Gasoline ETF Tracks Gas Prices at The Pump

You don’t have to be an investor in oil in order to notice if it’s been going up or down.  Car owners regularly experience the impact of oil price volatility at the pump. Not surprising since gasoline is derived from processing crude oil; gas is used as a fuel to power the internal combustion engine of millions of cars all over the world.

There are a few options for easing the pain of rising gasoline prices such as moving closer to work, buying a smaller car, taking the public transit or even buying an electric vehicle if you can afford one. However, there is also a gasoline ETF for investors looking to speculate on gasoline price movements or seeking to hedge against a rise in the price of gasoline. If you believe unleaded gasoline prices are going up, there is but one ETF to own:

The United States Gasoline Fund (NYSEArca: )
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MER: 0.88%
The UGA gasoline ETF is designed to reflect the changes in percentage terms of the prices of gasoline, as measured by the changes of the futures contract on unleaded gasoline traded on the New York Mercantile Exchange, minus the fund’s expenses. UGA’s portfolio mainly holds gasoline future contracts on the physical commodity of gasoline. UGA trades like a stock, you can buy it, sell it or short it as you see fit and it provides you with exposure to the commodity without the need of having a commodity futures account.

Live ONE YEAR Chart of the The United States Gasoline ETF– Symbol UGA 
Given the volatility of gasoline prices, profit opportunities abound. However, you need to keep in mind that this is no buy and hold ETF for the long term. This ETF is suitable for traders looking to capture profits through short term trades. Just like an oil ETF, UGA may suffer of backwardation (futures contracts prices lower than current prices) or contango (futures contracts priced higher than current prices) effects. This means that there’s a risk UGA may not closely track the changes in the price of gasoline over the long run which is a risk shared by all commodity ETFs holding futures contracts.

The price of gasoline is mainly linked to the price of crude oil, a global commodity that is affected by different variables. Since global oil supplies are tight, geo-political events could easily stress oil prices if a major producer faces instability.  The state of the global economy also plays a role in moving oil prices as demand for oil will rise or fall depending on whether the world economy is growing or contracting.  But while oil and gas prices are closely related, prices could drift apart for short period of times based on seasonality. Gas prices are usually lower when the cold sets in as people go on fewer road trips versus rising prices at the pump as gas consumption increases during the summer driving season. Regional supply issues can also impact gas prices across the country based on the type of crude processed by refiners. In the Midwest for example, refiners have access to landlocked crude oil supplies which sell at WTI prices while East Coast refiners have to pay Brent prices for their imported crude. The spread between WTI and Brent oil prices will result in gasoline price divergence across the country until the price gap is closed.

Disclaimer: the information presented above is only for informative purposes. It is in no way an encouragement to buy or sell the aforementioned securities.