Natural Gas ETFs to Play the Rally

ETF Trends

Natural gas traders are finally getting a break as lower inventories and rising demand helped supported a price rally. Investors can also capture the upside in the energy commodity through a number of exchange traded fund options.

The largest natural gas ETF, United States natural Gas Fund (UNG) , tracks Nymex natural gas futures contracts. The natural gas ETF rolls contracts, or sell a contract that is about to expire for a later dated contract, over from month-to-month, so investors are susceptible to shape of the futures curve. Specifically, when the futures curve is upward sloped – higher prices over a longer time frame, the market is said to be in “contango,” which could weigh on UNG’s performance as the fund keeps rolling into costlier front month contracts.

“In contangoed markets, a fund like UNG can suffer heavy losses even as natural gas prices rise, warranting investor caution,” according to Morningstar analyst John Gabriel.

UNG is up 16.9% over the past year. The fund has a 0.85% expense ratio.

The United States 12 Month Natural Gas Fund (UNL) tries to mitigate the effects of contango by laddering its holdings with 12 months’ worth of natural gas futures. While holding multiple contracts with varying maturities could help even out the performance, the fund could underperform in a backwardated market – a downward sloping futures curve where contracts with a later date are cheaper than the current spot price. UNL is up 7.6% over the past year. The fund has a 0.75% expense ratio.

The Teucrium Natural Gas Fund (NAGS) also tries to spread out its natural gas futures exposure through contracts for March, April, October and November traded on the NYMEX each weighted at 25%. NAGS has a 1.54% expense ratio and is up 7.7% over the past year.

For those who are wary of the natural gas rally, an ETF with varying futures exposure could provide a little more downside protection.

“NAGS is further out on the curve than everyone else,” Sal Gilbertie, President, Chief Investment Officer and co-founder of Teucrium, said in a phone interview. “The ETF responds slower to a rising market but also responds slower to a lower market.

Natural gas futures currently site around $3.93 million British thermal units. [Natural Gas ETF Gains Momentum after Breaking 200-Day Average]

Supporting natural gas prices, Gilbertie points to a steadily declining dedicated rate of natural gas production as producers shut down rigs in light of historic low natural gas prices. He does not expect rigs to turn on until we see a $4 support floor.

“Guys are not going to turn the assets back on”, Gilbertie said. “You can harm the assets if you turn it on and off.”

Moreover, Gilbertie remarks on the the rising inelastic demand – changing prices have little effect on overall demand, as more power plants and houses are switching from oil to natural gas as a primary energy source due to the current low prices. [Natural Gas ETFs Rally on Inventories, Weather]

Nevertheless, investors should be aware that the market suprlus is still above its 5-year average and there is still significant production capacity, Gilbertie warned.

For more information on natural gas, visit our natural gas category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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