After gold and oil, natural gas is one of the most widely traded commodities and it is also one of the most volatile. For better or worse, the evolution of the exchange traded funds (ETFs) business has made natural gas investing more accessible to ordinary investors.
That includes increased accessibility to leveraged products, such as the VelocityShares 3x Inverse Natural Gas ETN (NYSEARCA:DGAZ). As indicated by its name, the VelocityShares 3x Inverse Natural Gas ETN is an exchange-traded note (ETN). It also has a sister fund, the VelocityShares 3x Long Natural Gas ETN (NYSEARCA:UGAZ).
Exchange-traded notes differ from ETFs in that ETNs are unsecured debt instruments from an issuing bank.
In the case of DGAZ, the issuer is Credit Suisse AG (NYSE:CS).
This is an issue to consider for investors, because if an ETN issuer’s credit quality is questioned in the market, ETNs — as debt instruments — could be pinched, punishing investors along the way.
DGAZ Has Other Issues
DGAZ attempts to deliver triple the daily inverse returns of the S&P GSCI Natural Gas Excess Return Index. Investors that have actively followed the energy sector for several years likely know that the U.S. shale boom as has bolstered natural gas supplies while depressing prices.
Applying that logic, DGAZ would appear to be an easy, winning long-term trade. Actually, the opposite is true. As is the case with other leveraged ETFs and ETNs, VelocityShares’ fund is intended to be held just for a day or two. Holding a product like DGAZ for weeks or months is akin to a kamikaze mission.
If there is some good news associated with DGAZ, it is that data suggests it functions well for intraday traders.
Average daily volume is north of 27.2 million shares, which in dollar terms based on current prices equals nearly $129 million per day.
Still, DGAZ is not the product to turn into a long-term investment. Although natural gas prices have been declining, this fund has done plenty of that, too, and a spate of reverse splits have proven unsuccessful in propping up the ETN’s price.
Consider this: Several years ago, on a split-adjusted basis, DGAZ traded above $600. With its most recent reverse split, it resides around $20.
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