Why Is No One Buying UGA?

December 02, 2009

Commodity ETF investors have managed to miss all the major bull markets of 2009. Where’s the love for the lead, copper and gasoline ETPs?

That thought occurred to me as I read through the recently released November S&P GSCI commodity report. It’s by far the best monthly summary of commodity returns, and is available here.

The report notes that the S&P GSCI Energy Index was up 10.44 percent year-to-date. That 10.44 percent return, however, masked broad variability in the individual components.

 

Commodity

YTD Return

S&P GSCI Natural Gas

-60.66%

S&P GSCI Crude Oil

7.17%

S&P GSCI Heating Oil

20.86%

S&P GSCI GasOil

22.10%

S&P GSCI Brent Oil

31.55%

S&P GSCI Unleaded Gasoline

77.53%

Source: S&P. Data through Nov. 30.

 

If you’re like me, these numbers will surprise you. I knew that natural gas was down sharply, for instance, but who knew gasoline was up 78 percent? I have seen prices rise at the pump, but 78 percent? That’s seven times the return of the broad S&P GSCI, three times the return of the S&P 500 and nearly 140 percent better on an absolute basis than natural gas.

It has been completely off my radar. As a Web site, IndexUniverse.com hasn’t mentioned the related gasoline ETF—the
United States
Gasoline Fund (NYSEArca: UGA)—this year.

We haven’t been alone. Investors have completely ignored UGA as well. So far this year, UGA has attracted a whopping $5 million in inflows, compared with $4.9 billion for the retirement-destroying United States Natural Gas ETF (NYSEArca: UNG).

In fact, investors have been exactly wrong about where they’ve placed their bets in the energy ETF space this year, throwing more and more money at funds delivering lower and lower returns.

 

Commodity

YTD Return

Related Major ETF

Net Assets
($M)

Fund Flows YTD ($M)

S&P GSCI Natural Gas

-60.66%

UNG

$3,784

$4,903

S&P GSCI Crude Oil

7.17%

USO

$2,128

$1,085

S&P GSCI Heating Oil

20.86%

UHN

$17

$20

S&P GSCI GasOil

22.10%

N/A

N/A

N/A

S&P GSCI Brent Oil

31.55%

N/A

N/A

N/A

S&P GSCI Unleaded Gasoline

77.53%

UGA

$63

$5

Source: National Stock Exchange. Data as of Oct. 30, 2009.

 

Maybe those investors are making smart contrarian bets based on a careful analysis of supply and demand fundamentals in the space. A better guess, however, is that they’re just buying what they know, and natural gas and crude oil are on the tip of everyone’s tongues.

 

 

Lead And Copper Too

It’s not just gasoline. If you look at S&P’s chart of the total return performance of various commodities on a year-to-date basis, you can see where investors are missing out:

 

ETNs for the top two-performing commodity markets, lead and copper, have just $14.5 million and $145 million in assets between them, respectively.

Lead doesn’t surprise me: It’s an obscure commodity mostly known for poisoning young kids, and the ETN (NYSEArca: LD) trades with spreads a mile wide. But copper is a major market and the ETN (NYSEArca: JJC) trades well; I’m surprised it’s captured such a small share of assets. (Ditto sugar, where the iPath Dow Jones – UBS Sugar ETN (NYSEArca: SGG) has just $26 million in assets, despite Jim Rogers pushing sugar as an investment for more than a year now.)

Let me be absolutely clear: I’m not saying investors should rush out to buy UGA, SGG, JJC or LD. Far from it. Chances are they are probably closer to the top than the bottom.

But I am saying that many investors approach the commodities market naively. They fail to consider the structural challenges facing certain commodities like natural gas, and ignore major markets like gasoline where there might be more interesting opportunities.

Commodities Diversification Is Back

One unrelated point from S&P’s report: The diversification benefit for commodities is back.

According to S&P, the correlation between the S&P 500 and the S&P GSCI Index is returning to more normal levels. After peaking at .76 earlier this year—the highest reading since October 1980—it’s since retreated back to 0.44.

S&P includes a nice chart showing that the correlation between these two important indexes tends to be mean-reverting, suggesting that that 0.44 should narrow further in coming months.

Interesting stuff.

 

 

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