For investors focused in on commodities, 2013 has been a year
to forget. A variety of products in both the precious metal and
energy segments have seen severe weakness to start the time
Among the issues plaguing the space are concerns
over global growth, and an increasingly firm dollar. Both of
these trends are keeping a lid on a host of natural
resources, while many investors are forecasting these factors to
be in the market for quite some time.
Yet despite the broad gloom over the commodity market,
investors have seen a glimmer of hope in an unlikely place;
natural gas. The often beaten down commodity has seen a great
start to the year, gaining over 25% while other commodities
stumbled into the red (see
Natural Gas ETFs Soaring in 2013
This represents a huge reversal for natural gas, as the
commodity has been under severe pressure in years past thanks to
a huge supply and demand imbalance. But due to some rig shutdowns
and more power plant use of the fuel, natural gas is coming back
strong in 2013.
This trend has continued with the latest EIA storage report,
as this release suggested more bullishness in the important
energy commodity. The consensus expectation called for an
increase in natural gas stocks of
35 billion cubic feet
(bcf) but just 31 bcf were added to inventories instead, boosting
front month futures by over 5%.
So even though this marked the first increase in natural gas
stocks since December 2012, the lower-than-expected increase was
seen as another reason to be bullish on natural gas in the near
term. Many are expecting this trend to continue as well, as
colder-than-normal temperatures in much of the Midwest and
Northeast could keep a cap on supply increases in the weeks
This latest EIA release was also great news for the wide range
of natural gas ETFs that are in the market, as they also
benefited from the bullish tone in the space. Topping the list in
terms of volume was the
United States Natural Gas Fund (
which finished the day up about 5%.
This came on volume that was roughly 170% of normal, largely
thanks to a couple of volume spikes immediately following the
release of the crucial EIA report. Once this document was
released, UNG did about 20% of its usual daily volume in two
minutes, a situation that pushed the commodity fund sharply
higher as well (see
Behind the Surge in Natural Gas ETFs
Beyond UNG, investors also saw a good session out of the
United States 12 Month Natural Gas Fund (
. This product seeks to spread out exposure across the futures
curve in order to mitigate contango issues, a problem that has
been a big issue in the natural gas ETF market.
However, during bullish market environments, like the recent
one, this ends up hurting the return when compared to UNG. For
example, UNL was only up about 3.6% after the report was
released, while the fund has underperformed its more popular
counterpart by about 500 basis points in this calendar year,
although it has done much better over long time periods.
Leveraged options for natural gas
For investors with a big appetite for risk, there are also a
few somewhat popular levered natural gas products in the market
from VelocityShares and ProShares.
ProShares reigns over the double leverage segment with its
daily -2x bearish product
, and its 2x bull daily product
. Respectively, these two saw performances of -9.6% and 9.6% on
the session (read
the Comprehensive Guide to Natural Gas ETFs
Meanwhile, VelocityShares takes care of the triple leverage
market with its
for bearish daily exposure and
for bullish 3x exposure. As expected, these two were extremely
big movers on the day with DGAZ slumping by -14.6% and UGAZ
surging by 14.9% in Thursday trading.
Equity play on Natural Gas
For those that are scared off by UNG's long term performance
or the risky nature of leveraged ETFs, it is worth noting that
there is an equity play out there that targets the broad natural
gas market in ETF form. This fund is the
First Trust ISE Revere Natural Gas Index Fund (
, an ETF that holds about 30 stocks in its basket and charges
investors 60 basis points a year in fees.
The fund hasn't kept up with UNG so far in 2013-it is roughly
flat on the year-but that shouldn't be too surprising to
investors. After all, a big chunk of natural gas' rise as of late
has been due to lower production levels, a factor that helps to
boost prices but can shrink revenues for some in the
Additionally, the benchmark does include a number of
exploration companies, so these have been under pressure thanks
to the heavy competition in the market. The product also includes
a fairly big allocation to micro and small cap companies, so
volatility can be an issue.
Still, FCG doesn't suffer the contango (or backwardation)
worries that are inherent in natural gas ETFs like UNG. This
makes FCG a more stable play on the market, but one that may not
benefit from trends like some investors might be expecting (also
Time to Sell This Commodity ETF?
There are a number of options out there that target natural
gas in ETF form, both in the form of equities and especially in
terms of futures on the commodity. For much of 2012, these had
been terrible picks for investors and many assumed that this
trend would continue this year as well.
This is especially true given the broad slump in the commodity
market, as almost every product has been hit by the trend,
including traditional safe havens like gold. However, natural gas
has escaped this spiral, and thanks to some favorable supply
trends, has actually surged so far in 2013.
So while natural gas is still a very risky pick in the near
term, it is no longer the sure loser that it once was. The supply
and demand imbalance is beginning to shrink, while more are using
natural gas all the time.
This has helped natural gas have a more favorable futures
curve, suggesting that we could see some more solid days ahead
for volatile natural gas ETFs in the weeks ahead. Particularly if
cold weather and below-expectations supply increases continue in
this outperforming corner of the ETF world.
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VEL-3X INV NG (DGAZ): ETF Research Reports
FT-ISE R NAT GA (FCG): ETF Research Reports
VEL-3X LNG NG (UGAZ): ETF Research Reports
US-NATRL GAS FD (UNG): ETF Research Reports
US-12M NATL GAS (UNL): ETF Research Reports
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