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A Pure-Play Gasoline ETF to Profit From as Gas Price Tops $3

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Amid inflationary concerns, Americans are feeling the heat of soaring prices at the pumps as well. This is especially true as the average U.S. gasoline price surged above $3 per gallon for the first time since 2014 (read: Inflation Is Picking Up: 5 ETFs to Make the Most of It).

The spike came following a cyberattack that forced the shutdown of the country's largest refined oil pipeline. The Colonial Pipeline, which connects the Gulf Coast to the Northeast, carries nearly half of the fuel consumed by the East Coast and spans more than 5,500 miles. The pipeline is expected to fully restore operations later this week. The closure has prompted motorists to pile into gas stations, straining supplies in Virginia, Georgia, North Carolina and several other states, primarily in the Southeast and lower mid-Atlantic region.

The rise in gas prices has come at a time when most Americans are preparing to travel after being vaccinated. As summer is around the corner, travel is expected to make a big comeback. Per the recent Tripadvisor survey, about 67% of Americans are planning to travel this summer (Jun 1 to Aug 31), up 17% from spring (Mar 1 to May 31). Millennials are excited the most and form the vast majority (72%) of the population planning trips. Of those Americans planning to travel, 74% will take a domestic trip and 13% will travel internationally.

Investors could easily take advantage of surging gas prices by focusing on pure-play United States Gasoline ETF UGA, which allows investors to make a direct play on the commodity of RBOB gasoline (see: all the Energy ETFs).

UGA in Focus

This fund is designed to track in percentage terms the movements of gasoline prices. The benchmark futures contract is the futures contract on gasoline as traded on the NYMEX. If the near month contract is within two weeks of expiration, the benchmark will be the next month contract to expire. The ETF is illiquid with daily trading volume of about 110,000, suggesting that investors have to pay extra beyond the annual fee of 1.02% per year. The fund has managed assets of $112.7 million (read: 5 ETFs at The Heart of the Commodity Comeback This Year).

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 it is backwardation and the opposite holds true in contango.

State of Backwardation on UGA

UGA is poised to benefit from the prolonged period of backwardation, where later-dated contracts are cheaper than near-term contracts. Currently, the gasoline market is in backwardation, which is favorable for the commodity and the gasoline ETF UGA. As such, the fund continues to roll over the next month futures contracts at a lower price, thereby making profits. This signals continued bullishness in the commodity. This trend is likely to persist at least in the near term, acting as the biggest catalyst for the commodity.

Bottom Line

Given that gasoline prices are on the rise and will continue to remain steep at least in the near term, UGA could be an interesting pick for investors looking to make a concentrated play on the gasoline segment of the energy market.

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US GAS FUND LP (UGA): ETF Research Reports
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