As Memorial Day weekend approaches, American drivers are experiencing a welcome reprieve at the gas station. Gasoline prices are projected to be among the lowest in recent decades for the holiday, providing both consumers and investors reasons to cheer.
According to an analysis by GasBuddy, the average gallon of gas this Memorial Day weekend is expected to be around $3.08, down from $3.58 a year ago. This marks the cheapest rate at the gas station since 2021 and brings the pure-play United States Gasoline ETF UGA, which allows investors to make a direct play on the commodity of RBOB gasoline, in focus.
Lower gasoline prices are encouraging more Americans to travel during the holiday weekend. AAA projects that 45.1 million people will travel at least 50 miles from home, setting a new record for Memorial Day weekend travel. Of these travelers, approximately 87% will be driving, taking advantage of the more affordable fuel costs.
The increased travel activity is expected to boost consumer spending in various sectors, including hospitality, dining, and retail, as travelers allocate savings from fuel costs to other expenses (read: 4 Leisure ETFs Poised to Gain From U.S. Summer Travel Revival).
While gasoline prices are lower currently, high travel demand during the Memorial Day weekend could lead to increased consumption, potentially influencing gasoline futures and UGA's performance.
UGA in Focus
United States Gasoline ETF is designed to track the movements of gasoline prices in percentage terms. The benchmark futures contract is the contract on gasoline as traded on the NYMEX. If the near-month contract is within two weeks of expiration, the benchmark will be the next-month contract to expire.
United States Gasoline ETF is illiquid, with a daily trading volume of about 16,000, suggesting that investors have to pay beyond the annual fee of 1.17% per year. The fund has managed assets of $72.7 million (see: all the Energy ETFs).
As traders need to roll from one futures contract to another, the fund is susceptible to roll yield. Notably, roll yield is positive when the futures market is in backwardation and negative when the futures market is in contango. Basically, if the price of the near-month contract is higher than the next-month futures contract, then it is backwardation, and the opposite holds true in contango.
State of Backwardation on UGA
United States Gasoline ETF is poised to benefit from the prolonged period of backwardation, where later-dated contracts are cheaper than near-term contracts. Currently, the gasoline market is in backwardation, which is favorable for the commodity and the gasoline ETF UGA. As such, the fund continues to roll over next-month futures contracts at a lower price, thereby making profits. This signals continued bullishness in the commodity. This trend is likely to persist at least in the near term, acting as the biggest catalyst for the commodity.
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This article originally published on Zacks Investment Research (zacks.com).
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