Commodity investing has remained choppy, pretty much across the
board. Thanks to the political gridlock, many commodity ETFs have
of late been pushed into the red as demand for risky assets has
Meanwhile, in the natural gas market, prices have been severely
under pressure, not just for this month, but for the longer term as
well. This is largely due to a burst of supply, thanks to fresh
technologies that bring out more of this precious commodity.
The success of 'shale gas' - natural gas trapped within dense
sedimentary rock formations or shale formations - has transformed
the domestic energy supply, with a potentially inexpensive and
abundant new source of fuel for one of the world's largest energy
The Comprehensive Guide to Natural Gas ETFs
With the U.S. projected to surpass Russia in the global energy race
this year, the Oil & Gas sector in the U.S. has been in focus.
According to the Energy Information Administration (EIA), the
U.S. is projected to produce almost 50 quadrillion British thermal
units of oil and natural gas in 2013, which is almost 10% above the
second-largest producer, Russia, and double the third-largest
producer, Saudi Arabia.
The short-term projections look favorable for the natural gas
sector due to a few rig shutdowns in the Gulf of Mexico in the wake
of tropical storms, which raised natural gas prices. Warmer weather
expected for the month of October also acted as a catalyst.
Though this trend might be short-lived in the natural gas market,
more hot (or cold) weather could definitely extend this rally for a
bit longer (Read:
Natural Gas ETFs Jump on Hopes of Warm Weather
However, many investors generally focus in on one ETF for their
exposure to this space, United States Natural Gas ETF (
. This product attracts a great deal of assets, and remains quite
popular, despite a potentially better long term option existing,
First Trust ISE Revere Natural Gas Fund (
Below we have given a comparative analysis of these two ETFs from
the Natural Gas segment, each taking different sides on the
performance front due to the difference in approach. Hopefully, by
taking a look at some of these factors, investors can better
ascertain which natural gas ETF is right for them:
Fund Objective and Index Exposure
Launched in May 2007,
ISE-Revere Natural Gas Index,
which is an equal-weighted index comprising exchange-listed
companies that derive a substantial portion of their revenues from
the exploration and production of natural gas.
The fund will normally invest at least 90% of its net assets plus
the amount of any borrowings for investment purposes in common
stocks comprising the index. Since inception, the product has
amassed $495.9 million in assets.
Launched in April 2007, United States Natural Gas ETF (
Henry Hub Natural Gas Price Index
, which is also an equal-weighted index. The product seeks to
replicate the performance, net of expenses, of natural gas. The
trust invests in futures contracts on natural gas traded on the
NYMEX that is the front month contract to expire. Compared to FCG,
the ETF is rich in AUM with an asset base of $894.8 million.
A Difference in Asset Class
takes an equity based approach by including stocks that are engaged
in the production and exploration of oil and natural gas in its
portfolio. Therefore, it is implied that the fund would not be
impacted by the technicalities and complications of the derivatives
market, like its competitor UNG (Read:
The Key Differences between Natural Gas ETFs
is a futures ETF which tries to capture the daily difference in
spot prices of natural gas by gaining exposure to future contracts.
Although futures can be considered an efficient, cost effective way
to gain exposure in the commodities market without having to deal
with storage costs and physical delivery, they still have their own
deals in future gas contracts,
holds a total of 26 U.S. based securities in its basket. Its top 10
holdings make about 42% share in the basket.
Trading Size & Fees
has a huge average daily trading volume of 4.95 million shares a
has an average daily trading volume of 641,400 shares a day
For exposure in futures contract,
charges a hefty fee of 99bps, while
is a relatively cheaper choice as it charges investors 60bps in
fees (Find all
What makes FCG attractive?
employs an innovative methodology to select stocks from the entire
universe of companies engaged in the energy exploration &
production business. The stocks are screened and ranked based on
certain fundamental factors such as price to earnings, price to
book value, market capitalization and return on equity.
The ranks are then averaged and the top 30 stocks become part of
the index and are weighted equally. However, it is prudent to note
that these stocks may not have a 1:1 correlation with the natural
gas futures price; therefore it may not be a pure play on the
commodity. Furthermore, the index eliminates those gas companies
whose reserves do not meet certain criteria.
has posted a negative performance of about 1.3% year-to-date, in
stark contrast to
. Despite facing some headwinds in its path, FCG has given sturdy
returns of about 23% so far this year. (Read:
Natural Gas ETFs Continue to Soar
In terms of the last 52-week price performance FCG clearly stands
as the winner, since the product has gained almost 11%, whereas UNG
has shed close to 14.5%.
is less volatile to
when compared with the S&P 500 index. Moreover
has a better Beta and R-squared score than
The 50-Day Simple Moving Average for
has appreciated by only 1.09%, while for
it has appreciated by 7.32%.
Given the strong performance, investors are more likely to switch
from investing in futures gas ETF
to the equity ETF
The fund has also performed quite well against others in the same
sector, and its lack of futures curve issues could make it a better
pick over the long term.
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FT-ISE R NAT GA (FCG): ETF Research Reports
US-NATRL GAS FD (UNG): ETF Research Reports
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