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ETFs by Rob Wherry (Author Archive)
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.
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From the author: The $5,800 figure is correct, although I should have given readers some more information on how it was calculated. Collins estimated the family would drive one car more than the other. The car that is utilitzed more often has a lower gas mileage that requires more fill-ups. Hence the $550 difference between the $5,250 HaneyK1 calculated and the dollar amount in the story. To see Collins' example in more detail copy and paste this link into your browser: http://greenspringwealth.com/HedgingAtThePump.aspx
Thanks for taking the time to write in.
Rob Wherry
rwherry@smartmoney.com
Nice catch haneyk1 !
You are right. 35,000 miles a year at 20 miles to the gallon means the family buys 1750 gallons of fuel a year. At $3 a gallon, they pay $5250 each year. If fuel goes to $3.75 a gallon, their spending goes to $6562.50. The 75c increase in fuel prices relates to a 25% increase in fuel costs to the family, and the annual increase is $1312.50
I applaud Mr. Collins' idea however. Hedging fuel costs is something the airlines have done a poor job at, and, as Mr. Collins illustrates, it does not have to be a complex process.
One more idea: Take a look at the socially responsible angle: Investigate the purchase of 'clean energy' ETFs to hedge!
I may be crazy but my math works out a little differently. I get the family paying $5,250 per year. Can some one help me out.
Good Idea... with ETF's all you want, but I just take $10,000 & Buy Black Rock Global Resources Fund (SSGRX)and It's Top Energy Stock on margin & Another Fund's Top Energy Stock > XTO.. being +25% YTD and more importantly over 540% past 5 yrs,helps pay my Combined Energy Bills for both the Car and Home..( It's just too bad our Social Sec. $ couldn't be partially Invested in Energy Funds like these, the past 5 yrs ) :.(
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An strategy that sounds good until one takes a look at the tax consequences! My strategy which some may find a related strategy, has involved owning a basket of Canadian Energy (O&G, coal and forest product) Trusts. By selling up to 50% of your short term positions in partial lots for gains each year in this Memorial Day season and buying back shares between Thanksgiving and MLK W/E we find we generally net a very decent capital gain. The 15% Canadian tax is claimed as a tax credit. Selling most or all long term gains as well for LT tax savings. The +10% dividends are tax advantaged. The short term gains allow you to own shares on margin and deduct the marg interest against the ST Gain. Effectively xforming ST gains to tax advantaged dividends. The monthly income is used to pay for my heating oil.