In April 2020, young investors rushed to buy the USO (United States Oil) ETF when the price dropped to $3. Unfortunately, the millennials were confused; the ETF was making a play for the futures contract, not on the spot oil. Hence, experts warned that such ETFs should be handled with gloves and only held on to for a short time. On the other hand, in May 2020, gasoline ETFs experienced a comeback as the lockdown restrictions were rolled back, and Americans began making more movements. Consequently, gasoline futures surged, and so did the related ETFs. However, some traders are still careful about investing in oil and gasoline ETFs saying that the energy sector is the most beaten-up in the S&P, long-term. Whether the current gasoline prices are going to stay or not, the bottom line is that there are still some gasoline ETFs that you should consider for your portfolio, and they include:
United States Gasoline (UGA) ETF
In 2018 Nasdaq asked investors to take advantage of the surging gas prices by investing in UGA ETF, which would allow them to make direct plays in the RBOB gasoline commodity. By March 2020, another analyst, Seeking alpha, was advising investors to buy UGA stock calling it a once-in a-lifetime-opportunity. The article explained that although demand was likely going to decrease as refineries cut production, the RBOB front-month futures were selling at $0.50, the lowest since 1999.
Nasdaq explained how backwardation works; when prices for the next futures contract are expected to be lower, UGA benefits from the bullish market. The fund rolls over futures contract at lower prices, which mean higher profits. Consequently, investors stand to benefit from the increased profits shared out to them in the form of dividends.
SPDR S&P Oil & Gas Exploration & Production (XOP) ETF
StockInvest.us posted on October 13, 2020, that the share price has been fluctuating between $43 and $45 while the volume has increased by 80,000 shares. The signals have also been changing; there was a buy signal on October 1, 2020, which has kept rising to reach 7.89%. There have also been “sell” signals and “hold” signals. However, the article explains that the chances of the shares experiencing a turnaround make it the right candidate for holding or accumulating, which was an upgrade from the previous “sell” recommendation. The system ranked the hold-accumulate signal at 0.005 and added that the risk was medium.
One of its top holdings is Chevron, with 6.61%. Although traders are still wary of the risk exposure, one said that he would consider buying Chevron’s shares if it got back above $110. XOP’s expense ratio is 0.35%, which is quite favorable. Besides, the fact that the issuer saw it best to do a reverse split in March 2020 should speak of how dedicated it is to ensuring that the price per share remains favorable. As a result, the investor experience is also well taken care of, encouraging you to partake in the ETF’s profits. The dividend payments have been on an upward trend from $0.06 in September 2018 to $0.38 in September 2020.
How do Gasoline ETFs Work?
If you are not sure if even investing in a gasoline ETF should be on your mind mostly because you do not know how they work, How to Trade Stocks gives a detailed explanation. Due to gasoline and oil prices’ fluctuating nature, an ETF makes it easier to track the prices, unlike when you buy a gas-related stock. The article clarifies that ETFs have a variety of gas stocks that allow you to spread risk.
When you invest in an ETF, you invest directly into a portfolio that comprises stocks of companies that deal with the processing, production, and transportation of oil and gas. The ETFs will keep track of gasoline prices through futures contracts, which can be priced higher (Contango) or lower (backwardation). You can buy and sell its stock just like you would any other stock, and some ETFs even allow you to make money when the prices go down through a short sale. A short sale allows an investor to sell securities when he anticipates a price decrease.
Why Should You Invest in Gasoline ETFs?
Commodity enlightens us that commodities like gasoline have lower correlations with other bonds and stocks, unlike individual stocks, thus investing in gasoline provides an excellent strategy for diversification. Through an ETF, you buy into a basket of commodities that cushions you against the adverse impact you would get if you invested in only one specific commodity.
The article goes ahead to explain a few reasons why one should invest in gasoline, and top of the list is that eventually, oil will not be an option. Crude oil is the primary energy source in many companies, but the product’s extraction method has raised concerns. Therefore, predictions are that extracting fossil fuels will one day become unacceptable, and the environmental damage may also cause a shortage. Gasoline will be there to fill the gap, and with the surge in demand, the prices will be astronomical, and investors will cash in on the investments they made today.
Besides, we have witnessed how the easing up of lockdown restrictions have caused gasoline prices to go up as demand has also increased is proof of the enormous role it plays in the economy, not just in America but worldwide. Increased traffic resulted in higher demand for gas, and it was expected to return to pre-COVID 19 levels. Additionally, now is the time to invest because the supply is still low compared to demand; thus, the market forces are pushing the prices higher, causing more profits for companies in the gasoline sector. Since gasoline is a driver of economic growth, investing in it through ETFs is a wise decision, any investor looking to have an impressive portfolio should prioritize.