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Has GASZ Run Out Of Gas?

Olivier Ludwig

After all, as a salty old journalist once told me:“If your momma tells you she loves you, check it out!”

Specifically, UBS was comparing returns of its ETRACS Natural Gas Futures Contango ETN (GASZ - News) with those of the United States Natural Gas Fund (UNG - News).

While the comparison of GASZ and UNG may not be apt, or even fair, let’s just say things didn’t look too good for UNG in that press release, and that in the past month, as gas prices have rallied, things don’t look nearly as good for GASZ.

Since last June, when GASZ came to market, through the end of April of this year, UBS said GASZ was up more than 23 percent, while UNG fell more than 60 percent. In the six months ended April 30, GASZ gained almost 20 percent, while UNG fell 54 percent.

GASZ UNG prices, 11/11 to 4/12

While the numbers aren’t lying—and you have to be somewhat impressed that GASZ made money when gas futures were plunging amid booming production and somewhat stagnant demand—there’s more to the story, as I suggested above.

First off, these two exchange-traded products, while both focused on natural gas futures, are like comparing apples and oranges.

GASZ is really an investment strategy, with half of every dollar invested devoted to going short the front-month contract and the other half weighted equally among the 12 th -, 13 th - and 14 th -month contracts on the futures curve, which UBS collectively refers to as “midterm futures.”

Half The Story

GASZ proved to be a winning way to play the gas market in the past year, both because prices were falling and because front-month prices were falling faster than midterm futures. That means that contango was increasing, which is exactly what GASZ is designed to benefit from.

UNG is meanwhile as close to a “pure beta” investing approach as is possible, if such a term even applies to rules-based futures investing.

It only owns front-month contracts, which means it lives and dies with the vagaries of contango—wherein the front-month contract is cheaper than those further out on the curve.

That means each time UNG’s managers roll into the next contract two weeks before the front-month contract expires, they’re paying a bit more for the new contract than what they fetch for the one that’s about to expire.

In the real world, that means that while spot gas futures fell about 75 percent from their peak in 2008 before the market meltdown to mid-April of this year, UNG lost about 95 percent of its value and has undergone two reverse share splits in as many years to help pump up its wilted share price.


The Other Half Of The Story

None of this means there’s anything “wrong” with UNG, as it’s doing what it’s supposed to be doing; namely, providing front-month exposure to gas futures at a time when the market’s been in contango.

Moreover, anyone who has had the guts to short UNG in the past year or two would have done rather well, contango notwithstanding.

The other thing that’s crucial here is that in the past month, with gas prices stabilizing and actually moving up smartly as producers have started to cut output, UNG suddenly has the upper hand in this less-than-appropriate comparison with GASZ.

Front-month prices are leading the charge, which means UNG is in the money and is facing slightly less of a drag as the futures curve flattens and contango becomes less pronounced. It’s up more than 17 percent in the past month.

Meanwhile, GASZ is starting to suck methane because of that short position on front-month futures that makes up half the allocation, while the other half that’s long midterm futures isn’t rising as fast as the front month is. Translation:GASZ has fallen almost 6 percent in the past month.

At the end of the day, GASZ isn’t really designed to make money when gas prices are rallying and, while it theoretically could be profitable in a rising market, it definitely isn’t at the moment.

The chart below says it all.

GASZ ' UNG Prices, 6/11 to 4/12

So what does all this mean? At the very least, it means buyer beware. Understand what you’re getting yourself into.

The other thing I keep coming back to is that with all this talk of contango and of a strategy that’s short this and long that, might there be a simpler way to skin the cat?

Contemplating this question, the natural gas bull in me starts to muse about putting a small portion of my portfolio in an old-fashioned equities fund like the First Trust ISE-Revere Natural Gas ETF (FCG - News).

Of course, this may be nothing more than the latest version of “Olly’s Follies.” After all, FCG would hardly have won the GASZ-UNG sweepstakes. It’s lost a quarter of its value in the past year, and has fallen more than 5 percent in the past month.

But I’m still bullish on gas over the longer haul and, on balance, I’m a buy-and-hold sort of guy.

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