The shale revolution in North America unlocked vast hydrocarbon reserves restoring oil and gas production back on the track of growth. Shale gas which accounts for 23% of natural gas production is expected to double or triple over the next 25 years up to make up nearly half of U.S. production by 2035. The US Energy Information Administration (EIA) estimates total U.S. natural gas resources at 2,214 trillion cubic feet (TCF). But several geologists are convinced the numbers are too conservative and will be revised higher as more and more shale gas wells build production history.
Natural gas occupies an important part of the U.S. energy landscape accounting for 25% of the country’s energy consumption. Prices are dictated by several factors affecting supply and demand including storage levels, economic growth, winter and summer weather. Natural gas has been a very frustrating commodity for investors attempting to time a bottom and very rewarding for traders capitalizing on its price volatility.
Natural Gas ETF List
Natural gas ETFs provide the perfect vehicle to hedge natural gas movements or to take directional positions on natural gas prices without the need for a futures account. The following exchange traded securities provides investors unleveraged direct exposure to natural gas:
The United States Natural Gas Fund (NYSE: UNG)
UNG $6.56 [-0.02]
Average Volume: 6475200
UNG is designed to mirror the daily changes in percentage terms of the spot price of natural gas, net of expenses, by investing in short-term NYMEX natural gas futures contracts that are rolled over from month to month (in order to avoid taking delivery of the commodity). The fund was launched on April of 2007 and is the most popular natural gas ETF.
However, like many of its peers that invest in near-month commodity futures contracts, the fund suffers from one inherent risk: contango. While rolling over its futures position, the fund can lose money if the current contract is worth less than the next month’s contract it’s rolling into even if natural gas prices for the current month are on the rise.
Live ONE YEAR Chart of the The United States Natural Gas ETF– Symbol UNG
iPath Dow Jones-UBS Natural Gas Sub-Index Total Return ETN (NYSE: GAZ)
GAZ $0.2998 [-0.0073]
Average Volume: 29227
GAZ is an exchange traded note linked to the performance of the Dow Jones-UBS Natural Gas Subindex which consists of one Henry Hub Natural Gas futures contract traded on the NYMEX. GAZ tracks the changes in percentage terms of natural gas prices just like UNG but it suffers from a lower trading volume. The fund was launched in October of 2007.
United States 12 Month Natural Gas ETF (NYSE: UNL)
UNL $9.99 [+0.02]
Average Volume: 4623
UNL’s objective is to reflect the changes, net of expenses, of the sport price of Henry Hub natural gas as measured by the changes in the average of the prices of 12 futures contracts on natural gas traded on the NYMEX. Basically, the fund holds 12 natural gas futures contracts which consist of the near month contact to expire and the contracts for the following eleven months, for a total of 12. Tracking the average price of natural gas over a period of 12 months limits contango risk. The fund was launched in November of 2009.
Teucrium Natural Gas ETF (NYSE: NAGS)
NAGS $10.40 [+0.00]
Average Volume: 611
NAGS ETF seeks to mirror, net of expenses, the daily changes in percentage terms of a weighted average of the closing settlement prices for four futures contracts for natural gas: the nearest to spot month March, April, October and November Henry Hub Natural Gas Futures Contracts traded on the NYMEX. By investing in a range of futures contracts NAGS seeks to limit Contango risk just like UNL. However, the fund suffers from low trading volume and the highest management expense ratio in the list. The fund was launched in January of 2011.
iPath Seasonal Natural Gas ETN (NYSE: DCNG)
DCNG $18.36 [+0.00]
Average Volume: 291
DCNG is an exchange traded note linked to the performance of the Barclays Capital Natural Gas Seasonal Total Return Index. The index consists of one Henry Hub Natural Gas futures contract traded on the NYMEX that expires in December and rolls annually. 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. DCNG is highly illiquid which makes getting in or out of a large position potentially difficult. The note was first launched in April of 2011.
Finally, the chart of the most liquid natural gas ETF UNG is not pretty to look at. While natural gas has a great future ahead of it in the U.S. as an energy source, buy and hold investors have been burned by this commodity because consumption is not able to keep up with increasing production levels, the fact that NG is predominantly landlocked with no international exports yet does not help. Remember that most natural gas ETFs suffer from contango which continuously erodes the value of your holdings. However, there are many ways one can play the natural gas market such as buying an ETF to profit from contango in natural gas futures or buying the producers and explorers. You can also profit from the volatility of natural gas prices through a 2x natural gas ETF or a 3x natural gas ETF. Just remember that leveraged investing comes with risks and that the contango effect is magnified with double and triple ETFs which are designed for short term trading. If you are planning to hold one for an extended period of time, keep a close eye on your position and make sure stop-loss orders are in place.
Disclaimer: the information presented above is only for informative purposes. It is in no way an encouragement to buy or sell the aforementioned securities.