Top Gas ETFs to Buy in 2022 with Soaring Gas Prices

All anyone wants to talk about anymore is the soaring price of gasoline. After all, the cost to fill your tank has never been higher. With industry profits piling up, get your share with the best gas ETFs to buy before the second half (2H) of 2022.

First, the pandemic severely strained the industry as demand fell off from global lockdowns. As a result, over 100 oil and gas companies went out of business.

Then, as the economy reopened and demand started catching up, Russia’s invasion of Ukraine stoked a fire under an already strained market. So, demand is outpacing supply as nations look elsewhere to fill the supply gap left by Russia’s massive presence in the commodity market.

Nonetheless, gasoline is essential to keep the economy running smoothly. You need gas for fuel to get to work and back. Not to mention, businesses rely on gas for transporting goods, which influences prices. To grab your piece of the rising energy costs, below are the top gas ETFs to buy in 2H of 2022.

Top gas ETFs to buy in 2022.

What Are the Best Gas ETFs to Buy Right Now?

The top gas ETFs to buy are outperforming the market right now as soaring energy costs boost profits. For example, Natural Gas Futures (NG1) are up over 120% YTD and almost 200% over the past year.

Meanwhile, all major indexes are down significantly this year, with the Nasdaq 100 Index (NDX) slipping almost 30% YTD. On top of this, researchers at J.P. Morgan predict gas prices could remain elevated “even as far back as 2024” as supply disruptions will be hard to overcome.

No. 3 Barclays iPath Series B Bloomberg Natural Gas Subindex (NYSE: GAZ)

  • YTD Return: 124%
  • Expense Ratio: 0.45%

Although the Natural Gas Subindex is set up as an Exchange Traded Note (ETN), it can help you gain exposure to the surging gas market. An ETN differs from an ETF in that the fund consists of unsecured debt notes rather than holding a group of stocks.

The GAZ ETN seeks to replicate the returns of the Bloomberg Natural Gas Subindex by investing in futures contracts. That said, the ETN does not pay a dividend. Therefore, GAZ is best as a short-term tool.

Since the ETN is not tied to any companies, only futures, it can carry additional risks. For example, investors are left with little or nothing if the issuer defaults. In comparison, ETFs hold several companies, helping to diversify and spread risk.

At the same time, the ETN moves alongside the price of natural gas contacts. So, if you are looking for direct exposure to gas prices, the GAZ ETN may be for you.

Keep reading for more on gas ETFs to buy.

No. 2 United States Natural Gas Fund (NYSE: UNG)

  • YTD Return: 128%
  • Expense Ratio: 1.11%

The United States Natural Gas Fund is another way investors can invest in natural gas prices without physically trading futures. For one thing, UNG is a commodity pool. Or in other words, it pools investor money to invest in futures, swaps and forward contracts.

The fund aims to give investors access to daily changes in natural gas deliveries at the Henry Hub, a distribution center. As a result, the daily changes resemble changes in natural gas prices.

However, since management is consistently active, it will cost more to invest. Though the higher expense is not slowing UNGs momentum, up close to 130% YTD. Likewise, UNG is more geared for short-term trading as it holds near-month contracts.

No. 1 United States 12 Month Natural Gas Fund (NYSE: UNL)

  • YTD Return: 113%
  • Expense Ratio: 0.90%

Similarly, the United States 12 Month Natural Gas Fund is a commodity pool targeting the price of natural gas. But, UNL differs in that it holds futures contracts for the nearest 12 months.

In other words, UNL buffers itself from short-term movements. As a result, investors can gain exposure to changes in natural gas prices with less risk than short-term contracts.

If you wish to capture your piece of the soaring energy prices but want less risk of contango (higher spot price), UNL may be a better choice.

Best Leveraged Gas ETFs to Buy

To maximize your returns, you can opt for a leveraged ETF to multiply the changes in an underlying index. For example, the ProShares Ultra Bloomberg Natural Gas ETF (NYSE: BOIL) targets to return 2X the daily performance of a natural gas index.

As a result, investors can earn double the daily returns of natural gas changes. With this in mind, the BOIL ETF is up 322% in 2022 alone.

However, there is a significant risk of investing in leveraged ETFs. Though you can earn double the returns, you can also double your losses. Investing in these funds is only recommended if you are comfortable with the significant fluctuations.

Best Inverse (Short) Gas ETFs to Buy

For those that think gas prices will ease soon, finding an inverse gas ETF to buy in 2022 may be for you. Or, if you have earned a pretty penny on gas and oil stocks already, you may want to protect your downside.

Nevertheless, the ProShares Ultrashort Bloomberg Natural Gas ETF (NYSE: KOLD) is a way to earn (-2X) the daily performance of a natural gas index.

In comparison, the KOLD ETF is down 90% YTD while natural gas prices soar. So, it gives you an idea of how quickly earnings can dry up in these types of investments.

What Gas ETFs to Buy for Passive Investors

The funds listed above are the best gas ETFs to buy for capturing the explosive rise in gas prices. But, for passive investors, these may not be the best option. For one thing, the gas and oil market can change rapidly.

During the pandemic, oil prices plunged below $0 for the first time. Then, two years later, we are looking at record high prices of over $130. As a result, oil and gas ETFs are having wild swings.

Nonetheless, research from J.P. Morgan shows the cost burden of higher gas prices is around $7 billion per month. As a result, consumers have less to spend in other areas of the economy. We already see the evidence with companies like Walmart (NYSE: WMT) and Target (NYSE: TGT) missing earnings estimates while blaming transportation costs.

In short, profits are being pulled from other parts of the economy to compensate for the lack of supply and rising demand. With this in mind, the energy sector looks ready to continue its run.

The Energy Select Sector SPDR Fund (NYSE: XLE) is an excellent option for passive investors looking to gain exposure with less risk. The XLE ETF is up 48% YTD while investing in top gas and oil companies like Exxon Mobile (NYSE: XOM). No matter your investing style, with the price at the pump holding steady, these are the top gas ETFs to buy this year to get your share.

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Looking Closer at Bonds Inflation Risk

Bonds are generally considered a defensive investment and a safe haven when markets trend down or become volatile. Yet, it’s important to remember that bonds aren’t immune to economic forces. Specifically, inflation can decimate the returns bonds offer through coupon payments. Investors looking at diversifying into bonds need to be aware of bonds’ inflation risk and strategies for offsetting it.

Inflation risk can be a tricky concept to understand because it’s impacted by two diverse factors: bond interest rates and current inflation rates. Depending on the bond you hold and the macroeconomic forces affecting inflation, your bond portfolio could face more or less inflation risk than someone else’s.

Here’s a closer look at bonds’ inflation risk: the concept, how to measure it and strategies for mitigating risk over time as you build a healthy bond portfolio.

Bonds inflation risk and how to combat it.

What is Inflation Risk?

Inflation risk is the amount of your investment yield that’s eroded by inflation over time. It’s measured by subtracting the annual inflation rate from the annual yield of the investment, to arrive at the real rate of return. Investors can apply this calculation in both forward-looking and retrospective capacities, to anticipate real rate of return before investing or to calculate the efficacy of an investment after exiting the position.

Inflationary Risk Example

Stephanie holds a five-year $10,000 bond with a 10% coupon rate. The annual inflation rate is 3%. Stephanie’s bond has a diminishing rate of return year over year due to inflation risk. After year one, her $1,000 coupon payment is akin to $970. In year two, the $1,000 has a value akin to $940. This loss of value continues through the bond’s term.

How Inflation Affects Debts vs. Equities

Inflation risk affects all investments, because it’s always working against value appreciation. However, it disproportionately affects debt assets more than equities. This is because the value of bonds remains fixed over the term, whereas equities fluctuate in value and have the potential to appreciate more significantly to downplay inflationary concerns.

In the bond inflation risk example above, there’s nothing the investor can do to raise the value of that bond or the interest payments it yields. However, if they purchase stock in a company and that company appreciates 20% over the course of the year, the real rate of return can still outperform the market. Of course, this is a double-edged sword, since stock prices can also drop and exacerbate the losses incurred by inflation.

How to Combat a Bond’s Inflation Risk

Bonds are particularly at-risk for inflation concerns the longer the term of the bond. For instance, a 90-day Treasury Bill faces significantly less inflation risk than a 10-year Treasury Note. This is often the key to mitigating inflation risk within a bond portfolio.

Investing strategies like bond ladders and dumbbells are a great way to stagger bond terms in a way that allows investors to replace sub-par bonds as interest rates change against inflation. Consider this simple bond ladder:

  • A: $10,000 at 2.1%, purchased today, maturing in year one
  • B: $10,000 at 3.2%, purchased today, maturing in year two
  • C: $10,000 at 3.5%, purchased today, maturing in year three
  • D: $10,000 at 3.5%, purchased in year 2 using Bond A, maturing in year four
  • E: $10,000 at 3.5%, purchased in year 3 using Bond B, maturing in year five

Staggering maturity dates and funding the purchase of bonds with better rates is a great way to avoid inflation risk. Cycling through bonds gives income investors the flexibility they need to adapt in the face of rising inflation rates, or to take advantage of better coupon rates.

Dumbbell strategies serve much the same purpose. The strategy involves mixing short and long-term bonds to capitalize on the high yield of long-term bonds, while using short-term bonds to avoid inflation risk. It’s a strategy that requires more active portfolio management.

A Closer Look at Treasury Inflation Protected Securities (TIPS)

For investors who want to combat bond inflation risk directly, there are always Treasury Inflation Protected Securities (TIPS). TIPS directly offset the price of inflation by adjusting their principle to match. As a result, investors will never fall behind inflation and there’s no inflation risk to consider.

The downside to TIPS? There’s no way to outperform inflation. TIPS track it to preserve wealth, not accumulate it. These inflation-proof assets are usually in a bond portfolio as a safeguard or a hedge. They come in minimum denominations of $100 and are available in 5-, 10- and 30-year maturities.

It’s worth noting that TIPS are the ultimate safe haven investment, and they typically gain favor with investors during periods of extreme inflation. The current market, in 2021 and 2022, is a great example of a time when TIPS became a popular hedge against record levels of inflation, especially alongside depressed equity markets.

Inflation is an Ever-Present Concern

Bonds can be a great hedge against market downturn and inflation, but you need to utilize them correctly. Treating some bonds as a “set it and forget it” defensive investment can end poorly if investors don’t take inflation into account. Strategies like bond laddering or investment products like TIPS are a smart way to take inflation into account.

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A Closer Look at the Best Performing Bond Funds of 2022

After settling to historic lows, bond yields are coming back up. Rising interest rates are also an opportunity for retirees and passive income investors to begin exploring the best performing bond funds as a way to preserve their wealth. But, like any type of ETF or mutual fund, bond funds require a little bit of investigation before you make an investment. Namely, you want to make sure the fund is structured to meet your expectations.

Bond funds offer plenty of stability and the appeal of stable income, but not all bond funds are the same. They vary greatly depending on the type of bonds the fund holds, its objectives and strategies for fund maintenance, and even the changing nature of the bond market. To that end, it’s not always easy to pinpoint the best performing bond funds through objective analysis.

Here’s a closer look at bond funds in 2022, including the most reliable funds based on trailing returns and how they’re expected to perform in the current rising rate environment.

Find the best performing bond funds

Why Invest in Bond Funds?

The purpose of a bond fund is primarily to generate a steady stream of income through the interest payments generated by bonds. Bond funds offer a simple alternative to building your own bond portfolio. For example, instead of building a bond ladder that ensures accumulated monthly payments, an investor can invest in a bond fund that’ll deliver this same level of payout.

The other instance in which a bond fund is useful is as a portfolio hedge. Investors seeking to bring stability to an equity-focused portfolio might invest in a bond ETF. It’s a way to hedge against volatility, as well as create passive investment income that someone can reinvest in equities.

Bond ETFs vs. Bond Mutual Funds

Like equity funds, bond funds come in both ETF and mutual fund varieties. For most investors, the decision comes down to fund performance vs. expense ratio. Bond funds typically have a lower expense ratio than equity funds, but there’s still a level of active management that’s needed to ensure they perform as-expected.

The type of bonds you’re interested in can also have an effect on the type of fund you choose. Those interested in U.S. Treasuries, large corporate bonds and even municipal bonds will find both ETFs and mutual funds accessible. Those looking for riskier investments like foreign bonds or bonds from subprime issuers will want to trend toward ETFs, since most mutual funds will stick to safer investments.

The Best Performing Bond ETFs

The appeal of many bond ETFs is that it’s easy to enter and exit positions, giving bond investors flexibility to pursue the best yield. That, and there aren’t typically minimum investments for ETFs. Here’s a look at the best performing bond funds in this category:

  • Invesco National AMT-Free Municipal Bond ETF (PZA) is continually rebalanced to optimize return and averages roughly 2.3% monthly on municipal bonds.
  • iShares Core 1-5 Year USD Bond ETF (ISTB) safeguards against interest rate risk by holding short-term bonds at an extremely low 0.06% expense ratio.
  • Pimco Active Bond ETF (BOND) includes corporate and municipal bonds, as well as emerging market bonds, to produce an average yield of 2.53%.
  • VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) is a junk bond ETF that manages an impressive 3% average yield.
  • Vanguard Tax-Exempt Bond ETF (VTEB) has an extremely low expense fee of 0.06% and a respectable monthly yield of 1.83%, on average.
  • Vanguard Total International Bond ETF (BNDX) focuses on foreign bonds: specifically, non-U.S. denominated investment-grade bonds.

The Top Performing Bond Mutual Funds

Investors looking for a managed bond investment will find it in bond-focused mutual funds. Many of these funds outperform ETF funds on the surface; however, they do come with higher expense ratios that can make these investments a horse apiece. Here are some of the top performers:

  • BNY Mellon Bond Market Index Fund (DBIRX) is a short-term focused bond fund that returns 1.85% on average. It requires a minimum $1,000 investment.
  • Fidelity Total Bond Fund (FTBFX) tracks both domestic and foreign bonds for broad exposure. This fund carries an expense ratio of 0.45%, but average a return of 2.28%.
  • Northern Trust Bond Index (NOBOX) requires $2,500 to invest and has an impressive 2.13% average yield. Its expense ratio sits at 0.15%.
  • Schwab U.S. Aggregate Bond Index Fund (SWAGX) has the lowest expense ratio on this list (0.04%) and averages 1.95%. It’s also the youngest fund on the list, est. 2017.
  • T. Rowe Price QM U.S. Bond Index Fund (PBDIX) has a minimum investment requirement of $2,500. Investors should expect 1.92% yield and fees of 0.25%.
  • Vanguard Total Bond Market Index Fund (VBTLX) requires a minimum investment of $3,000 but has almost no expense ratio (0.05%). It averages 1.95% monthly.

A Smart Way to Maintain Retirement Income

For retirees and investors who rely on bonds for regular income, the performance of the fund matters significantly. To that end, it’s important to carefully select funds that have a trailing history of returns, strong managers at the helm and strategies for adapting to the bond market itself.

Want more tips on how to invest in bond funds with confidence? Discover the best investment newsletters to get the scoop on bond funds and expert picks. You’ll learn not only how to identify the best performing bond funds, but what to expect from them as the bond market continues to take shape in 2022 and beyond.

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