Energy ETF Report - Commodity ETFs

Zacks Investment Research
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Posted: Jul 20, 2011 10:59 PM
The energy department reported today that US stockpiles of gasoline fell for the first time in seven weeks. According to Bloomberg Gasoline Supplies dropped 460,000 barrels in the week ending June 17 this well above the median forecast of 17 analysts surveyed by Bloomberg News which actually predicted a gain of 1 million barrels. Also Gasoline imports slid 22 percent to an average 867,000 barrels a day, the fewest in five weeks.

This news plus the upcoming 4th of July Holiday, should drive gasoline prices higher in the short run.

One of the best ways to invest in gasoline is in the fuel itself through the U.S. Gasoline Fund (UGA). The United States Gasoline Fund is a commodity based ETF that invests exclusively in gasoline futures contracts.

UGA has an expense ratio of 0.60%. As of yesterday’s close UGA is trading at a -0.21% discount to its Net Asset Value and is currently up more than 20% year to date. Currently the gasoline market is in backwardation which is bullish for the commodity and the gasoline ETF UGA.

(One disadvantage of commodity based ETF’s is that they can be susceptible to “roll yield”. Roll yield is the positive or negative return that occurs when a futures index or ETF rolls from the current month’s contract to the next month’s contract.

The roll yield is positive when the futures market is in backwardation and negative when the futures market is in contango. Basically if the current month’s future has a higher price than the next nearest month, this is backwardation and it is a bullish sign for the commodity.

Conversely if the current months futures contract has a lower price than the next nearest month, the market is in contango it is a bearish for that commodity, and it produces a negative roll yield which indirectly hurts the shareholders of ETF’s that are in contango.) A negative roll return is the percentage cost that investors incur by holding an ETF that holds futures contracts that are have a negative roll yield and has a market in backwardation.

So basically anyone who owns an ETF such as the heating oil ETF UHN above is losing a -.67% each month regardless of the ETF’s price movement and therefore has to make a .67% return to just break even.)

Bearish Signs For Crude and Heating Oil Oil inventories declined less than analysts expected and oil supplies increased by 38 million barrels the first gain in four weeks, all of which is a short term bearish sign for the price of oil.

The most direct way to invest in the price of oil is through the US Oil Fund (USO), a commodity based ETF that mainly holds crude oil futures contracts. USO has an expense ratio of 0.45%. As of yesterday’s close USO was trading at a -0.46% discount to its Net Asset Value and USO is currently up more than 9.2% year to date.

Heating oil demand was also week as supplies for heating oil increased to a five week high, a short term bearish sign for the price of heating oil. The most direct way to invest in heating oil is through the US Heating OIL Fund (UHN) a commodity based ETF that mainly holds heating oil futures contracts. UHN has an expense ratio of 0.60%. As of yesterday’s close UHN was trading at a -0.57% discount to its Net Asset Value and UHN is currently up more than 21% year to date.

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