ETF Talk: Into The Pits For A Splash

In auto racing, you often hear about a car coming in for a pit stop and taking a “splash.” For those of you who aren’t acquainted with racing lingo, that just means the car is going to be filled with gasoline. Taking advantage of that splash often helps the team go the distance and finish out a race near the front of the pack.

Now investors may have their own chance to take a splash and finish in front of the pack, courtesy of a new exchange-traded fund (ETF) designed to take advantage of record-high gasoline prices.

This new ETF is the United States Gasoline Fund (UGA). The fund tracks the commodity price of gasoline. With gasoline prices hitting an inflation-adjusted record high on Monday, March 3, of $103.95, anyone who invests in this fund establishes a personal hedge against the rising gasoline prices at the pump.

The release of UGA comes amidst a boom in the value of commodity ETFs, a trend that I want you to approach with caution, especially if you are considering jumping into anything commodity related (more on this in the next section).

The rising volume in commodity ETF trading indicates to me that this commodity rally could be running out of fuel. If a correction comes, you do not want to have just bought into one of these funds, and you especially don’t want to have bought into UGA at record levels.

The following table shows ETFs that track a single commodity — such as oil, gold, silver, gold, and natural gas. These ETFs do not track the companies that produce, mine, or work with the given material. Rather, they just track the commodity itself.

The trading volumes in the above table generally are on the high end, since any ETF with a volume in excess of one million shares per day is considered heavily traded. These ETFs have a high level of penetration in the marketplace, and are owned by both institutional and individual investors.

Next week, we’ll take a look at ETFs that are diversified into more than one commodity. Those ETFs also play the commodity boom but they consist of funds that spread their risk among multiple commodities, rather than take the “pure play” approach.

Still, I like the idea of being able to take a splash when the pedal is to the metal in the gasoline market, and I definitely recommend putting UGA on your watch list of commodity sector ETFs.