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Pump Up Solid Gains With Gasoline ETFs

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Americans are feeling the heat of soaring prices at the pumps with skyrocketing inflation and rising oil prices. This is especially true as the national average for a gallon of gas spiked to a seven-year high of $3.423, slightly surpassing the previous high-water mark of $3.422 from Nov 8, according to AAA.

Per GasBuddy, the nationwide average price for a gallon of gas is hovering at $3.42, up 12.3 cents from a month ago and 97.5 cents per gallon from a year ago.

Investors could easily take advantage of surging gas prices by focusing on the pure-play United States Gasoline ETF (UGA - Free Report) , which allows investors to make a direct play on the commodity of RBOB gasoline. The fund has gained 20% so far this year.

The massive surge came as U.S. oil price crossed $90 per barrel for the first time since 2014. The geopolitical tensions between Russia and Ukraine and in the Middle East, and frigid weather heightened concerns over tight energy supply amid increasing demand. The global price of crude oil accounts for roughly half of what Americans pay to fill up at the gas station. Oil price has spiked 21% this year, representing a $16 increase that equates to 40 cents more at the pump (read: ETFs to Gain & Lose From Higher Oil Price).

GasBuddy expects gas prices to go even higher, with a huge jump coming later in spring as a confluence of seasonal factors and the potential flare-up in geopolitical tensions. The forecaster projects gas price to hit $4 a gallon by Memorial Day.

UGA in Focus

United States Gasoline ETF 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. United States Gasoline ETF is illiquid with a daily trading volume of about 35,000, suggesting that investors have to pay extra beyond the annual fee of 1.02% per year. The fund has managed assets of $85 million.

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 (see: all the Energy ETFs).

State of Backwardation on UGA

United States Gasoline ETF 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 (read: 5 ETFs at the Heart of the Commodity Boom).

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