Count natural gas among the commodities that exchange-traded funds (ETFs) have made more accessible to everyday investors. Among natural gas ETFs, the United States Natural Gas Fund, LP ETF (NYSEARCA:UNG) is the bellwether.
Prior to the ETF boom, investors had to turn to single stocks or ultra-volatile futures to gain exposure to the natural gas. That is no longer the case as exchange-traded products have made natural gas just as accessible as gold or silver.
In fact, UNG is the largest futures-based natural gas ETF in the U.S. and with almost $457 million in assets under management, UNG is bigger than several of its direct competitors on a combined basis.
UNG “offers straightforward exposure to front-month natural gas futures, rolling expiring front-month contracts to the next-nearest month,” according to ETF.com.
Like a leveraged ETF, this fund is an instrument best used by sophisticated traders with the ability to monitor positions on a daily basis.
“The investment objective of UNG is for the daily changes in percentage terms of its shares’ net NAV to reflect the daily changes in percentage terms of the price of natural gas delivered at the Henry Hub, La., as measured by the daily changes in the Benchmark Futures Contract, less UNG’s expenses,” according to United States Commodity Funds, the ETF’s issuer. “UNG invests primarily in listed natural gas futures contracts and other natural gas related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less.”
UNG Has a Lot in Common With USO
Like its oil counterpart, the United States Oil Fund LP (ETF) (NYSEARCA:USO), UNG rolls over derivatives and futures exposure. That runs costs up (UNG has a total expense ratio of 1.27%) and means the fund’s returns do not necessarily mirror those of spot natural gas prices.
The methodology of ETFs such as UNG and USO also increases the potential for contango, the scenario where an investor pays more for front-month futures than what the market is expecting the commodity in question will trade at several months in the future.
While UNG is liquid with tight spreads and average daily volume of almost $88 million in dollar terms, its construction is not conducive to long-term holding.
The fund’s five-year returns are abysmal, losing 65% of its value during that stretch.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
