Hedging Gas Prices Revisited: Gasoline ETF UGA vs. Retail Gas Prices

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.

Comments

  1. Index funds are fine. But individual ETFs/ stocks are still lot of fun, right? :)

  2. How about… riding your bike! This and other MMM articles rightly advocate using the best, most under-used mode of transportation available:

    http://www.mrmoneymustache.com.....ve-a-bike/

  3. Biking is great, minus the times I nearly get hit by bad drivers. A helmet can only do so much in heavy traffic with intermittent bike lanes.

  4. I’d say no to biking as well. I saw a person riding a scooter and cars were following it too close for comfort. Too many drivers out there without the courtesy and common sense to not follow bikes and motorcycles too closely.

  5. I do not think that it is feasible for the average consumer to hedge their gasoline consumption using futures. The standard gasoline contract is for 42,000 gallons, which is more gasoline that you can use for several years.

    http://barchart.com/commodityf.....file/RBU12

  6. That, of course, implies that being in a car is without risk. Awareness of your surroundings is a must whether you’re on a bike or in a car.

    It’ll naturally become even more important to you once baby MMB comes along. Nonetheless, my first child is about to turn 1 (on Friday) and I am still an avid bike commuter. It saves money and gives me an opportunity to get some exercise — something that became increasingly difficult to accomplish with the kid around.

  7. Jenna, Adaptu Community Manager says:

    Makes me so thankful for public transportation.

  8. Interesting idea and good to at least see UGA tracking prices of gas more-so than the oil ETF’s tracking prices of crude oil. Your point about the concern with contango is a VERY valid one. Almost all of the oil ETF’s suffer from this and aren’t as accurate of a proxy for oil as one would hope: http://www.marketfolly.com/200.....s-and.html

Speak Your Mind

*