Markets

More Pain Ahead for Natural Gas? 2 Bear ETFs to Play

A generic image of a stock chart
Credit: Shutterstock photo

Broad commodities have gone ballistic for quite some time now on sluggish trends. Among the issues plaguing the space are global growth worries affecting the demand profile, a supply glut and a strong dollar ahead of an impending Fed lift-off. Despite this, natural gas ETFs normally grab investors' attention every winter on falling temperatures, and higher demand for heating and power which in turn result in falling supplies.

This was true for the last two winters when the country shivered with polar vortex locking economic activities indoors and giving a fresh lease of life to the natural gas price. The polar vortex caused natural gas prices to jump over 50%. As almost 50% of Americans use natural gas for heating purposes, many investors expect natural gas prices to repeat history in the upcoming winter months (read: Cold Weather Saves Natural Gas ETFs from Commodity Slide ).

This Winter Might Turn Warm on El Nino

However, this group of investors might be disappointed to know that this winter might not imitate the previous two. First, El Niño, a warm-water phenomenon that blows off the Pacific coast of South America, often has a great impact on several commodities. El Nino causes weather disruptions in many regions around the world, including drought in some and flooding in others due to abnormal warming of the Pacific Ocean.

This is year El Nino is not only the strongest (almost in 65 years ), it is likely to be a relatively more long-standing one too. The National Weather Service projected that "there is an approximately 90% chance that El Niño will continue through Northern Hemisphere summer 2015, and a greater than 80% chance it will last through 2015."

As per Weather Services International, El Niño is expected to cause below-normal temperatures across the southern Plains and into the Southwest, while above-normal temperatures will likely prevail in the eastern and northern parts of the U.S. This pattern of weather would result in lower heating demand in the northern hemisphere this winter. WSI also predicted gas-weighted heating degree days to tally about 3,600, suggesting 10% less demand than the year-ago winter.

Huge Inventory Addition

Per EIA, there was a 106 billion cubic feet (bcf) of natural gas injection in the week ending September 18 that breezed past analysts' estimate of 97 billion cubic feet. The figure was up 15.7% year over year and 4.5% from the five-year average. Investors should note that natural gas futures for January is hovering around the 16 -year low and will likely remain soft in the coming days (read: Natural Gas ETFs Tumble as Supply Levels Surge ).

If this prediction comes true, natural gas ETFs including United States Natural Gas (UNG) which is down 16.9% this year, iPath Bloomberg Natural Gas SubTR ETN (GAZ ) (down 49.3% YTD) and United States 12 Month Natural Gas (UNL) (down 15.4% YTD) will see no signs of a retreat (see all energy ETFs here).

In such a backdrop, any of the short natural gas ETF plays could be better options for investors who are bearish right now, given the supply/demand imbalance and an unfriendly weatherman (likely) this winter. These products profit when the gas price declines and are suitable for hedging purposes against the fall of natural gas.

VelocityShares 3x Inverse Natural Gas ETN (DGAZ)

The ETN provides inverse (opposite) exposure to three times (300%) the daily performance of the S&P GSCI Natural Gas Index Excess Return plus returns from U.S. T-bills net of fees and expenses. This $82.6 million product is a high cost choice in the natural gas space, charging 165 bps in fees per year from investors.

The fund trades in solid volumes of 9.7 million shares a day. DGAZ is down over 16.2% so far this year but was up 7.8% in the last one month (as of September 28, 2015).

ProShares UltraShort DJ-UBS Natural Gas Fund (KOLD)

The fund seeks to deliver twice (2x or 200%) the inverse return of the daily performance of the Dow Jones-UBS Natural Gas Subindex. The product is illiquid and has about $11.2 million in AUM. It charges 95 bps in fees and is up 6.4% year to date. Over the last one month, the fund advanced over 5.3%.

Bottom Line

Investors should note that since these products are extremely volatile, they are suitable only for short-term traders. Additionally, the daily rebalancing - when combined with leverage - may cause these products to deviate significantly from the expected long-term performance figures (see more in the Zacks ETF Center ) .

Still, for ETF investors who are bearish on natural gas in the near term, any of the above products could make an interesting choice. Clearly, some are abandoning the commodity, so a near-term short could be intriguing for those with a high risk tolerance, and a belief that the "trend is your friend" in this corner of the investing world.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days . Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

US-NATRL GAS FD (UNG): ETF Research Reports

IPATH-BB NGAS (GAZ): ETF Research Reports

US-12M NATL GAS (UNL): ETF Research Reports

VEL-3X INV NG (DGAZ): ETF Research Reports

PRO-ULS BB NG (KOLD): ETF Research Reports

To read this article on Zacks.com click here.

Zacks Investment Research

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

DGAZ UNL UNG GAZ KOLD

Other Topics

ETFs

Latest Markets Videos

    Zacks

    Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at www.zacks.com.

    Learn More