Summer is coming, and that often mean rising gas prices. A comment from reader Thadf reminded me of an old post from late 2008 about hedging gas prices using ETFs. He points out that looking back, using the United States Gasoline ETF (UGA) was a much better hedge than using alternative ETFs like the United States Oil ETF (USO) and iPath S&P GSCI Crude Oil TR Index ETN (OIL) which tracked crude oil futures instead of unleaded gasoline.
All of these ETFs use futures to try and match the price movements of a commodity, but they don’t actually hold the commodity itself as storage and transaction costs would be cost-prohibitive. The concern back then was that UGA only started trading in February 2008 and was thinly traded so the bid/ask spreads could be wide and NAV premiums could be high. Today, UGA still has significantly net assets than OIL or USO.
Here’s a chart of the past 3-year performance of USO vs. OIL vs. UGA, via Google Finance:
Here’s a chart comparing the past 3-year price change of UGA vs. gasoline prices at the pump. UGA daily closing prices from Yahoo Finance, national average gas prices from the US Energy Information Administration.
The tracking looks better than expected, considering the concerns I’ve read about contango and hedge fund manipulations. UGA’s expense ratio is 0.80%. I wonder how much trouble it would be to trade gasoline (RBOB) futures directly on the NYMEX.
Is hedging gas prices worth the effort for the average consumer? Probably not. Unless you are especially sensitive to a price spike for some reason, any money is better invested for the long run. But if that’s your goal, your better option would appear to be UGA.
By Jonathan Ping | Budgeting | 5/8/12, 3:00am