ETFs – exchange-traded funds – have become wildly popular in the market over the past few years. They give you the broad exposure of a mutual fund with the tradability of a stock, meaning you can actually buy and trade shares of funds like they were shares of any other company on the market. Gasoline ETFs in particular are becoming popular simply because gasoline is always in demand and fluctuates enough to create room for profit.
Here, I’ll cover gasoline ETFs – what they are and how you can trade them effectively to increase your gains.
What Are Gasoline ETFs?
As mentioned, ETFs are funds that are traded on exchanges. They track either an index, a commodity, or a basket of tradable assets – like stocks – instead of one single company. This is how they are similar to a fund. They are similar to a stock in that you can buy shares in an ETF and places orders with these shares just like you would shares of, say, Apple or Microsoft or any other company.
Gasoline ETFs are designed to track the value of gasoline in the market, roughly speaking. Like other ETFs, like gold ETFs, for example, gasoline ETFs more or less rise and fall with the value of gasoline as it is manipulated by supply and demand across a global market.
So, when you’re buying shares of a gas ETF, you’re essentially betting that the value of gas will rise from the time of your investment, mainly because people need gas and there’s no really solid, widespread replacement for it (nor will there be for the foreseeable future). That alone makes gasoline ETFs pretty attractive.
Trading Gas ETFS: Getting Into the Market
There are two ways you can gain exposure to gasoline in the ETF world. One is by directly trading a gasoline ETF; the other is by trading gasoline futures or investing in broad energy ETFs that hold shares of refining and distribution companies like Chevron, Valero, Shell, BP, and the like.
As of now, there is only one true gasoline ETF on the market: the United States Gasoline Fund (UGA). UGA is designed to track gasoline price movements. In other words, as the price of gasoline rises, so does the value of UGA. UGA has a management fee of 0.6%, is marginable, can be traded with options, and has net assets of $79.49 million (as of June, 2012).
UGA’s holdings consist of NY Harbor RBOB Gasoline Futures, which are sold on the NYMEX. Futures are estimates of what a commodity will be valued at some later point in time, and are a way minimize risk between buyers and sellers. So, the value of UGA isn’t really based on what the price of gas is today, but what the market expects the price of gas to be in the future, whenever the futures contract expires.
Since this is the only ETF traded on the market at the moment directly tied to gas, many investors use other, more indirect ways to gain exposure to gasoline prices. The best way to do this is to invest in ETFs that track the performance of companies that are involved in producing, refining, and distributing gasoline.
One of the main ETFs is the iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO). This fund tracks the oil exploration and production sub-sector, has an expense ratio of 0.48%, and contains shares in companies like Occidental Petroleum Corporation (OXY), Apache Corporation (APA), Anadarko Petroleum Corp (APC), Marathon Petroleum Corp (MPC), and Valero Energy Corporation (VLO). Since all of these companies make, market, and distribute transportation fuels – a.k.a. gasoline and diesel, for the most part – you can gain exposure to the rise and fall of gas prices.
Tips on Trading Gasoline
The first thing you have to remember is this: Gasoline prices are very volatile. They are not only seasonal – meaning they rise and fall throughout the year according to the season – but they can also be subject to speculation in the commodities markets. People drive more during the summer, for example, so you can expect gasoline prices to rise during that season. They drive less during the winter, so you can expect gas prices to fall during those months.
Keep an eye on economic developments that can slow the economy and cause people to drive less and turn to alternative energy sources. If alternative energy stocks and prices are up, gasoline will more than likely be down. Also keep an eye on gasoline futures, since that’s how UGA’s value is determined. If the market expects gas prices to take a tumble, UGA’s value will take a tumble, too.
Above all, remember that gasoline is a fungible, inelastic commodity. Fungible means that prices are set by worldwide supply and demand, so the United States producing more oil in 2013 may not do a thing for gasoline prices in the United States. Inelasticity means that people will keep buying gasoline no matter how expensive it gets (up until a reasonable point) because we need it for our everyday life.