BOIL ProShares Ultra Bloomberg Natural Gas New

Natural gas prices have fallen about 80% since their 2008 peak. The commodity remained under pressure as new supplies of the key fuel were continuously brought online, making the historic oversupply situation even more of an issue (Read: Have The Natural Gas ETFs Finally Bottomed Out?).

Now, this situation seems to be turning around with the reversal of trends in gas prices, or at least a near term bottoming out. The remarkable run-up in prices is creating bullish sentiments for the commodity, suggesting that this market could begin to attract more attention in the future.

Demand/Supply Outlook

U.S. is the second biggest producer of natural gas, trailing Russia. A large part of the natural gas that is produced in the U.S. stays in America itself due to the lack of cross-ocean pipelines and the relative difficulty that comes from transporting a gas quickly and efficiently across vast distances (Read: Buy American with these Three Commodity ETFs). Accordingly, natural gas production threatens to disrupt the energy market by either eventually becoming a major export to power hungry markets, or by reducing crude oil imports in the near future.

Several gas producers have slowed down their production on lower gas prices, which is much below their cost of production. Though natural gas is mainly used for heating and cooling, it is now being considered for various new usages as well. In this regard, the U.S. government is finding ways to substitute coal in power plants and gasoline in cars with natural gas.

Further, with the arrival of hurricane season, the weather is turning favorable for natural gas demand. This trend was seen when the recent Tropical Storm Debby disrupted some offshore production in late June and could be seen again with Isaac and New Orleans (Read: Three Muni Bond ETFs to Weather the Coming Storm).

It appears that demand for natural gas is gradually exceeding the supply, signifying the revival in this corner of the energy market (Read: Two Energy ETFs Holding Their Ground). While there are a number of individual securities that target the sector, an ETF approach may lessen the risks in a play.

Types of Natural Gas ETFs

Natural gas ETFs are divided in two categories: futures and equity-based ETFs. Both of these will be detailed for investors looking to play in this increasingly important energy market segment:

Future-Based Natural Gas ETFs

United States Natural Gas Fund (UNG)

Investors seeking direct exposure to the natural gas, a key fuel source for power plants, may find UNG an attractive option. It is the most popular and most liquid ETF, trading in about more than 10 million shares per day. Launched in April 2007, the fund has so far attracted assets of $1.2 billion (Read: Ten Biggest U.S. Equity Market ETFs).

The product looks to track the changes in percentage terms of the price of natural gas futures contracts that are traded on NYMEX. The fund takes positions in the near month futures contracts on expiry and rolls over to the next month futures contracts. As the prices of next month futures contracts exceed that of the near month futures contracts (also called “contango”), the fund loses on rolling making strong long term performances very weak.

Hence, UNG is vulnerable to the prolonged period of contango (Read: ETF Investors: Beware the Coming ETN Backlash). The fund lost about 19% so far this year and charges fees of 60 bps per year from investors.

iPath Dow Jones-UBS Natural Gas ETN (GAZ)

The ETN seeks to match the performance of the Dow Jones-UBS Natural Gas Total Return Sub-Index. This represents a benchmark of the commodity of natural gas, a critical fuel for heating and cooling across the United States. The product is highly traded with a solid volume of more than 400,000 shares a day although it has just $51.6 million in AUM.

The product was launched in October 2007 and in August of 2009, Barclays had suspended fresh issuance in GAZ. This had given ETN a push to the higher premiums. Once this happened, the premium reached to unprecedented levels of nearly 134%, one of the highest that investors have ever seen in the space. This massive premium has begun to recede in recent months and is now ‘only’ 50%. 

Due to the heavy fluctuations in the premium, this ETN is the most volatile fund making it a risky play. The fund lost around 11% year-to-date and charges 75 bps in fees per year.

United States 12 Month Natural Gas Fund (UNL)

Investors seeking direct exposure to the natural gas market may also play with this fund. Unlike UNG which only holds next-month contracts, this ETF spreads its exposure across the maturity curve. In fact, the fund consists of 12 natural gas futures contracts consisting of the near month security as well as the next eleven months (See more ETFs in the Zacks ETF Center).

This approach can help cut down on contango because only 1/12th of the portfolio is rolled at any one time and a month of heavy contango will only impact a small portion of the holdings. Similarly, the fund will benefit less from backwardation (the price of near-month futures contracts exceeds that of the next month contract). As a result, this balances the negative effects of contango and positive effects of backwardation better than most products. 

Despite this feature, the ETF trades in small volumes of less than 56,000 shares per day and lost around 16% year-to-date (Read: Three Unlucky Equity ETFs). Launched in November 2009, the fund has attracted assets of $43.8 million and charges 75 bps in fees per year from investors.

E-TRACS Natural Gas Futures Contango ETN (GASZ)

Launched in June 2011, the ETN seeks to match the performance of the ISE Natural Gas Futures Spread Index. The fund takes short positions in the near-term month natural gas futures contracts and long positions in the mid-term futures contracts through a series of investments in natural gas sub-indices. As mid-term futures contracts are priced at higher prices than the near-term futures contracts, the fund capitalizes on the price differences due to an upward sloping futures curve.

With AUM of $11.1 million, the product is less volatile and trades in small volumes say nearly 13,000 per share on a daily basis. The fund seems to be costly relative to other ETFs in the space, charging investors a fee of 85 bps annually, as it does arguably have a more advanced strategy. Unlike other natural gas ETFs, GASZ generated returns of more than 1% year-to-date in the current turmoil (Read: The Five Best ETFs over the Past Five Years).

Teucrium Natural Gas Fund (NAGS)

Launched in February 2011, this fund seeks a new way to play the natural gas market and reduces the effects of both contango and backwardation. Unlike UNG, the product spreads out exposure across multiple points on the curve.

The product invests in futures contracts in the nearest to spot month for the following four periods — March, April, October, and November. All four months are weighted equally giving the fund a balanced exposure across these key delivery dates. These four were chosen in particular because they give the fund a focus on the key times in the natural gas season at both the end and beginning of the heating and cooling seasons.

The fund has so far attracted assets of $3.7 million and trades in a tiny volume of less than 4,000 shares per day. It is a high cost choice in the space charging about 1.54% in annual fees. Despite its advanced features, the ETF declined nearly 10% this year to date.

iPath Seasonal Natural Gas ETN (DCNG)

The ETN, initiated in April 2011, seeks to match the performance of the Barclays Capital Natural Gas Seasonal TR Index. The index generally comprises single futures contract with the exception of two contracts during the roll period (expiration).

Unlike many commodity indices, the index offers exposure only to December contracts. In October of each year, the index closes out its position in the current year's December contract and rolls into a natural gas futures contract expiring in December of the next calendar year.

The product is quite expensive as it charges 75 bps in fees per year and is illiquid (Read: Use Caution When Trading These Three Illiquid ETFs). It trades in paltry volumes of 643 shares on average daily basis that increases the trading cost in the form of wide bid/ask spreads. The fund is unpopular and has attracted only $2.4 million of assets so far in the year. The fund lost about 11% value year-to-date. 

ProShares Ultra DJ-UBS Natural Gas Fund (BOIL)

Investors seeking double exposure in the natural gas market can find BOIL an intriguing option. This fund seeks to deliver twice (200%) the daily performance of the Dow Jones-UBS Natural Gas Subindex (Read: Understanding Leveraged ETFs). The index intends to reflect the performance of a rolling position in natural gas futures contracts traded on NYMEX.

With total assets of $72.7 million, the fund is liquid as it exchanges about 190,000 shares per day. Launched in October 2011, the ETF lost about 47% so far in the year and charges 95 bps in fees per year.

ProShares UltraShort DJ-UBS Natural Gas Fund (KOLD)

Like BOIL, the fund tracks the Dow Jones-UBS Natural Gas Subindex but provides inverse (opposite) exposure to two times (200%) the daily performance of the index (Read: Leveraged and Inverse ETFs: Suitable Only For Short Term Trading). The product is less liquid and has about $11.1 million assets under its management. The ETF delivered returns of about 2% so far this year while it charges 95 bps in fees annually.

VelocityShares 3x Long Natural Gas ETNs (UGAZ)

This product debuted in the space in February 2012. The ETN provides long exposure to three times (300%) the daily performance of the S&P GSCI Natural Gas Index ER, net of fees and expenses. Thanks to the newness of the product, the fund is less liquid and attracted only $13.3 million in assets. It lost nearly 23% since inception and charges a high fee of 1.65% from investors per year.

VelocityShares 3x Inverse Natural Gas ETN (DGAZ)

Like UGAZ, the ETN tracks the S&P GSCI Natural Gas Index ER but provides inverse (opposite) exposure to three times (300%) the daily performance of the index. The product was initiated in February 2012 and has assets of $5.1 million under its management. It lost more than 54% value since inception but like UGAZ, offers the only triple leveraged exposure to the natural gas market.

Equity-Based Natural Gas ETFs

First Trust ISE-Revere Natural Gas Index Fund (FCG)

Investors seeking exposure to natural gas equities in the basket form may find FCG a good play. The ETF seeks to replicate the price and yield of the ISE-Revere Natural Gas Index, before fees and expenses. The fund holds about 31 securities in the basket and comprises companies that derive a substantial share of their revenues from the exploration and production of natural gas (Read: Inside The Forgotten Energy ETFs).

With AUM of $426 million, the product puts about 37% of assets in top 10 holdings. Quicksilver Resources (KWK), Penn Virginia (PVA) and Comstock Resources (CRK) are the three key elements that make up for 12% share in the basket.

Initiated in May 2007, the fund is volatile as mid and small cap account for more than 67% of the assets. Trading in volumes of 555,000, the product seems to be liquid. It is the low cost choice in the space, charging 60 bps in annual fees. The fund delivered negative returns of about 13% year-to-date but yields 0.50% in annual dividend.

Direxion Daily Natural Gas Related Bull 3x ETF (GASL)

Launched in August 2010, the fund seeks to deliver thrice (300%) the daily performance of the the ISE-Revere Natural Gas Index. The ETF has an expense ratio of 0.95% and has net assets of $26.6 million. The product lost 44% so far in the year and yields just 0.3% in annual dividend.

Direxion Daily Natural Gas Related Bear 3x ETF (GASX)

Similar to GASL, the ETF tracks the ISE-Revere Natural Gas Index but provides inverse exposure to three times (300%) the daily performance of the index. The fund has total assets of $3.6 million and charges 0.95% in annual fees from investors. The ETF generated impressive returns of around 9% year-to-date, making it attractive for play in the bearish market (Read: Three Defensive ETFs for a Bear Market).

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TEUCRM-NAT GAS (NAGS): ETF Research Reports
 
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US-12M NATL GAS (UNL): ETF Research Reports
 
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