Prior to Monday, it was safe to say natural gas futures and the relevant exchange traded products were enjoying banner starts to 2014.
Even with a 5.7% decline Monday, the United States Natural Gas Fund (UNG) is still up more than 26% this year while the iPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN (GAZ) is up more than 20%.[Some Investors Leaving Nat Gas ETFs]
The equity-based First Trust ISE-Revere Natural Gas Index Fund (FCG) is struggling to keep pace and is up just 5.6% year-to-date.
“This is hardly what one would expect. While costs and other factors also have an important impact on producer profits, revenues are directly impacted by commodity prices. Due to operating leverage, an increase in gas prices should have a more than commensurate effect on the increase in a producer’s earnings. This effect can and will be muted by any hedging that producers may undertake. But the producers and the commodity should track each other both directionally and to some greater or lesser extent, proportionally,” writes Christopher Wallace in a post on Seeking Alpha.
Wallace notes that the “ratio of FCG to natural gas now sits at 3.3, over 60% below where it peaked at during 2012 and some 43% below the 4-year average for that ratio,” a scenario that could imply upside ahead for the $479.4 million FCG.
To FCG’s credit, the ETF defied Monday’s slump in natural gas futures, gaining 1.6% due in part to news that Chesapeake Energy (CHK) is pursuing alternatives, possibly a spin-off, of its oil services business. Chesapeake, the second-largest U.S. natural gas producer, is 3.42% of FCG’s weight. No stock accounts for more than 5% of the fund’s weight.
Worth noting is FCG’s legacy of out-performance of UNG even when the latter declines. In the six-year period ending 2008, UNG only topped FCG once, in 2008. There are, however, other elements to consider with FCG.
“At the end of the day FCG invests in equities and with the pressure we have seen on stocks this year the ETF is not immune to the risk off dynamics we have seen in the overall market,” said Al Sabogal, former head trader for Perry Capital, in an email exchange with ETF Trends earlier this year. “Investors may be skeptical about the duration and sustainability of high demand for the underlying commodity…the polar vortex made for a harsh winter but spring is just around the corner.” [An ETF Left Behind]
First Trust ISE-Revere Natural Gas Index Fund