As the economy is recovering gradually in 2013, economic
activity has started to pick up across the country (read:
Three Surging ETFs with Strong Momentum
). Yet, some significant headwinds could upset the potential
recovery before it manages to pick up steam, specifically, the
impact of high gas prices.
This surge in prices has been brought about by a few key
factors. First, the price of crude is climbing as the global
equity indices is hitting the new 52 week high and Euro zone is
showing some signs of improvement.
Additionally, the closure and maintenance of refineries on the
East and West Coasts will likely curtail gasoline supplies.
Beyond that, gasoline demand is also on the rise owing to
improving job markets and recovering economic fundamentals (read:
3 Energy ETFs for America's Production Boom
Investors could easily take advantage of this trend by
focusing on broad energy
. While all energy products have been performing well this year,
the real winner has been in the world of gasoline, as represented
UGA in Focus
UGA allows investors to directly make a play on the commodity
of RBOB gasoline and provides a vehicle to hedge gasoline
movements or to take directional positions on gasoline prices
(see more ETFs in the
The fund tracks the changes in percentage terms of its units'
net asset value to reflect the changes in percentage terms of the
price of gasoline. This is measured by the changes in the price
of the futures contract on unleaded gasoline traded on the NYMEX
that is the near month to expire, except when the near month is
within two weeks of expiration. When that is the case, the next
month's contract will be used instead.
The ETF is less liquid with daily trading volume of about
36,000, suggesting a wider bid-ask spread. As such, investors
have to pay extra beyond the annual fee of 60 bps in fees per
year. The fund has managed assets of $70.1 million so far.
The fund easily outperformed the other oil-based ETFs in the
segment, gaining about 9.6% year-to-date compared to 5.9% gain
Brent Oil (
and WTI crude, as represented by
. In fact, UGA also outpaced the broad market fund
by 340 bps so far in the year (read:
Venezuela: The Next Black Swan for Oil ETFs?
While generating solid returns, UGA can be susceptible to roll
yield. Roll yield is the positive or negative return that occurs
when a futures index or ETF rolls from the near month's contract
to the next month's contract.
The roll yield is positive when the futures market is in
backwardation and negative when the futures market is in
contango. Basically, if the price of the near month contract is
higher than the next month futures contract, then this is
State of Backwardation on UGA
UGA is poised to benefit from the prolonged period of
backwardation. Currently, the gasoline market is in backwardation
which is bullish for the commodity and the gasoline ETF UGA.
Hence, the fund rolls over the next month futures contracts at
a lower price, thereby making profits. A market in backwardation
signifies that demand exceeds supply boosting gasoline prices
Why the Gasoline ETF Is a Top Performer
Given that gasoline prices seem to be on the rise with
supply/demand imbalances and the economy appears to be on the
mend, UGA could be an interesting pick for investors looking to
make a concentrated play on the gasoline segment of the energy
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US BRENT OIL FD (BNO): ETF Research Reports
US GAS FUND LP (UGA): ETF Research Reports
US-OIL FUND LP (USO): ETF Research Reports
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