Summary
- UGA was the first ETF created (back in 2008) to track the price of gasoline, using futures contracts.
- In this report, I go light on the intricacies of the gasoline market, to focus on how investors can use UGA to hedge their own household inflation.
- I rate UGA a Hold, as I currently assess it as being in a range-bound price pattern.
by Rob Isbitts
Other than in the Strategy section below, this article is focused on the more generic term “gasoline.” I’ll leave the geology and commodity industry terminology to other contributors who have intimate knowledge of oil and gas production.
Here, I am focused strictly on what most consumers worry about: the price at the pump, and how it invades their personal income statement, perhaps crimping their ability to travel during periods of elevated gas prices. Because I see this ETF, nearing its 15-year anniversary, as a potentially under-appreciated way for consumers to fight back against rising prices they pay for gasoline. As someone who comes from a family that is generally on top of what the price of gas is, and where to find the lowest-priced gas in our area, I have been looking at [[UGA]] and thinking it could be one of the more easily-understood ETFs I follow, as far as non-investment-oriented folks are concerned.
Strategy
UGA aims to track the spot price of gasoline in the United States. It accomplishes this by investing in near-month (i.e. the next month’s) futures contract on the New York Mercantile Exchange. By gasoline, the specific definition applied here is what is referred to as RBOB, which is “reformatted blend-stock for oxygen blending” gasoline. The front-month contract owned, then rolled to the next month’s contract each month.
ETF Grades
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Offense/Defense: Offense
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Segment: Commodities
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Sub-Segment: Gasoline
Technical Ratings
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Short-Term (next 3 months): D
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Long-Term (next 12 months): D
Rating scale: A = Excellent, B = Good, C = Fair, D = Weak, F = Poor
For a detailed description of MII's proprietary technical rating system, see disclosures at bottom of this report.
Holding Analysis
UGA has two holdings. The main holding, currently representing about 74% of assets, is a gasoline futures contract. The rest of UGA’s assets is invested in a money market fund.
Strengths
UGA is about as transparent as an ETF gets. It simply owns those gasoline futures contracts, and rolls them. That is something an investor can do on their own, if they open a contract to trade futures, and make the moves themselves. I’ve been a professional investor for nearly 30 years, and there are two things I’ve never done. One is to short a stock, and the other is to trade futures (I am an active options trader in my own account). This is because I prefer to use convenient vehicles (mainly ETFs these days) to express my intentions as an investor.
Weaknesses
UGA is small, with assets of only around $70mm. After 15 years in business, that may indicate investor dissatisfaction with how UGA is structured. Or, it could simply be the main reason so many ETFs continue to be “under the radar”: because they don’t have big marketing budgets to promote themselves, either by circumstance or by choice. UGA’s expense ratio is nearly 1% (0.93%) which may turn some investors off. But to me, it is the price of convenience, liquidity and access to participate in the movement of gasoline prices.
Opportunities
As I see it, by owning UGA, you are basically being part of the “house” in the casino that is the gasoline market. Prices bob up and down based on political issues, energy trader and speculator activity, technical price levels and much more. This all conspires against the consumer, who just wants to get from here to there in their car or truck. So, having an exchange-traded investment vehicle that allows investors to access changes in the spot price of gasoline seems like a good way to profit during those times when it feels like the gas station and oil companies are taking money out of people’s pockets. Because, as the past few years have shown us, gasoline prices we pay at the pump can gyrate wildly. So, why not try to make some money to offset those higher prices? That does imply that this is more of a tactical investment report, though some investors may determine that having a gasoline price hedge in this manner is a long-term investment. That’s not my call, that’s theirs.
Threats
UGA is an ETF. And it is taxed as a limited partnership, so it issues a K-1 tax statement to owners each year. In my experience as an investment advisor (1993-2020), I do recall some investors wanting to avoid K-1s, perhaps because of the additional filing burden. So, do understand this is a K-1 situation.
Conclusions
ETF Quality Opinion
UGA is a long-tenured but very small ETF. But in small chunks, it may be a helpful way to take advantage of sustained gas price spikes. I’ll continue to follow it.
ETF Investment Opinion
For now, UGA is a Hold-rated ETF for me. It has traded in a range following a big price jump in 2022. But gas prices can shift suddenly, strongly and sustainably. So I’ll be keeping this little ETF on my screen and charts from here forward.
Modern Income Investor's proprietary technical rating system was created by the firm's founder, Rob Isbitts, a chartist for more than 40 years. The ratings emphasize risk-management, and the belief that while any investment can appreciate in price at any time, each investment carries a different level of potential for major loss. The balance of reward and risk is calculated each night for thousands of securities, using a formula that analyzes price trend, strength of that trend and key price levels. It analyzes data over multiple time frames to produce a short-term rating (looking 3 months out) and a long-term rating (looking 12 months out).
For further details see:
UGA: A Way For Investors To Hedge Their Own Income Statement