There are mainly 2 ways to invest in natural gas, either through futures contracts or through the stock of producers and explorers. Unfortunately, you just can’t buy the physical commodity and hold it in your backyard; storage might be slightly problematic because of the logistics and the costs involved. The recent proliferation of ETFs have made it very convenient for both investors and traders to gain exposure to natural gas. While investors enjoy a long list of natural gas ETFs holding futures contracts to chose from, the market only has 1 natural gas stocks ETF to offer.
Investing in stocks of companies involved in the exploration, extraction, and sale of natural gas is an indirect way of playing the commodity. These companies tend to exhibit strong a correlation to the performance of natural gas, after all, their profitability depends on the market price of the commodity they sell.
First Trust ISE-Revere Natural Gas Index ETF (NYSE: FCG)
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FCG is the only natural gas ETF that holds stocks rather than futures contracts. The ETF is designed to track the performance of the ISE-REVERE Natural Gas Index before expenses and fees. The ISE-REVERE Natural Gas Index is an equal weighted index comprised of the top 30 US listed stocks of companies that derive a substantial portion of their revenues from the exploration and production of natural gas.
Live ONE YEAR Chart of the First Trust ISE-Revere Natural Gas Index ETF– Symbol FCG
The index holdings are rebalanced on a quarterly basis whereby the top 30 stocks are selected by ranking eligible candidates using price/earnings ratio, price/book ratio, return on equity and the correlation to natural gas futures prices. Encana, Questar, Cabot Oil & Gas, Exco Resources and Comstock Resources are in the top 10 holdings. In a way, you’re buying a fund with the best natural gas stocks. FCG was first launched in May of 2007 and has so far outperformed the most popular natural gas ETF: UNG.
It is obvious from the chart above that FCG is better suited for buy and hold investors with a long term bullish view on natural gas rather than using an ETF holding futures contracts. Moreover, the best part of holding an ETF with equities is eliminating the risk of Contango which has caused long term investors massive losses (see UNG). While there are ways to profit from contango in natural gas futures markets, investing in equities as part of a diversified and balanced portfolio may be a better approach to gain exposure to natural gas. A stock ETF also has the advantage of eliminating company specific risk. Finally, there is no guarantee that the performance of FCG will exhibit perfect correlation with natural gas. After all, economic and political factors have a direct impact on the performance of the stock market, sometimes equities will mirror the level of uncertainty, fear or euphoria rather than the fundamentals of the sector/commodity they make money from.
Disclaimer: the information presented above is only for informative purposes. It is in no way an encouragement to buy or sell the aforementioned securities.