Two controversial ETF and ETN products in commodities are the United States Natural Gas (NYSE: UNG) ETF and the United States Oil (NYSE: USO) ETF. These ETFs are supposed to track the natural gas markets and crude oil markets. But despite all of the underlying and inherent problems these ETFs face, the trading volume is still exceptionally high as these are two of the most liquid ways for Joe Public to invest in oil and natural gas as though these commodities were stocks.
The reason the ‘supposed to track’ is noted is because of this steady and constant notion of “contango” and contract roll dates as these invest predominantly in the front month contracts. For those who aren’t familiar with the term, contango describes an upward sloping forward curve of prices where future commodity prices are higher than the spot price – and a far future delivery is higher than a near future delivery.
ETF Database has noted how this affects share prices for each of these ETFs. Most know of this issue now, but it is amazing that many investors still do not. Unlike the SPDR Gold Shares (NYSE: GLD) that actually buys gold bullion, the UNG/USO are futures based.
The big issue is that while they track intraday moves, these ETF products can trend toward zero if the underlying markets do not rise. In a down market they trend lower faster and faster, but they will still tend to drift to zero even in a flat market.
Over the last five trading days before Friday, the USO is up close to +2.5% while the UNG has had to fight just to stay flat. The UNG also just hit another 52-week low of $6.18 on Thursday, but this was actually an all-time low.
The USO trades over 9.5 million shares per day now and frankly the volume has even held up well considering it is the dog days of summer right before Labor Day. The UNG trades over 22 million shares per day and its volume has also held in well for this time of year.
Friday’s unemployment and non-farm payrolls, not being a disaster, are offering a bid under each ETF. The ProShares Ultra Oil & Gas (NYSE: DIG) has not been as active of late and it tends to invest in those companies which drill and explore for oil and gas.
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