal income tax purposes, which means that investors will report taxable income and expenses directly on their returns.
Still hot for energy
According to the Department of Energy, gasoline accounts for roughly 17% of U.S. energy consumption. Although it is produced year-round, the summer driving season is when gasoline demand is usually highest.
Since 2005, the retail price of gasoline has been driven by demand from both developed countries and increasingly from developing nations. However, gas prices can change rapidly due to disruptions in crude oil supply or as a result of global or domestic problems. With better energy efficiency and the development of energy alternatives becoming an entrenched part of the energy mix, demand might slow for gasoline.
On the other hand, demand has remained strong even as prices have risen sharply. If this continues, limited supplies could sustain current lofty price levels.
Portfolio fit?
The United States Gasoline Fund is mostly a speculative play on a commodity. As stocks of oil giants Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), and others move for a variety of reasons, this ETF will rely solely on gas prices.
With this focus, the fund will probably be extremely volatile. Most investors shouldn't see the fund as an essential part of their portfolio. But for those who want to place their bets on gas prices going up going forward, this fund may be exactly what they're looking for.
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