UGA: United States Gasoline Fund ETF

UGA: United States Gasoline Fund ETF

The United States Gasoline Fund (NYSEARCA: UGA) is an exchange-traded fund (ETF) tracks the daily percentage fluctuations in the price of gasoline, also known as reformulated gasoline blend stock for oxygen blending. The fund provides investors, traders and speculators an opportunity to gain exposure to RBOB gasoline.

The fund's benchmark is the RBOB Gasoline PR USD, which is measured by the daily fluctuations in the price of the futures contracts on RBOB gasoline for delivery to the New York harbor, traded on the New York Mercantile Exchange. If the near month contract is within two weeks of its expiration date, the benchmark is the RBOB gasoline futures contract expiring the next month.

UGA tracks the daily price movements and provides exposure to RBOB by holding primarily front-month futures contracts on RBOB and other gasoline-related futures contracts, and it may invest in forwards and swap contracts. For example, as of Aug. 3, 2015, the fund holds 1,182 NYMEX RBOB Gasoline futures contracts that expire in September 2015 at $1.6745, and the total market value of this holding is $83.13 million. The fund also holds various U.S. Treasury securities, as well as cash in U.S. dollars.

Characteristics

The United States Gasoline Fund is listed on the New York Stock Exchange Arca, and investors, traders and speculators can trade the ETF on multiple platforms. Like other United States Commodity Funds, UGA's administrator is Brown Brothers Harriman &; Company, its general partner is the United States Commodity Funds LLC, and its distributor is ALPS Distributors Inc.

UGA must change the composition of its holdings as the futures contracts approach the expiration date. Consequently, UGA rolls its contracts by selling the RBOB gasoline futures contracts expiring in the near month and buying RBOB gasoline futures contracts expiring the next month. Since the fund does not select its futures contracts based on the futures curve, UGA sensitive to the shape of the natural gas futures curves. If the RBOB gasoline futures are in contango, it can cause a negative roll yield, which may lead to losses.

Given the average expense ratio of the UGA category of commodities energy is 0.57%, the fund has a moderately high expense ratio of 0.75%. This can be attributed to monthly rolling of futures contracts. This expense ratio does not include broker fees.

Suitability and Recommendations

Investors should pay attention to the futures prices of RBOB gasoline, EIA Petroleum Status reports, EIA Short-Term Energy Outlook reports, EIA U.S. Weekly Supply Estimates, and geopolitical and weather-related news. Investors should pay particularly close attention to the weekly fluctuations in the supply of RBOB gasoline. The supply of RBOB gasoline affects the prices of the futures contracts on the commodity, as well as UGA.
As of June 29, 2015, based on trailing three-year data, UGA had an alpha (against the MSCI ACWI NR USD Index) of 10.82; a beta (against the MSCI ACWI NR USD Index) of 1.65, an R-squared value of 75.78 and a Sharpe ratio of -0.05. Based on modern portfolio theory (MPT), UGA's alpha indicates it outperformed the MSCI ACWI NR USD Index by an annualized 10.82%. The fund's beta indicates that it is theoretically 65% more volatile than the MSCI ACWI NR USD Index; this may indicate UGA carries more risk. UGA's Sharpe ratio indicates the fund has not been providing investors with an adequate return given the amount of risk taken. UGA's R-squared value indicates that 75.78% of its past fluctuations were explained by fluctuations in the MSCI ACWI NR USD Index.

Although UGA carries a high level of risk, it has the potential to provide high returns. UGA is not suitable for all investors due to its specialized exposure to RBOB gasoline. According to modern portfolio theory, UGA is suitable for short-, intermediate- and long-term value investors who believe RBOB gasoline prices are poised to rebound in the intermediate term or the long term. Investors who have a value investing approach and believe the supply in RBOB gasoline will decrease, causing the prices of gasoline to increase, can use UGA as an investment vehicle. Due to UGA's low average share volume, it may not be suitable for active day traders.