ETF Strategy Aims to Profit From $4 Gas

No doubt that will have a profound impact on millions of households across the country. Indeed, Patrick Collins, founder of Greenspring Wealth Management in Towson, Md., recently sat down with one of his more affluent clients who could easily afford to absorb the rising costs. Nevertheless, the client was wrestling with whether to take his family on a cross-country vacation this summer or simply head to a nearby beach instead.

"If you talk to people about where their money is going, a big percentage is going to energy costs," says Collins.

Advisors like Collins — here is an in-depth interview with him on SmartMoney TV — have been searching for ways to make that situation a little less painful. After all, companies that rely on commodities have long locked in their costs using hedging strategies. Why can't consumers do the same thing? The problem was there was no product that allowed for easy access to oil or gasoline. Now, though, advisors have just begun to devise strategies using exchange-traded funds that could, at least on paper, lessen the blow to drivers' wallets.

The ETF industry has been accused of launching products simply for the sake of getting a certain strategy to market. That's one of the reasons dozens of funds languish with little assets and thin trading volumes. However, it scored a home run when fund companies like PowerShares, State Street (STT) and Barclays (BCS) launched commodity ETFs that track everything from gold and silver to cattle and crops to oil and gas. As a group these funds hold well over $30 billion.

Most of these ETFs are designed to increase in value at the same time the underlying commodity is rising in price. So what many advisors are exploring is whether it makes sense to invest in one of these ETFs to offset high energy prices. The strategy is sound, but as you will see it also has many drawbacks.

To illustrate the idea, Collins came up with a hypothetical example of a family that drives two vehicles a total of 35,000 miles in a given year. Collins estimates that if the cars average 20 miles per gallon and they pay an average $3 a gallon for gas they will spend around $5,800 to fill up the tanks. If the price per gallon happens to jump to an average $3.75, a 25% increase, the family would see its gas bill jump $1,500.