Natural gas prices have fallen about 80% since their 2008 peak.
The commodity remained under pressure as new supplies of the key
fuel were continuously brought online, making the historic
oversupply situation even more of an issue (Read:
Have The Natural Gas ETFs Finally Bottomed Out?
Now, this situation seems to be turning around with the reversal
of trends in gas prices, or at least a near term bottoming out. The
remarkable run-up in prices is creating bullish sentiments for the
commodity, suggesting that this market could begin to attract more
attention in the future.
U.S. is the second biggest producer of natural gas, trailing
Russia. A large part of the natural gas that is produced in the
U.S. stays in America itself due to the lack of cross-ocean
pipelines and the relative difficulty that comes from transporting
a gas quickly and efficiently across vast distances (Read:
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). Accordingly, natural gas production threatens to disrupt the
energy market by either eventually becoming a major export to power
hungry markets, or by reducing crude oil imports in the near
Several gas producers have slowed down their production on lower
gas prices, which is much below their cost of production. Though
natural gas is mainly used for heating and cooling, it is now being
considered for various new usages as well. In this regard, the U.S.
government is finding ways to substitute coal in power plants and
gasoline in cars with natural gas.
Further, with the arrival of hurricane season, the weather is
turning favorable for natural gas demand. This trend was seen when
the recent Tropical Storm Debby disrupted some offshore production
in late June and could be seen again with Isaac and New Orleans
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It appears that demand for natural gas is gradually exceeding
the supply, signifying the revival in this corner of the energy
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). While there are a number of individual securities that target
the sector, an ETF approach may lessen the risks in a play.
Types of Natural Gas ETFs
Natural gas ETFs are divided in two categories:
-based ETFs. Both of these will be detailed for investors looking
to play in this increasingly important energy market segment:
Future-Based Natural Gas ETFs
Natural Gas Fund (
Investors seeking direct exposure to the natural gas, a key fuel
source for power plants, may find UNG an attractive option. It is
the most popular and most liquid ETF, trading in about more than 10
million shares per day. Launched in April 2007, the fund has so far
attracted assets of $1.2 billion (Read:
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The product looks to track the changes in percentage terms of
the price of natural gas futures contracts that are traded on
NYMEX. The fund takes positions in the near month futures contracts
on expiry and rolls over to the next month futures contracts. As
the prices of next month futures contracts exceed that of the near
month futures contracts (also called "contango"), the fund loses on
rolling making strong long term performances very weak.
Hence, UNG is vulnerable to the prolonged period of contango
ETF Investors: Beware the Coming ETN Backlash
). The fund lost about 19% so far this year and charges fees of 60
bps per year from investors.
iPath Dow Jones-UBS Natural Gas ETN (
The ETN seeks to match the performance of the Dow Jones-UBS
Natural Gas Total Return Sub-Index. This represents a benchmark of
the commodity of natural gas, a critical fuel for heating and
cooling across the United States. The product is highly traded with
a solid volume of more than 400,000 shares a day although it has
just $51.6 million in AUM.
The product was launched in October 2007 and in August of 2009,
Barclays had suspended fresh issuance in GAZ. This had given ETN a
push to the higher premiums. Once this happened, the premium
reached to unprecedented levels of nearly 134%, one of the highest
that investors have ever seen in the space. This massive premium
has begun to recede in recent months and is now 'only'
Due to the heavy fluctuations in the premium, this ETN is the
most volatile fund making it a risky play. The fund lost around 11%
year-to-date and charges 75 bps in fees per year.
12 Month Natural Gas Fund (
Investors seeking direct exposure to the natural gas market may
also play with this fund. Unlike UNG which only holds next-month
contracts, this ETF spreads its exposure across the maturity curve.
In fact, the fund consists of 12 natural gas futures contracts
consisting of the near month security as well as the next eleven
months (See more ETFs in the
This approach can help cut down on contango because only 1/12th
of the portfolio is rolled at any one time and a month of heavy
contango will only impact a small portion of the holdings.
Similarly, the fund will benefit less from backwardation (the price
of near-month futures contracts exceeds that of the next month
contract). As a result, this balances the negative effects of
contango and positive effects of backwardation better than most
Despite this feature, the ETF trades in small volumes of less
than 56,000 shares per day and lost around 16% year-to-date (Read:
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). Launched in November 2009, the fund has attracted assets of
$43.8 million and charges 75 bps in fees per year from
E-TRACS Natural Gas Futures Contango ETN (
Launched in June 2011, the ETN seeks to match the performance of
the ISE Natural Gas Futures Spread Index. The fund takes short
positions in the near-term month natural gas futures contracts and
long positions in the mid-term futures contracts through a series
of investments in natural gas sub-indices. As mid-term futures
contracts are priced at higher prices than the near-term futures
contracts, the fund capitalizes on the price differences due to an
upward sloping futures curve.
With AUM of $11.1 million, the product is less volatile and
trades in small volumes say nearly 13,000 per share on a daily
basis. The fund seems to be costly relative to other ETFs in the
space, charging investors a fee of 85 bps annually, as it does
arguably have a more advanced strategy. Unlike other natural gas
ETFs, GASZ generated returns of more than 1% year-to-date in the
current turmoil (Read:
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Teucrium Natural Gas Fund (
Launched in February 2011, this fund seeks a new way to play the
natural gas market and reduces the effects of both contango and
backwardation. Unlike UNG, the product spreads out exposure across
multiple points on the curve.
The product invests in futures contracts in the nearest to spot
month for the following four periods - March, April, October, and
November. All four months are weighted equally giving the fund a
balanced exposure across these key delivery dates. These four were
chosen in particular because they give the fund a focus on the key
times in the natural gas season at both the end and beginning of
the heating and cooling seasons.
The fund has so far attracted assets of $3.7 million and trades
in a tiny volume of less than 4,000 shares per day. It is a high
cost choice in the space charging about 1.54% in annual fees.
Despite its advanced features, the ETF declined nearly 10% this
year to date.
iPath Seasonal Natural Gas ETN (
The ETN, initiated in April 2011, seeks to match the performance
of the Barclays Capital Natural Gas Seasonal TR Index. The index
generally comprises single futures contract with the exception of
two contracts during the roll period (expiration).
Unlike many commodity indices, the index offers exposure only to
December contracts. In October of each year, the index closes out
its position in the current year's December contract and rolls into
a natural gas futures contract expiring in December of the next
The product is quite expensive as it charges 75 bps in fees per
year and is illiquid (Read:
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). It trades in paltry volumes of 643 shares on average daily basis
that increases the trading cost in the form of wide bid/ask
spreads. The fund is unpopular and has attracted only $2.4 million
of assets so far in the year. The fund lost about 11% value
ProShares Ultra DJ-UBS Natural Gas Fund (
Investors seeking double exposure in the natural gas market can
find BOIL an intriguing option. This fund seeks to deliver twice
(200%) the daily performance of the Dow Jones-UBS Natural Gas
Understanding Leveraged ETFs
). The index intends to reflect the performance of a rolling
position in natural gas futures contracts traded on NYMEX.
With total assets of $72.7 million, the fund is liquid as it
exchanges about 190,000 shares per day. Launched in October 2011,
the ETF lost about 47% so far in the year and charges 95 bps in
fees per year.
ProShares UltraShort DJ-UBS Natural Gas Fund (
Like BOIL, the fund tracks the Dow Jones-UBS Natural Gas
Subindex but provides inverse (opposite) exposure to two times
(200%) the daily performance of the index (Read:
Leveraged and Inverse ETFs: Suitable Only For Short
). The product is less liquid and has about $11.1 million assets
under its management. The ETF delivered returns of about 2% so far
this year while it charges 95 bps in fees annually.
VelocityShares 3x Long Natural Gas ETNs (
This product debuted in the space in February 2012. The ETN
provides long exposure to three times (300%) the daily performance
of the S&P GSCI Natural Gas Index ER, net of fees and expenses.
Thanks to the newness of the product, the fund is less liquid and
attracted only $13.3 million in assets. It lost nearly 23% since
inception and charges a high fee of 1.65% from investors per
VelocityShares 3x Inverse Natural Gas ETN (
Like UGAZ, the ETN tracks the S&P GSCI Natural Gas Index ER
but provides inverse (opposite) exposure to three times (300%) the
daily performance of the index. The product was initiated in
February 2012 and has assets of $5.1 million under its management.
It lost more than 54% value since inception but like UGAZ, offers
the only triple leveraged exposure to the natural gas market.
Equity-Based Natural Gas ETFs
First Trust ISE-Revere Natural Gas Index Fund (
Investors seeking exposure to natural gas equities in the basket
form may find FCG a good play. The ETF seeks to replicate the price
and yield of the ISE-Revere Natural Gas Index, before fees and
expenses. The fund holds about 31 securities in the basket and
comprises companies that derive a substantial share of their
revenues from the exploration and production of natural gas (Read:
Inside The Forgotten Energy ETFs
With AUM of $426 million, the product puts about 37% of assets
in top 10 holdings. Quicksilver Resources (
), Penn Virginia (
) and Comstock Resources (
) are the three key elements that make up for 12% share in the
Initiated in May 2007, the fund is volatile as mid and small cap
account for more than 67% of the assets. Trading in volumes of
555,000, the product seems to be liquid. It is the low cost choice
in the space, charging 60 bps in annual fees. The fund delivered
negative returns of about 13% year-to-date but yields 0.50% in
Direxion Daily Natural Gas Related Bull 3x ETF (
Launched in August 2010, the fund seeks to deliver thrice (300%)
the daily performance of the the ISE-Revere Natural Gas Index. The
ETF has an expense ratio of 0.95% and has net assets of $26.6
million. The product lost 44% so far in the year and yields just
0.3% in annual dividend.
Direxion Daily Natural Gas Related Bear 3x ETF (
Similar to GASL, the ETF tracks the ISE-Revere Natural Gas Index
but provides inverse exposure to three times (300%) the daily
performance of the index. The fund has total assets of $3.6 million
and charges 0.95% in annual fees from investors. The ETF generated
impressive returns of around 9% year-to-date, making it attractive
for play in the bearish market (Read:
Three Defensive ETFs for a Bear Market
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PPO-ULT DJ-U NG (BOIL): ETF Research Reports
VEL-3X INV NG (DGAZ): ETF Research Reports
FT-ISE R NAT GA (FCG): ETF Research Reports
DIR-D NG BL 3X (GASL): ETF Research Reports
DIR-D NG BR 3X (GASX): ETF Research Reports
E-TRC NAT GAS (GASZ): ETF Research Reports
IPATH-DJ-A NGAS (GAZ): ETF Research Reports
TEUCRM-NAT GAS (NAGS): 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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