ETFs For A Natural Gas Rebound

June 20, 2012

After falling nearly 80 percent from their peak in 2008, natural gas prices have begun to make a recovery, and investors seeking to make plays off the rebounding commodity can choose popular futures-based ETPs or can avoid them completely with an equities-based fund, according to an article on ETF Trends.

Investors may be drawn to the U.S. Natural Gas Fund (NYSEArca: UNG), as it continues to make headlines after surging recently by nearly 15 percent. However, as a futures-based fund, UNG will have issues with contango, particularly if and when gas prices begin to plateau or decline, the article said.

Contango is a situation where nearest-month contracts are cheaper than those further out on the futures curve, meaning fund managers, as they maintain exposure, have to pay more for a new contract than what they fetch for the one that’s about to expire. That eats into investment returns, and significantly over time.

To mitigate the contango problem, the U.S. 12 Month Natural Gas Fund (NYSEArca: UNL), the iPath Dow Jones-UBS Natural Gas ETN (NYSEArca: GAZ) and the Teucrium Natural Gas Fund (NYSEArca: NAGS) can be used as alternatives. While UNL, GAZ and NAGS are futures-based, they are designed to limit the deleterious effects of returns on contango, the ETF trends article said.

An important sidenote is that GAZ is pretty much of a broken security. The ETN stopped creating shares in 2009 and since then it has traded at a premium a lot of the time, which means investors are exposed to a lot more than the natural gas market when they take a position in GAZ.

The last ETP mentioned was the First Trust ISE-Revere Natural Gas Index Fund (NYSEArca: FCG), which is a viable option for investors looking to avoid the futures market and contango, the article said.

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