For U.S. drivers fed up with the volatility and seemingly annual spring/early summer surge in gasoline prices, there is a way to hedge most of that risk via an exchange-traded fund: the U.S. Gasoline Fund (NYSE: UGA). UGA traded Monday afternoon down 82 cents to $29.95. I haven't mentioned the fund because UGA has less than three year's price history, and, frankly, the economics literature is mixed regarding how effective petroleum funds are at matching (and hence hedging) price rises.
Further, given the reality that gasoline prices have probably peaked for 2009, a hedge is not recommend for the remainder of this summer driving season, which ends in September.
Instead, for next driving season, starting in November 2009, consider a Buy of UGA up to the value of your gasoline bill for the year, and you're roughly hedged against gasoline price rises for that dollar amount. For example, if you spend $1,000 on gasoline in a year and UGA is trading at $30, buy 35 shares of UGA. UGA is managed by United States Commodity Funds LLC and there is a 0.6% management fee.
Note: Keep in mind that by buying UGA's shares you're roughly hedged for that dollar amount against a gasoline price rise: as U.S. airlines will regrettably tell you, you won't save any money if the price of gasoline falls after you purchased UGA's shares. By definition, hedging factors-out the risk of a loss, and it also factors-out the potential for gain/the recovery from a loss.
Of course, if you buy a UGA dollar amount that's considerably larger (10% or more) than your annual gasoline cost, you're no longer hedging gasoline price risk, you're speculating on a potential price rise in gasoline. And given the U.S. gasoline market's complexity, that's not advised.
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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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