U.S. Markets closed

Can the Gasoline ETF Continue to Surge? - ETF News And Commentary

Sweta Killa

While trading in the energy commodity space, in particular oil and gasoline, was extremely choppy over seven months ended January, the trend has reversed lately on an improving demand/supply balance. Notably, the average price of regular gasoline at U.S. pumps rose nearly 21 cents to $2.54 a gallon over the past two weeks ending March 6, according to Lundberg Survey Inc.


This surge in prices has been brought about by a few key factors. First, crude oil has strongly bounced back from its low hit in late January. Crude oil is the primary component of gasoline, and $1 dollar increase in crude oil led to an increase of nearly 2.5 cents a gallon in the price of gasoline. Second, a biggest strike in the U.S. refineries since 1980 by the United Steelworkers union is disrupting one-fifth of the U.S. production (read: Beyond WTI Crude: Better Energy ETFs for Investors Now).


Additionally, a refinery explosion at Exxon Mobil (XOM), seasonal maintenance and changes in the summer-blend fuel sold at the pump are contributing to the higher gasoline price. The trend is likely to continue at least in the near term as gas price typically rises during late winter and spring. This can be easily depicted from last year’s average gas price, which increased by about 43 cents per gallon from early February to late April.


As per the AAA monthly gas price report, the national average price of gas could rise by 20 cents per gallon or more in March as the refinery maintenance season is still on. However, the price would remain lower than the recent years at under $3 per gallon due to cheap crude oil and above-average gasoline supplies.


Investors could easily take advantage of the surging gas prices by focusing on United States Gasoline ETF (UGA), which allows investors to make a direct play on the commodity of RBOB gasoline. The fund easily outperformed the other oil-based ETFs in the segment, gaining about 11.8% since the start of February compared to gains of 9.9% for United States Brent Oil Fund (BNO) and 3% for United States Oil Fund (USO). In fact, UGA also outpaced the broad PowerShares DB Energy Fund (DBE) by a wide margin (read: 5 ETF Winners of February).


UGA in Focus


The fund provides investors with exposure to front-month gasoline futures, tracking RBOB gasoline for delivery to the New York harbor which is traded on NYMEX. The ETF is less liquid with daily trading volume of about 61,000, suggesting that investors have to pay extra beyond the annual fee of 60 bps per year. The fund has managed assets of $99.9 million so far.


As traders need to roll from one future contract to another, the fund is susceptible to roll yield. Notably, 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 backwardation and the opposite holds true for contango.


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 favorable for the commodity and the gasoline ETF UGA. This bullishness is expected to continue until the end of 2015. Hence, the fund continues to roll over the next month futures contracts at a lower price, thereby making profits (see: all the Energy ETFs here).












Bottom Line


Given that gasoline prices are on the rise with supply/demand imbalances and the economy tracking towards full growth, UGA could be an interesting pick for investors looking to make a concentrated play on the gasoline segment of the energy market.


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
US GAS FUND LP (UGA): ETF Research Reports
 
US BRENT OIL FD (BNO): ETF Research Reports
 
US-OIL FUND LP (USO): ETF Research Reports
 
PWRSH-DB EGY FD (DBE): ETF Research Reports
 
To read this article on Zacks.com click here.
 
Zacks Investment Research
 
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report