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Which ETF for Gasoline?
Old 03-08-2009, 01:02 PM   #1
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Which ETF for Gasoline?

In previous months we've discussed the idea of buying an ETF to profit or protect from rising gas prices in the future. Even if economic activity and the stock market stay down, oil seems likely to rise in coming years because of the current reduction in exploration.

In the past, oil company or other industry stocks have been a proxy for actual oil. But the current administration is likely to be really tough on them, I could easily see oil prices doubling while profits stay flat or even decline.

I've got two questions:

1. Which ETF to use? USO seems most popular and folks here have bought it, but the contango problem seems to mean you'll lose money if the price stays flat or rises only a moderate amount. USL seems to avoid most of that problem, and then there's UGA and DBO. Which one do you recommend and why?
2. My investments are all IRAs at Vanguard, how would I buy one of these ETFs through them and keep it in the IRA?

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Old 03-09-2009, 09:09 AM   #2
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Old 03-09-2009, 09:12 AM   #3
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Originally Posted by Gearhead Jim View Post
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It isn't an easy question. Someone may give you ananswer. That doesn't mean that it is the right answer.

Lots of wrong answers available; right ones are harder.

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Old 03-09-2009, 09:22 AM   #4
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OK, if you insist...

My first advice would be to find some other game of chance and avoid any oil price related investment. But if you can't resist, I'd recommend USL as the lesser of the evils since, as you pointed out, it avoids much of the contango problem that burned me and other USO investors.

Vanguard will allow you to purchase a stock, MF, or ETF in your IRA through their brokerage service. Look for "Brokerage Account" under the "Account Types & Services" tab on their website.
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Old 03-09-2009, 10:23 AM   #5
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For a disussion of contango, I would draw your attention to a thread we had back on Feb 11, in particular my post #8.

Over the past three weeks, the oil futures contango has begun to flatten. Consequently, since my Feb 11 post above, USO has outperformed USL by 10%.

Closing prices Feb 11

USO 26.08
USL 28.64

Closing prices Mar 6

USO 27.99
USL 27.85

Returns Feb 11 - Mar 6

USO + 7.3%
USL - 2.8%

Ex market impact issues, the relative performance of these two ETFs is driven by the change in slope of the futures curve and not by a mechanical investment strategy.
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Old 03-09-2009, 12:15 PM   #6
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I understand that your OP indicates you disagree with this approach, but I recently moved 2.5% of my portfolio to XOP (SPDR S&P Oil and Gas Exploration and Production ETF). I am convinced that within my investment horizon of 5-10 years, oil is going to become very expensive. Remember, producers usually have more potential upside (as well as downside ) than the commodity itself.

For the same reason, I loaded up (2.5%) on Marker Vectors Gold Miners ETF (GDX) when prices collapsed last October (currently up 60-70%) rather than gold itself (up about 25%). I plan on selling at least half of the GX when it appears the economy has bottomed out (6 months to 5 years perhaps).

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