Investing in natural gas and the related equities is hard. Even the professionals know this. Over the past several years, some natural ETFs amount to value destroyers. Consider the case of the United States Natural Gas Fund (NYSE:UNG).
UNG, one of the most heavily traded commodities funds, tracks front-month natural gas futures. Over the past three years, that’s been a rough strategy as the natural gas ETF has shed 49.3%, or more than double the loss of the S&P GSCI Commodity Index over the same period.
There are multiple pressure points on natural gas, including the market being oversupplied and the transition to alternative energy sources. Indeed, it’s tough getting involved with natural gas ETFs and there appears to be a lot going against these products at the moment, but for tactical investors, there may be some opportunity in this category.
Natural Gas ETFs to Buy: Alerian Energy Infrastructure ETF (ENFR)
Expense ratio: 0.65% per yer, or $65 on a $10,000 investment.
The Alerian Energy Infrastructure ETF (NYSEARCA:ENFR) isn’t a pure play on natural gas exploration and production, but that’s a plus, not a disadvantage. Rather, ENFR, which tracks the Alerian Energy Infrastructure Index, focuses on energy infrastructure, otherwise known as the “toll road” aspect of this industry.
Adding to the case for ENFR is the fund’s focus on the midstream. Upstream are volatile oil exploration and production companies, which have been slammed by eroding oil prices. Downstream is the refining companies, which have been similarly plagued by eroding margins.
However, being stuck in the middle may not be a bad idea for energy investors because midstream companies are more defensive and have the possibility to actually grow dividends this year thanks to improving balance sheets.
“Some of the largest US and Canadian midstream companies are guiding to robust annual dividend growth in 2020,” said Alerian in a recent note. “After growing its dividend by 25% in 2019, Kinder Morgan (NYSE:KMI) is planning another 25% increase in 2020, which would bring its dividend up to $1.25 per share on an annualized basis. The outsized dividend growth marks a recovery from KMI’s 2015 dividend cut.”
Looking further out, the dividend scenario with ENFR could be improving even more.
“Additionally, with midstream companies approaching a free cash flow inflection point, particularly in 2021, it’s possible that excess cash flow will drive further dividend growth,” according to Alerian.
VanEckVectors Unconventional Oil & Gas ETF (FRAK)
Expense ratio: 0.54% per year
Like so many natural gas ETFs, the VanEckVectors Unconventional Oil & Gas ETF (NYSEARCA:FRAK) has been bludgeoned this year. FRAK has shed almost 69% of the value from its 52-week high and even with last Friday’s 8.26% pop, the fund is off 54.24% this month.
Translation: there are plenty of risks associated with FRAK, but those risks could bring rewards with this fund. Plus, it’s trading at depressed multiples, a trait seen throughout the energy sector. According to issuer data, FRAK trades at just 10.7 times earnings and 0.83x book value.
Home to 38 stocks with an overall yield of 3.83%, FRAK follows the MVIS Global Unconventional Oil & Gas Index, “which is intended to track the overall performance of companies involved in the exploration, development, extraction, and/or production of unconventional oil and natural gas,” according to VanEck.
“Unconventional oil and gas includes coal bed methane, coal seam gas, shale oil, shale gas, tight natural gas, tight oil, tight sands, in situ oil sands, and enhanced oil recovery.”
First Trust Natural Gas ETF (FCG)
Expense ratio: 0.60% per year
The First Trust Natural Gas ETF (NYSEARCA:FCG) could be the ultimate risk/reward play among natural gas ETFs, but its reputation says the fund leans more toward risk than gratification, as highlighted by a three-year decline of 78.3%.
Although FCG holds 33 stocks, it’s dominated by two names — Cabot Oil and Gas (NYSE:COG) and EQT Corp. (NYSE:EQT). Those two stocks combine for nearly 19% of FCG’s weight, so any credible rebound hopes this fund has begin and end with those two names.
Many of FCG’s holding are also oil exploration and production firms, meaning the fund could get a lift if crude prices rally, but investors need to remember that while history doesn’t always repeat, it often rhymes and FCG’s history isn’t all that appealing. Use it as a tactical play on a short-term “natty” rally.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.